As stated earlier, the change about to be adopted by the United States in adopting the International Finance Reporting Standards (IFRS) from the current Generally Accepted Accounting Principles (GAAP) will redound to the benefit of the United States in general (Holger Daske, 2008). This issue has taken a special place of importance in reaction to the adoption of the European Union of the IFRS (Daske, 2008).
The seeming move of the United States to homogenize its accounting standards with that of the rest of the world comes on the heels of increasing initiatives of other nations to link their respective economic machines and falling trade restrictions (Wharton School-University of Pennsylvania , 2007). It is also seen in this initiative that the world is constructing a sort of universal communication link in terms of accounting practices (Wharton, 2007). History of the Switch On the 28th of August, the United States Securities and Exchange Commission made a major announcement that the U. S was jettisoning its the rules-based GAAP in favor of the principles-based IFRS (Richard Sasanow, 2008).
But the Sec has emphasized caution in its departure from the old system in its drive to comply with the newer IFRS (Sasanow, 2008). Basically, the map for the convergence of the United States’ accounting procedures is not a map at all (Sasanow, 2008). In essence, the “map” that the Sec has given is a “map to the map” (Sasanow, 2008). The map is intended to aid companies with an earning capacity of at least $700 million to adhere to international accounting practices by the year 2014 (Sasanow, 2008).
At present, that would mean that about 100 companies headquartered in the United States spread among 34 industrial sectors would be able to adopt the IFRS system by the end of 2009 (Price Waterhouse Coopers, 2008). How Much? Is the move worth the proverbial price tag? The Financial Accounting Board (FASB) has began to take steps in allowing companies in the United States to adhere to the standards of the United States GAAP while proceeding to establish standards for compliance with the International Accounting Standards Board (IASB) for convergence to the widely adopted IFRS (Deloitte Touche Tohmatsu, 2008).
Under the aegis of the IASB, about 100 countries from the European Union and Asia have either already integrated themselves into the framework of the IFRS system or are initiating policies to bring them into compliance (Wharton, 2007). The only country still bent on non-compliance is the United States (Wharton, 2007). But the hold-out wasn’t to last. On the 17th of November, 2007, the United States Securities and Exchange Commission (SEC) allowed foreign companies in the United States to report all their financial records using the IFRS system (Wharton, 2007).
This was seen as reversal of the earlier policies of the SEC that compelled U. S. -based foreign companies to report to them their records either in the United States-recognized GAAP or to reconcile their records with the latter system (Wharton, 2007). It was also reported that the SEC would initiate moves to make companies choose between IFRS or GAAP as their mode of reporting (Wharton, 2007). GAAP and IFRS: What’s what? The Generally Accepted Accounting Principles (GAAP) recently being championed by the United States is a system that counts expenditures and development outlays as they happen (Sasanow, 2008).
The International Finance Reporting Standards (IFRS) strategy will spread these disbursements over a span of time (Sasanow, 2008). Another difference is that the GAAP has a prescription of procedures for the management of such sectors as oil and the insurance sector; the IFRS is not equipped with such steps (Sasanow, 2008). But the main difference of the two is that the GAAP in the United States is founded on rules, while the IFRS is one that is established on principles (Sasanow, 2008).
In essence, a single regulator would be responsible for guidance and enforcement of the rules, giving consideration to some ethnic diversity (Sasanow, 2008). The proposal of the United States SEC has already picked up steam in the policy implementation stage of the new statute (James Turley, 2007). Under the proposal offered by the SEC, foreign companies doing business in the United States can either file their reports either in IFRS or in GAAP format (Turley, 2007). The SEC has taken this initiative, but is also seeking comments on whether to allow the privilege to be afforded also to local companies as well (Turley, 2007).
The question thus posed is; should the SEC reverse itself of its commitment on the adherence to the GAAP and ally itself with the snowballing move of the international accounting community (Turley, 2007)? Is the move toward IFRS the right thing? In a diverse world, where mere words can be the source of a severe misunderstanding, the move to harmonize systems for better comparison and coordination seems to be a move in the right step (Turley, 2007). Such diversities in systems of reporting in financial matters breed inefficiency and confusion, and in dire need of upgrading (Turley, 2007).
With the adoption of the IFRS, the comparison of records among global business concerns will be made easier to accomplish (Wharton, 2007). With the imposition of a single system of reporting and reference, the management and utility of financial records will be greatly improved (Turley, 2007). From the standpoint of the European Union, the adoption of the IFRS system was a significant sally in line with the development of globally acceptable accounting practices and the assurance of premium quality and improved levels of comparability among the EU members (Holger Daske).
In the United States, the move of the Sec to move the United States from the GAAP to the IFRS mode of reporting was also seen as a major step to bring the United States in line with global accounting practices (Sasanow, 2008). If a single criterion is set for everyone to follow with regard to the reporting of their financial dealings, then most companies in the United States would negate the instances that business would hire auditors-both in-house and external- to aid the companies in complying with differing accounting standards in various locations and jurisdictions (Turley, 2007).
How Soon? If it is to be understood that the shift from the GAAP to the IFRS will redound to the benefit of Americans, how soon can the shift be implemented? According to the SEC, the shift will not be a wholesale, one-time event (Sasanow, 2008). The SEC foresees a staggered compliance for companies in the United States (Sasanow, 2008). Earlier, the study indicated that the 100 largest companies in the United States could be eligible for the change from the GAAP to the IFRS at the end of 2009 (Sasanow, 2008). These companies represent about 15 percent of the market capitalization of the United States economy (Sasanow, 2008).
