US Adoption of IFRS as Reporting Standards - Research Paper Example

 Outline 1. Background 2. Context of controversy 3. Nature of controversy a. Rule based and principle based accounting b. Changes in structure and reporting of financial statements c. Interim reporting d. Consolidation e. Impact on the banking industry i. Financial instruments ii. Leases f. Affect on the systems and processes of the entities 4. Nature of disagreement a. Arguments of critics 5. Claims a. Refutation by officials and supporters 6. Conclusion US adoption of IFRS as reporting standards In the recent past, there has been a great debate over the adoption of IFRS as the reporting standards in the United States in place of the Generally Accepted Accounting Principles (GAAP). Some of the accountants have seen this as a good step towards bringing the accounting of the US in line with that of the rest of the world while other have seen it as a “terrible idea”. No matter what the arguments are, it is being said that it is imperative that the United States adopts the International Financial Reporting Standards form of financial reporting. Background Since the US regulators are very much involved in the management of the credit risk due to the recent market downfall of the west while the companies on the other hand are occupied with the cutting of their costs, the process of the adoption of the IFRS in the US has slowed down. (IFRS Blog) But this slowing down of the impetus does not refute the claims that there is an imperative requirement of a global and single set if financial reporting and accounting principles that proves beneficial to the investors. Although there has been a great debate over the adoption of IFRS over the traditional US GAAP, but the differences should be properly identified between the two reporting standards. US GAAP are the reporting standards which are followed in the United States to prepare, report and present the financial data for the users of the financial statements which were developed by the AICPA along with the participation of the SEC, (Gauthier) while the IFRS are the reporting standards that are based on principles rather than rules and are followed globally by most of the countries such as UK, Canada, Australia, Japan, India and Pakistan etc. (IFRS) Context of controversy The U.S. is looking forward towards the next step of adopting IFRS and contrasting to what went down with other countries; FASB and IASB have been participating on meeting for many years. Countries have developed their own standards for many years which were either largely based on rules or principles and some were tax or business oriented. To summarize, it can be said that the standards developed by other countries were all distinct from each other. (Forgeas) With the emergence of globalization, it has become mandatory for all the countries to correspond in the field of accounting so that the investors can obtain benefits from it as well. In the 1990s, there were only two standards which dominanted the accounting world and they were the IFRS and the US GAAP. At the present, the US SEC has clearly shown its intent on the adopton of the IFRS, people related to the accounting field are speculating the probable affects and the possible impact of the distinctions of both the standards. The controvercy of the adoption is that the people who support the adoption of IFRS argue that the adoption will diminish the cost of the reporting and the adoption will increase the comparibility of the reporting of the US with reporting of other countries. (Parks) On the other hand, there are people who argue on the fact that due to the transition from the US GAAP to the IFRS, the whole accounting scenario will be changed and the accounting of the US will be subjected to confusion and controversy as not only the presentation but also the accounting methods will be changed due to the shift. The issue of the transition is of immense importance as it involves the switch in the accounting methods as IFRS accounting is more principle based compared to that of the US GAAP which is rule based. The Financial Accounting Standards Board has taken 6 initiatives since 1999 for the convergence with the International Financial Reporting Standards and the Securities and Exchange Commission also issued a plan for the proposed implementation of the IFRS. (IFRS) Nature of controversy The controversy of the adoption of the IFRS is based on the differences that exist in the accounting of both the accounting standards which will have a major impact on the business in the years to come. Rule based and principle based accounting: The IFRS will tend to change the basis on which the accounting is carried out as the numerous standards of IFRS are principle based while the accounting offerred by the US GAAP is rule based. In the system of accounting which is principle based, the interpretation issues or arguments can be elucidated by the board that sets the standards which provides lesser exceptions compared to a system that is rule based as is the standard of US GAAP. The main distinction is that of the methodology followed in order to evaluate the treatment of accounting. As in U.S. GAAP, the greater focus is on the text while the IFRS relies more on the facts thoroughly. Changes in structure and reporting of financial statements: The shift to International Financial Reporting Standards (IFRS) is on its own a most significant program in the reporting world. Its impact influences each major judgment and decision that an accountant takes, which extends far beyond the world of accounting as to how a company reports it. There are significant differences in the reporting and the presentation of the financial statements based on both