Adopting the International Financial Reporting Standards in the USA - Research Paper Example

U.S. Adopting the IFRS of Contents Contents 2 Introduction 3 Pros of IFRS 3 Cons of IFRS 5 Recommendation 6 References 8 Introduction When one speaks of accounting standards in the USA, the debate often arises as to which one of the two is better. One format is the rules based accounting system or the US GAAP (Generally Accepted Accounting Principles) while the other is the principles based accounting format that is yet to be introduces, the IFRS (International Financial Reporting Standards). The US GAAP is a standard for financial accounting that sets down a framework of guideline for the jurisdiction in which it is followed. IFRS is the global language for maintaining company accounts such that it facilitates understanding and comparison of accounts boundaries. Both US GAAP and the IFRS serve the same purpose of providing relevant financial information to the users of it, the only difference being in the objectives for which they operate. The US GAAP has separate sets of objectives for business firms and non business users while the IFRS has the same sole objective for all of it users. The following paper examines the pros and cons of the IFRS standards which is about to be implemented in the United States and tries to establish which one of the two is better from the overall perspective (IFRSUSA, 2011). Pros of IFRS The US GAAP based accounting system is based on a rule based method of accounting which might have both advantages as well as disadvantages. However, when compared to the IFRS method of accounting practice, the GAAP principle is more of a strictly controlled approach which requires that each transaction is recorded as per the rule stated for its accounting even if such maintenance might be misleading and does not allow for comparison between various industries even if the type of transactions are similar. GAAP accounting also increases the risk of non compliance of the stated rules of accounting because it is extremely difficult to defend your position whenever a GAAP rule is not followed. IFRS might be based on principles of accounting rather than stated rules mandated to be followed. This format certainly has more advantages associated with accounting practices more because principles provide a base for a basis of accounting allowing the freedom to companies to choose from among the best way of accounts maintenance possible. Defined and clarified principles allow for a more clear way of accounting and reporting transactions such that making comparisons between companies and similar transactions is facilitated. Such principle basis does not differentiate based on industries and also allows companies to defend their accounting reporting based on the principles they have followed (Diffen, n.d.). IFRS implementation might call for initial implications on company costs in terms of transformation of the accounting system from one format to the other. However, in the long run, the standard shall facilitate benefits and cost saving in terms of easier company comparison across boundaries for the purpose of business as well as mergers. There shall be significant cost savings when accounting practices are similar and business decisions shall be far quicker. The global marketplace today allows a distinct advantage to the IFRS standards over the US GAAP accounting. IFRS is required and permitted in more than 120 jurisdictions while the US GAAP system is required in only one jurisdiction. The Securities and Exchange Commission or the SEC shall be the decision making body over the implementation of IFRS within USA. Whenever the IFRS comes into practice in USA, companies in US shall have to develop a framework for judgment whereby accounting decisions will have to be fit in a principles based environment of accounting practice. This shall be necessary in order to reduce the variation in accounting by different companies for the same transaction. Such framework shall also decide upon the disclosures required for the accounting basis followed and what factors have been considered and possible reasons behind accounting decisions. One such drafting of framework shall be required in the re-exposure draft for leases and Revenue recognition. Such planning shall need to begin much before the adoption date so that proper implementation can be facilitated (Eyden, 2012). From the investor’s point of view, the IFRS shall have a more informative earnings statement that records the losses and gain in a more timely fashion than the US GAAP. The investors shall also find the balance sheet to be more useful and standards reflecting more of economic substance than legalities. Cons of IFRS When one understands that there is increased freedom for companies to allow a principle based accounting based on IFRS and also the facility to defend ones position when the accounts are based on principles, it is also to be noted that such principle based accounting also gives scope for manipulation of accounting and maintaining huge variations in the approach of accounting for similar transaction types. Further, companies can also choose among what they wish to disclose and what they want to keep hidden. This can be done through making