US moving to IFRS. (International Accounting) - Essay Example

The costs/benefits of the US moving to IFRS Many publicly traded companies in the world today use International Financial Reporting Standards (IFRS) to give an account of their financial results. In the Us the IFRSs have not been adopted but they are likely to, if the Securities and Exchange Commission (SEC) rules in favor of the IFRSs over the US GAAPs for all US public companies. The big question is, in terms of cost versus benefits will this adoption be favorable to the business community? A clear answer to this could be obtained by evaluating its effect to the various entities in business.

This write up focuses on the cost/benefits of the IFRSs to an investor, a US based multinational and local (publicly traded) companies.To an Investor Albrecht affirms that the best way to determine the viability of adopting a new course of action is by use of incremental analysis in which the benefits of the change should outweigh its cost. The decision of the US moving to IFRS has triggered a lot of debate, with many participants narrowing its effect to the various parties. Among them are the investors whose protection is included in the SEC mission.

According to Albrecht two key elements defining financial markets under the U.S. GAAP are the low cost of seeking capital and the highest ROIs as compared to other markets in the world. This has to a major extent been attributed to the good rules that have been developed, challenged and shaped for several years, which has led to “bright lines” in reporting unlike in IFRSs where managers can manipulate numbers. If the adoption occurs the U.S. companies may experience a reduction in market value in stocks and bonds to unknown levels.

According to Parks the cost of adoption could be approximately $32 million per company. In fact British Petroleum CEO said that for his company $100 million was spent for the first year and roughly $150 million for the second and third year. This is a huge cost against revenue and it’s likely to affect the profit margins and consequently returns on investment.Finally on the costs, in the U.S investors and accountants will need to learn how to read and interpret the financial statements prepared using IFRSs.

This will need resources in terms of money and time to cover millions of these people.The benefits to investors will be an expected reduction in audit fees whose effect will be felt as years pass by, as auditors will have to take corporate numbers at face value. Based on this analysis the cost are more tangible and seem to outweigh the benefits hence the move would not really benefit the U.S. investors.CFO of a Multinational Company These are U.S. based multinational companies. According to PWC’s article on IFRS, multinational companies are likely to benefit from this move as it will promote their competitiveness globally, facilitate management as financial reporting will be in sync from all branches (for instance costs will be controlled on the same basis), they will also have a better presentation to international investors which will increase their market place hence following a larger access capital, reduced audit fees recurring cost savings on reporting.

On the other hand the companies will have to spend a lot on the adoption process in millions of dollars. They will also be faced by the challenge of obtaining skilled personnel who will be scarce in addition to training their own. Though the benefits are pleasing they can hardly be quantified posing a high risk as opposed to the costs which can be quantified. A CFO of such a company would not risk this move, instead it’s better to look for a solution that seeks compatibility with the IFRSs with a lesser risk.

CFO of a Small US (Publicly Traded) CompanyFor small companies they will enjoy reduced complexity in accounting and reporting guidelines which will lead to significant cost savings and improved process efficiency but they will face adoption costs, training and hiring of technical expertise. For their case the benefits are minimal and intangible yet the cost is the same relative to size and tangible hence adoption would not be recommended.The current US standards are geared to propagating the culture of investor protection and transparency and so are the IFRSs.

The world is changing to IFRSs which poses a threat if the U.S continues with their standards, but based on this analysis, this move will not necessarily be very beneficial to the U.S but could be to others. In general there will be a huge cost incurred in the adoption which could impact the U.S economy negatively, hence alternative ways of achieving synchronized financial reporting should be considered such as dual-reporting or voluntary adoption. Work Cited:Albrecht, D. Benefits and Costs to U.S. Adoption of IFRS. (2008). Retrieved 2 May 2011 http://profalbrecht.wordpress.com/2008/10/01/benefits-and-costs-to-us-adoption-of-ifrs/