the standards. The IFRS follows the IAS 1 for the presentation and disclosures which has several distinctions with that of the rules of US GAAP. The US GAAP prefers the comparative data to be shown where there is no hard and fast rule while the IFRS makes it mandatory for comparative figures to be presented, which is why there can be an issue with some of the companies presenting the comparison where they usually didn’t. (Deloitte) There are also issues regarding the presentation, layout and minimum requirement of items to be presented in the balance sheet as well as the income statement. This distinction will cause all the companies to go through a stringent exercise in order to get their financial statements in line with that of the presentation requirements of IFRS. Interim reporting: The US GAAP views the interim period as part of the yearly period which is why some of the costs which provide benefits in over a single interim period can be distributed between those periods that result in accumulation of costs while the IFRS treats it as a distinct period and costs are not deferred. (Coopers) Consolidation: In the US GAAP the companies that are controlled through the rights of voting are classified as subsidiaries but this does not include the potential voting rights while the IFRS focuses on the conception of the authority to control, where the control is referred as the ability of the parent to govern the operating and financial strategies of an entity. The control is assumed if the parent owns more than 50% of the voting rights as well as the potential voting rights. (Young) The consolidation requirements of the IFRS require that the statement mentions all the subsidiaries of the company. Special Purpose Entities (SPE) are formed by banks in order to secure loans, influence the leasing transactions and plan the investments and banks are at times form a part in the SPEs which are not included in the consolidated statements, the IFRS may require consolidation to those SPEs as well. (International, 2011) Impact on the banking industry: The accounting based on the financial instruments, which an integral part of the banking industry, is also affected as the classification and measurement of the financial instruments is complex with respect to both the standards. (Young, 2011) The measurement of impairment of the financial instruments also involves complexity when a company transits from GAAP to IFRS. The methods of impairment as well as the recognition will also be affected with the use of IFRS in the company. (Hail) The accounting criteria of IFRS for leases is different from that of GAAP and the IFRS requires more lease transactions to be recognized in the accounts of an entity as compared to those required by GAAP and those banks will be greatly affected who do not recognise the operating leases on their balance sheets when the substance of the lease transaction is that the bank has all the rewards and risk transferred to it. Affect on the systems and processes of the entities: The adoption of IFRS by any company will require an additional amount of effort in order to comply with the requirements of the IFRS. Some premeditated decisions will be needed to be taken to avoid any additional or incremental costs for the transformation. (IAS Plus) Nature of disagreements It has been argued by Ernest and Young that the accomplishment of achieving consistent international accounting standards will rely on the eagerness of nationwide industry and the regulators to assist in order to keep away from any local understanding and interpretation issues concerning the IFRS and the direction that presents exceptions to its principles. (Young) Few instances of these issues have already started coming forward and possibly will intimidate the accomplishment of global harmonization of the accounting standards. In the journal called “The Accounting Onion”, Tom Selling has highlighted the 10 reasons why the adoption of IFRS is not a good idea. He argues that the cost of the IFRS conversion will be in billions of dollars which will require cumbersome exercise for all the companies to implement the standards in place of US GAAP and according to him, the claims that there will be increased comparability and reduction in the cost of capital is just another myth as the cost of conversion will be much greater. (Selling) The Indiana University’s Professor Teri Yohn has conducted a research and has argued on the fact that the investors prefer the US GAAP more that the IFRS because IFRS has offered more prospects of income to the organization. (Accounting Onion) Bob Jensen, another professor of the Trinity University mentions that “The major dilemma in the subprime predicament was not due to the standards of accounting but was the scams that went on in self-serving loans and property appraisals. Those went further than what purchasers had anticipated to discharge.” He further adds “It's not an issue with the IASB standards or the FASB but is more of a crisis with professionalism and auditing standards” (Jensen) Claims Apart from the major disagreements that the various writers and analysts have sought, there is a major fact that should be acknowledged which is that it is imperative that U.S. adopts the IFRS reporting as their set of reporting standards. In the memorandam that was published by the joint efforts of the FASB and the IASB, it was acknowledged that the growing reception and use of International Financial Reporting Standards in the chief capital markets worldwide over the past numerous years signifies that IFRS provides a regular stage on which all the entities can present and state their financial data and where the investors can evaluate financial data. (FASB) For those