a choice of methods to reflect only those results that the company wishes to show. Such irregular disclosure can lead to manipulation of profits and revenues and also hide those financial problems that might even mount up to a financial fraud. An example in this regard could be the method adopted for valuation of inventory which brings higher income in the incomes statement of the present financial year which manipulates and shows company profits higher than it actually is (Mohr, n.d.). IFRS also allows for companies to make changes in the specified rules of accounting that are justified. However, in practicality, it is often difficult for companies to invent causes that would justify the changes made. In this event, it shall be beneficial if the IFRS brought forth stricter norms and rules such that there is uniformity in company statements across all businesses Principles based accounting and freedom of expression in accounts lends higher scope for interpretation and becomes a difficulty in cases of litigations. Disclosures and accounting statements can be manipulated under litigation based on perception. Another drawback to the IFRS is the lack of individuals to think as critically as IFRS expects them to with regard to principles of accounting. It is therefore required that IFRS becomes more inclined towards a set of rules so that attack and defense is facilitated (Ernst & Young, 2011). IFRS rules also tend to inflate the earnings statement when compared to other formats. This might not be a problem for firms but it definitely creates an artificial picture about a company’s earnings by giving a false boost to its earnings statement. Such boost in earnings also tends to make sweeping changes in taxes and investor loyalties. In terms of cost implications, small companies shall be equally affected by the incoming of IFRS norms as the large companies. The implementation of IFRS calls for huge costs in terms of transforming company accounts from one form to another and hiring of outside consultant for implementing such changes. It is difficult for smaller firms to bear such non profit bearing financial costs and this might even deter and defer implementation of IFRS. Lastly, accounting from the IFRS method might be difficult to learn and perfect. Accountants have been practicing the US GAAP for years; a complete shift to the IFRS would call for a lot of unlearning to be done. IFRS learning, implementation and perfection can take years to come into effect. Recommendation The principles based accounting or the IFRS is favored over the rules based accounting but it is understood that one cannot follow one distinct method without some mandated intervention by the other. The best solution shall be to largely follow the IFRS and bring in the US GAAP in areas that need rules based accounting. For example, the general accounting can be followed in rules based approach but when it comes to making disclosures, one can bring in the rules based format and allow for certain mandated disclosure requirements. Such mandated disclosures shall also facilitate an understanding among the investors over the principles that have been followed in accounting and look through the impact of the followed principles over the financial statement and notes to accounts disclosures. IFRS is a platform that shall allow for easier business operations and also facilitate the process of mergers and acquisitions across countries by making it simpler through uniformity in accounting processes. Uniformity in accounting globally also eliminates any ambiguity in accounts on the global platform wherever IFRS jurisdiction is applicable (Forgeas, 2008). Another way of looking in favor of the IFRS is that principles based accounting allows for the freedom to express the probability. Certain things in accounting cannot be stated in clear cut ways and principles based accounting allows for such freedom of expression in terms of ambiguity reflection unlike the US GAAP. Despite all arguments, the fact remains that all have to prepare to accept the IFRS over U.S. GAAP now (IFRSUSA, 2013). References Diffen. (n.d.). GAAP vs IFRS. [online] Retrieved from http://www.diffen.com/difference/GAAP_vs_IFRS Ernst & Young. (2011). US GAAP versus IFRS: The Basics. [pdf] Ernst and Young. Retrieved from http://www.ey.com/Publication/vwLUAssets/US_GAAP_v_IFRS:_The_Basics/$FILE/US%20GAAP%20v%20IFRS%20Dec%202011.pdf Eyden, T. (2012). International Financial Reporting Standards - Advantages & Disadvantages. [online] Retrieved from http://www.accountingweb.com/article/not-good-year-ifrs-adoption-us/220564 Forgeas, R. (2008). Is IFRS That Different From U.S. GAAP? [online] Retrieved from http://www.ifrs.com/overview/General/differences.html IFRSUSA. (2011). Which is Better – Principles or Rules? [online] Retrieved from http://ifrsusa.wordpress.com/2011/04/05/which-is-better-%e2%80%93-principles-or-rules/#comments IFRSUSA. (2013). Will IFRS Be Mandated Under New SEC Chair White? [online] Retrieved from http://ifrsusa.wordpress.com/ Mohr, A. (n.d.). International Financial Reporting Standards - Advantages & Disadvantages. [online] Retrieved from http://smallbusiness.chron.com/international-financial-reporting-standards---advantages-disadvantages-2167.html Read More