IFRS Adoption in the US

IFRS Adoption in the US? Introduction “The International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB). The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements.” (Rouse, 2011, p.1) At present, over 100 countries have adopted IFRS but certain countries including the US have yet to adopt IFRS standards and currently use US GAAP accounting standards. Whilst these two standards are converging and becoming more similar, differences still exist. In this report I will discuss the benefits and the outstanding issues regarding IFRS adoption in the US. Potential benefits of IFRS adoption Adopting IFRS has many advantages, most notably making comparisons of companies in different countries very easy. This means that “cross-border businesses benefit from reduced preparation costs, and cross-border trading in securities increases.” (ICAEW, 2012, p.6) This is beneficial as companies will have lower costs and therefore more retained earnings.

The extra trading aids growth and helps them to achieve higher turnovers. As IFRS was introduced into the EU in 2005 evidence can be obtained and this concluded that the implementation of IFRS in the EU led to reductions in the cost of raising capital. (ICAEW, 2012) This benefit can be expected by the US, should they adopt IFRS and this would encourage more companies to invest as it would cost less to raise capital, making otherwise unfeasible projects feasible. IFRS adoption leads to “a set of truly global, high quality accounting standards, providing the foundation for transparent and comparable financial statements.” (ICAEW, 2012, p.6) Transparent accounts breed confidence within investors as they have a clearer picture of the company’s financial position, allowing them to make more informed decisions about which company they want to invest in. It also allows swift comparisons of international companies and this creates more opportunities to invest abroad. Adopting IFRS will help to increase the reliability of the accounts and this will lead to higher market efficiency. (Brown, 2011) Another advantage is that IFRS has been designed for use on an international scale. It was developed away from particular controls such as legal controls. However, this is not the case for US GAAP, which has specific regulations and has been subject to political intervention. Therefore, US GAAP is not as effective when companies which aren’t in the US use it. (ICAEW, 2012) IFRS also has the advantage of being principles based whilst US GAAP is rules based. Rules based accounting can be exploited easier creating misleading accounts. It can also lead to a set of more complex accounts being produced, which is ineffective for international companies.

For example, when accounting for inventory costs using IFRS the LIFO method isn’t acceptable, however when using US GAAP either the LIFO or the FIFO method are acceptable. If only one method was used comparisons between international companies would be improved and inventories under the LIFO method wouldn’t need to be adjusted in order to compare companies. (Nguyen) Therefore analysts wouldn’t be needed to adjust the figures and this would save time and money. The figures would also be more reliable as they’re less prone to error leading to a better informed decision. Barriers to IFRS adoption A barrier to IFRS adoption is the fact that there is no global regulator to ensure that IFRS has been adopted and applied constantly.

Different countries will interpret IFRS in different ways and maybe change it slightly to reflect any difference of opinion that they have. If this is the case the benefits of having one global set of accounting standards will be lost. (ICAEW, 2012) Also IFRS adoption wouldn’t guarantee comparability because of a number of factors that differ between countries. Some of these factors include language, cultures and legal systems. A considerable barrier to IFRS adoption in the US is the costs and disruptions that will be caused to businesses by adopting IFRS. Accounting policies and computer systems will change and this means that staff would have to be retrained to become comfortable and efficient in the new policies. This will cost the company lots of time and money, which could be used more effectively if IFRS isn’t adopted. (ICAEW, 2012) Selling states in his journal that spreading out the expenses that would come with adopting IFRS over a long period of time would have no significance as it would still impact the companies in the same way. The companies would have less money and therefore would miss out on investment opportunities, regardless of how long the payments were spread out for. Smaller companies have no interest in being compared to foreign companies, as they don’t trade internationally, and therefore wouldn’t want to adopt IFRS as they would bear the transition costs.

