The economic and infrastructure benefits of adopting IFRS create a justifiable argument for the possible implementation of IFRS in the U.S. The main argument for IFRS adoption in the U.S. revolves around the idea of comparable reporting. It has been shown to lead to greater market liquidity, a lower cost of capital, and a better allocation of capital. Even though IFRS adoption is likely to have small effects on reporting quality, the cross-boarder comparability of U.S. reports will be large. The argument that Luez makes is that comparable reporting makes it easier to differentiate between less and more profitable firms or low-risk and high risk firms. This helps reduce the information asymmetries among investors and minimize risk. Comparable reporting helps U.S. firms understand there competition better across countries making it easier for them to effectively compete. Lastly, growth in the Asian markets presents new financing opportunities for U.S. firms. Even though in the present U.S. firms are the most liquid. Once American investors are educated in IFRS they are likely to better understand the foreign firms. In a well-functioning economy, the key elements of the institutional infrastructure fit and reinforce each other. Thus, changing one element of the institutional infrastructure has the potential to lead to undesirable outcomes for the economy as a whole, even if the change unambiguously improves the element itself.
As U.S. firms and investors have access to the world’s largest domestic capital market, companies do not need to attract foreign investors as urgently as companies from European countries do. Furthermore, they may even approach foreign investors without a switch to IFRS because foreign capital markes are strongly oriented to the U.S. capital market. Already today, investors around the world have to deal with U.S. GAAP since many of the worlds most important companies use them. There are numerous arguments that limit the benefits of Comparable reporting. According to KPMG 2006, the discretion applied in IFRS has a tendency of firms to refer to their previous, local GAAP when making judgment calls and exercising discretion. Additionally, since IFRS has already been converging with U.S. GAAP many of the comparability benefits have been realized. This means that the network effects of IFRS have already been achieved. U.S. firms would not enhance their position by switching towards IFRS because the U.S. GAAP network is already very large and offers many peers using the same set of standards. (hail 2009)
Essentially comparability benefits to U.S. firms and investors will be limited for at least three reasons. First, the US is a large economy with many firms. Comparability effects are likely to be larger for smaller economies with fewer firms. Second, firms and countries have incentives to implement IFRS in ways that fit their particular institutional infrastructure and meet the specific needs of their stakeholders. Third, U.S. GAAP and IFRS are already fairly close and are expected to be closer by the time the...