Advantages and Disadvantages of Switching from U.S.Gaap to Ifrs

Topics: International Financial Reporting Standards, Financial Accounting Standards Board, International Accounting Standards Board Pages: 9 (3327 words) Published: May 29, 2011
Advantages and Disadvantages of switching from U.S.GAAP to IFRS Nara Yoon
Charles Center Summer 2009

2 Advantages and Disadvantages of switching from U.S.GAAP to IFRS

In today’s business, markets are demanding increasing conformity. Many countries have converted to and implemented the International Accounting Standards Board (IASB)’s accounting standards. The United States, however, still maintains its own Financial Accounting Standards Board (FASB). Both IASB and FASB have created International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (U.S.GAAP) respectively. These accounting standards are rules of measurements for financial statements that companies issuing stock to the public must provide to stockholders (Libby, 21). There are various advantages and disadvantages of the U.S. companies changing their systems from U.S.GAAP to IFRS. As the markets have grown to become more complex and global, the disparities between the two standards have been a significant issue as consumers and producers call for reform. The current differences between U.S.GAAP and IFRS affect many aspects of business. There seems to be some future losses but the U.S. is continuing to move toward conversion. The primary benefits U.S. hopes to get are comparability, and thus, greater market liquidity and lower cost of capital. They also hope to see cost savings for multinational companies who keep record of several accounting standards. Most importantly, U.S. businesses wish to take advantage of the global accounting network. At a closer view, these assumed benefits are not nearly as influential as many people suggest. The first benefit of the conversion is comparability. Switching to IFRS would allow people to see various companies from different parts of world on the same plane. As willingness to trade increases, cross-border investment and integration of capital markets are easier with greater market liquidity and lower cost of capital (Hail, 12). Investor bases would increase as the financial reports are becoming comparable. With better information, companies would be able to more effectively allocate their capital. Having one standard, however, does not guarantee comparability. With the same standard, practices and enforcement can differ considerably across firms and countries. It is only natural because diversity in accounting standards would result from diversity of the countries’ institutional infrastructures. Although there are currently more than 113 countries on IFRS, an estimated 29 countries using IFRS added their own exceptions, defeating the purpose of a global standard (IOMA, 6 ) (Henry). Although comparability in general is a difficult goal in an international setting, the nature of IFRS itself also seems to hinder the process of becoming a global standard. The major difference between IFRS and U.S.GAAP is that IFRS requires more discretion and that U.S.GAAP is more principles-based and detailed (Hail, 7). IFRS has wider rules and less specific guidance applications, giving more room to interpretation. Thus, IFRS incorporates the value judgment of an accountant in its financial report. These value judgments can easily be influenced by incentives a company may have, causing a variety of ways to implement IFRS. This further interferes with creating a global standard. Although U.S.GAAP is moving toward convergence with IFRS to make them more similar, the differences have considerable influence in representing the company’s economic performance. Differences do matter. The five principal areas where there are disparities are fair values, revenue recognition, share-based payment, financial liabilities and equity, and consolidation. One of the most debated issues is the use of fair values in IFRS and U.S. GAAP (Hail,53). IFRS had allowed fair-value accounting, which is “incompatible with the current legal,

3 Advantages and Disadvantages of switching from U.S.GAAP to IFRS

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