Therefore adopting IFRS has no positive impacts on their company. (Selling, 2013) It is estimated that switching to IFRS will cost US companies $8 billion. (Jordan, 2013) “One off transition costs for small and medium sized companies will be on average $420,000.” (Jordan, 2013) This is a substantial amount for these companies and could possibly put some in financial distress. Therefore the majority of SMEs don’t want to adopt IFRS as it could have a detrimental effect on their businesses especially in the short term. Conclusion In conclusion there are many benefits and barriers to IFRS adoption in the US. One of the most important benefits is the reduction in the cost of raising capital for companies and the increase in cross border trading. IFRS also promotes transparent and comparable financial statements and this gives investors a clearer idea of whether to invest in the company. It is also principles based meaning that accounts are less likely to be exploited. However, the biggest barrier to IFRS adoption in the US is the costs that are associated with switching from US GAAP to IFRS. These costs are substantial and are too high for many of the companies in the US. It is likely that the US will adopt IFRS in the future but for the moment it doesn’t appear that they will be adopting IFRS. Annotated Bibliography BROWN, P. (2011), ‘International Financial Reporting Standards – what are the benefits?’ Accounting and Business Research, 41 (3), 269-285 This journal mainly highlighted the benefits that are associated with IFRS and only slightly touched on the barriers for IFRS. The paper was sponsored by ICAEW. The main arguments all involved reference to the effect on the financial markets. One of the main arguments was that IFRS adoption encourages cross border trading leading to market efficiency. Brown used lots of sources to back up his points and further his argument. He concluded that many benefits could be obtained by adopting IFRS but it would take more than one country to achieve these, but more evidence was required. I used this journal because it concentrated on the benefits of IFRS and it was useful in furthering my understanding of IFRS and how it impacted the financial markets.

However this paper was commissioned by ICAEW who work with IASB and therefore would favour the introduction of IFRS. This explains why the paper only concentrates on the benefits. ICAEW also assisted in the UK adoption of IFRS. The paper is also written by a respected author/journalist. ICAEW (2012) ‘The future of IFRS’ This journal was written by ICAEW. One of the biggest accounting firms and it has a good reputation. The journal discussed both benefits and barriers to IFRS adoption. The main arguments included the high costs involved with adopting IFRS and the associated benefits such as high quality accounting standards that are transparent and comparable. The journal uses many sources to back up its arguments including other ICAEW publications. It concluded by discussing possible options going forward.

This paper was presented in a non-biased way it discussed both benefits and barriers to IFRS. However it was written by ICAEW so it could be biased as they assisted in the adoption of IFRS in the UK. Jordan, Anna., 2013 Advantages and disadvantages of IFRS compared to GAAP [Online] Available at: https://research-methodology.net/advantages-and-disadvantages-of-ifrs-compared-to-gaap/ [Accessed: 2nd December 2014] This article displayed several advantages and disadvantages of IFRS adoption. It had advantages such as improved consistency and transparency of financial reporting. It also wrote about disadvantages such as the high costs of changing to IFRS. This article was not biased although it contained more advantages than disadvantages. The accuracy of the information could be questioned as it is not written by a known author. Nguyen, J. What are some of the key differences between IFRS and US GAAP? [Online] Available at: https://www.investopedia.com/ask/answers/09/ifrs-gaap.asp [Accessed: 3rd December 2014] Fact based website explaining key differences. The information was provided by a non-scholar so it may not be entirely accurate. Rouse, M.,2011 IFRS [Online] Available at: https://searchsecurity.techtarget.co.uk/definition/IFRS-International-Financial-Reporting-Standards [Accessed: 3rd December 2014] Provided a definition. Selling, T. (2013) ‘Bumps in the road to IFRS adoption: Is a U-turn possible?’, Accounting Horizons, 27 (1), 155-167 This journal focused solely on the barriers for IFRS adoption. It listed 10 facts and then went on to disprove them. It focused on the barriers and the main arguments included that the costs of implementing IFRS were too high for it to be feasible. It used many sources to back up its points and to further them. The journal was written by an American and he is displaying part of his opinion that he doesn’t want the US to adopt IFRS.

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