The United States is currently going through a big decision. It is deciding on whether to fully adopt International Financial Reporting Standards (IFRS), or to stay with the current U.S Generally Accepted Accounting Principles (GAAP). Since this is such a major decision, now would be an opportune time to take a look at what the pros and cons would be of switching to this new way of financial reporting, and in doing so, show why I believe the costs (both financial and otherwise) are too high to adopt a new set of reporting standards. Purpose and Scope
The purpose of this report is to look at the advantages and disadvantages that would occur if the United States were to switch their financial reporting standards from U.S GAAP to IFRS. My analysis will focus on: The differences between IFRS and U.S GAAP, the cost it would take to implement a new set of reporting standards, the education and training gaps, and the advantages vs. the disadvantages of adopting IFRS. Analysis
The Differences between IFRS and U.S GAAP
The Encyclopedia of Business and Finance’s summarizes and explains what the main difference of GAAP and IFRS: “[GAAP] are not a set of specific circumscribed standards that can be easily found in one convenient set of rules and that it is highly regarded in the United States for the quality and comparability of the information they provide. Investors and other users have also been well served by our system of financial reporting.” 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. 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. In comparison, IFRS provides much less overall detail. Its guidance regarding revenue recognition, for example, is significantly less extensive than U.S. GAAP. IFRS also contains relatively little industry-specific instructions. IFRS is also about ten times shorter than US GAAP. This is the case because it utilizes “principles” that lay out the guidelines for what is expected and then allows its users to take it from there. With respect to revenue recognition, US GAAP has developed a detailed guidance for different industries incorporating standards suggested by the other local accounting standard organizations in the US. IFRS, on the other hand, mentions two main revenue standards along with a couple of interpretations related to revenue recognition as guidance. There are also some significant differences related to when an expense should be recognized and the amount that has to be recognized. For instance, IFRS recognizes the expense of certain stock options with vesting over a period of time sooner than the GAAP. There are also some significant differences between the US GAAP and IFRS with respect to the arena of financial liabilities and equity. Instruments that were regarded as equity by the US GAAP will be considered as debt under the IFRS standards.
Costs of Implementing IFRS
Based on survey data for 2005 mandatory transition to IFRS in the European Union, it was possible to construct an estimate of the first-time preparation costs of IFRS consolidated financial statements for publicly traded firms. Using the survey’s measurements, the transition costs estimate “to be at least 8 billion dollars for the entire U.S. economy”. “The average one-time cost of $420,000” will be difficult to absorb for local and small firms. The main beneficiaries would be multinational corporations. Education and Training Gaps
While the SEC and IASB have embraced IFRS, study participants believe a critical and formidable challenge looms in the lack of IFRS education, knowledge and training at the university, business enterprise and...