who have argued regarding the complete wipeout of the US GAAP, Mr. Paul Beswick, the SEC Deputy Chief Accountant has explained that “under the ‘condorsement’ approach the U.S. Generally Accepted Accounting Principles (U.S. GAAP) will persist to exist and the IASB and FASB will conclude their projects of joint converge. After the project, FASB will continue its efforts to congregate the U.S. GAAP to IFRS for standards that are not on the IASB’s map.” (Beswick) Some of the big questions that have given rise to more controvercy in the recnt past have to be addressed and company management also acknowledges the fact that a continuing development of FASB and IASB for converging the standards will slowly but surely align both the standards in some major areas of concern, such that certain disputes of adapting IFRS will be tackled eventually. These major areas comprise of areas for instance consolidation, accounting for lease, revenue recognition, hedge and fair-value accounting. (Marshall) Conclusion Summing up the reactions and concerns of management, finance personnel and board members it can be said that convergence to IFRS will achieve numerous milestones in the long-term that include: Reduction in cost of reporting Greater comparability and accountability More reliance to the investors worldwide Annotated Bibliography Accounting Onion. 2010. 1 May 2011 . The website mentions the argument regarding the benefits that the US investors are deriving from the US GAAP and the adoption of the IFRS instead of it will not prove to be as beneficial as thought. Beswick, Paul. "Current SEC and PCAOB Developments." AICPA’s National Conference. Washington, 2010. The conference shed light on the transition phase as to how the transition will take place which will help in convergence the IFRS to GAAP. Coopers, Pricewaterhouse. "Illustrative interim financial information." (2008). The auditing firm explains the impact of IFRS on the interim reporting of the US financial statements and the changes that need to be brough up to cope with the requirments. Deloitte. IFRSs and US GAAP: A pocket comparison. Comparison. London: Deloitte, 2008. A comparison conducted by Deloitte Toche Tohmatsu that sheds light on some of the major similarities and differences between the US GAAP and the IFRS. FASB. "A Roadmap for Convergence between IFRSs and US GAAP." Roadmap. 2006. The Memorandum of Understanding mentions the benefits which will accrue to the companies throughout the world in form of increased comparability and a single platform for presentation of data. Forgeas, Remi. "Is IFRS That Different From U.S. GAAP." CPA Insider (2008). The article discusses the pros and cons of the IFRS and GAAP while shedding some light on the distinctions of both the standards. Gauthier, Stephen J. Governmental Accounting, Auditing, and Financial Reporting. 2005. The book explains the ins and outs of the US GAAP along with the basic compilation and roots of the US GAAP. Hail, Luzi. "Global Accounting Convergence and the Potential Adoption of IFRS by the United States." University of Pennsylvania (2009). The article presents the analysis on the policies and the effects on the economy as well as the quality and comparability of the U.S. financial reports IFRS . Access the unaccompanied IFRSs. 2011. April 2011 . The website points out the background of the issue with differences of the IFRS and GAAP which will have a considerable impact on the accounting of the US with comparison of Principle and rule based accounting. IAS Plus. April 2011 . The website has explained with respect to various changes that will have to be taken in the systems and processes of an entity due to the implementation of the IFRS in the United States. International, KPMG. "Impact of IFRS: Banking." KPMG (2011). The article by KPMG LLP argues regarding the possible impact of the implementation of the IFRS and its impact on the banking industry of the United States. IFRS Blog. 2011. 1 May 2011 . The blog discusses the recent developments in the issues and the explanations given by the Securities and Exchange Commission on the issue of IFRS conversion and updates on the progress. Jensen, Bob. "Trinity University." AECM listserv 2010. The writer argues on the fact that the issue is not the adoption of the IFRS or the GAAP but it is professionalism that needs to be improved. Marshall, Ken. "IFRS Adoption in the US." Corporate Compliance Insights (2009). Mr. Marshall explained the roadmap of the convergence to the IFRS and the pros and cons of the convergence as well as adoption along with the Milestones that the US accounting will achieve. Parks, Paul. "IFRS: Convergence or Adoption." IFRS Sources (2009). The article sheds some light on the benefits that will accrue to the country through the adoption the IFRS such as the reduction of costs and the increased comparability with other countries. Selling, Tom. "Top Ten Reasons Why U.S. Adoption of IFRS is a Terrible Idea." The Accounting Onion (2010). The analyst argues and mentions the 10 reasons why he believes that the adoption of IFRS is not a good idea and the US GAAP are the best set of standards that the US can have. Young, Ernest &. US GAAP vs. IFRS: The basics. Guidnace. London: Ernst & Young LLP, 2009. The report provides the guidance on the difference that will arise due to the adoption of IFRS and their affects on the accounting of the US. Young, Earnest and. "Effects of IFRS on the U.S. banking industry." (2011). The auditing firm has mentioned the affects and changes that will be brought forward to the banking sector by the introduction of the IFRS in the US, especially the effects on the accounting of financial instruments. 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