The change from the GAAP to the IFRS would represent one of the more significant changes in the United States business world (The Metropolitan Corporate Counsel, 2008). But this change must be planned ahead and sooner than later (Metropolitan, 2008). At present, and as earlier stated, there are about 100 countries that currently utilize the IFRS as their standard of financial reporting (Metropolitan, 2008). Aside from members of the European Union and some Asian countries, Canada is bound to adopt the IFRS by the year 2011 (Metropolitan, 2008).
Many observers thought that the United States abandoning the GAAP for the internationally accepted IFRS would be next to the impossible (Wharton, 2007). But the immediate stimulus to the United States’ eventual capitulation of its adherence to the GAAP is the curtailment of the increasing capital expenditures (Wharton, 2007). This is in tandem with the attendant costs of reporting separate financial reports happening when listed firms itemize their reports to financial authorities (Wharton, 2007).
Many individuals in business acknowledge that improved accounting standards and disclosure procedures will drive down capital expenditures of companies that will embrace internationally recognized standards (Daske). Also, the move towards a unitary system of financial reporting would prove beneficial to parties other than business concerns (Turley, 2007). Potential investors would just have to analyse one set of reports than go over several differing documents when they decide to invest in companies, which are regularly expanding to different locales (Turley, 2007).
But as stated earlier, companies in the United States must be preparing now for the eventual shift (Turley, 2007). In essence, the time for business to begin for the adoption of the IFRS should be done post haste, and drop the “wait-and-see” attitude prevalent in business circles (Turley, 2007). Under the new system, the totality of listed firm in the United States is perceived to be affected by the shift to IFRS based reporting (Metropolitan, 2008). Business concerns expected to be hit by the move would include system for information technology and corporate structure concerns (Metropolitan, 2008).
Expenses would likely be more concentrated in the area of retraining of employees and in upgrading or switching information technology software and equipment (Metropolitan, 2008). But these initial costs are expected to be recovered once the instance of consistency in disclosing of reports in the IFRS methods is established (Metropolitan, 2008). It must be noted that the change for companies to switch over to the new IFRS system will not be entirely easy (Turley, 2007).
Companies are usually wary about the degree or level that courts of law will decide in regards to the application of international barometers (Turley, 2007). But if the changes are done in time, then the transition to the new strategy can dispense immense dividends for the prepared companies (Price, 2008). Inclusive of the dividends are more efficient operational and accounting structures and procedures and reduced outlays for capital needs (Price, 2008). Adoption of the IFRS: Raising the bottom line? It is admitted that the change for the present GAAP to the IFRS will impact companies in differing ways (Price, 2008).
Also, it is noted that businesses must begin to prepare for the eventual mandatory transition as early as possible to avoid “catch-up” scenarios on variety of finance topics and concerns at the last minute (Price, 2008). Adherents for the transition into the IFRS system aver that aside from the increased compatibility of the financial records of different companies, the eventual change will enhance transparency in corporate affairs, ameliorate corporate reporting standards that will redound to the gain of investors and the companies themselves (Wharton, 2007).
For example, if a European based company would consider listing on the New York Stock Exchange, under previous practice, the company would have to expend considerable resources to conform to the GAAP standards of the United States and the IFRS reports in its possession (Wharton, 2007). If the reports were accomplished under a single set of procedures rather than trying to dovetail the two, potential investors of a listed company would be in a far better situation (Wharton, 2007). This is the perceived effect as the company would forego additional encumbrances in preparing reports for potential investors to go over (Wharton, 2007).
This would also allow the investor an opportunity to be more educated about their choice to invest (Wharton, 2007). The adoption of the IFRS would afford investors with clear directions and analysis of the company, rather than going over two sets of reports (Wharton, 2007). In essence, the adoption of the IFRS, as stated earlier, would considerably reduce the costs of companies with respect to their capital disbursements (Daske). Foreign companies that would have to prepare several sets of financial reports would now be able to craft a single report for investors, and aid in the optimum allocation of investment capital (Sasanow, 2008).
Developing and newly-rising capital markets are also targeted to be beneficiaries in this trend to unify financial reporting standards (Turley, 2007). The adoption of a globally acceptable, permitted mode of disclosure will allow these markets to actively advance their locales for investment purposes, which will provide capital for economic activities that will uplift the lives of the citizens of that state (Turley, 2007). Resistance to change: Unfounded or inequivaocable? In Managerial Accounting, the course is inclusive of a topic known as incremental analysis (David Albrecht, 2008).
In the discussion, it is determined whether a course taken or will be taken will provide benefits outstripping the costs of adopting the proposed action (Albrecht, 2008). In some studies conducted for the purpose, it was shown that there are negative aspects to the United States’ shift from the GAAP to the IFRS (Albrecht, 2008). How much are the costs? British Petroleum officials estimate the cost for them to switch to the IFRS method cost the company $100 in the first year alone, with increasing costs of about $100-150 million in the short-term (Albrecht, 2008).
Conclusion It must always be considered that in switching to other systems, there are always attached costs and outlays that need to be addressed. The main point in the shift to IFRS is the reform and harmonization of accounting financial reporting in an enlarging global market (Jon Newberry, 2008). The cost to the United States, while they may be negligible to investors in the United States (Albrecht, 2008), is whether the United States can delay in its implementation of the new policy (Metropolitan, 2008).