Globalization is a trend businesses cannot ignore. The transformation to International Financial Reporting Standards (IFRS) from U.S. GAAP began in early 2005, with numerous states in the European Union adopting techniques to prepare their financials in accordance with the new standards. Since 2005, many states that were planning on converting to U.S. based Generally Accepted Accounting Principles (GAAP) have switched their focus to adopting IFRS. Countries like New Zealand, Canada, and Australia have already implemented IFRS, while Japan plans to do so by 2011 and the United States by 2014; a huge change that will affect everyone.
Now that a little background has been brought to the table on the history of International Financial Reporting Standards, it is important that you know the key differences when comparing U.S. based GAAP with IFRS. To begin, IFRS does not permit Last in First Out (LIFO) as an inventory cost method. However, it is to my knowledge that only a small number of companies, about ten percent still use LIFO. IFRS ideas regarding revenue recognition are more widespread than GAAP containing very little instruction specific to each industry. IFRS uses a single-step method for impairment write-downs compared to the two-step method U.S. GAAP supports. Under the single-step method, write downs are far more likely to take place. Overall, the main and most important difference is the fact that IFRS provides much less specific detail and has fewer requirements to adhere to in reporting than GAAP does.
The main differences in International and U.S. standards create certain advantages and disadvantages. Detail has been the key factor that has made GAAP successful for so many years. Eliminating required specifics may cause uncertainty and distrust in auditing and more fraudulent scandals in the accounting world. Stockholders and lenders may lose faith as a result of this with full detail not being shown. Frightening enough, this could affect many other areas of our economy. I have never heard of anyone wanting to invest in something they do not know almost every piece of information about; the rock investments have been made on. To put it in perspective, the 'book' on Generally Accepted Accounting Principles is almost ten inches thick, while International Reporting Standards measures only between two and three.
No matter how you look at it, the main goal and reason to convert to IFRS is to put everyone globally on the same level with respect to preparing financial statements. This being said and done will allow domestic companies to present their financials on the same level as foreign competitors. Furthermore, companies with subsidiaries on other continents will be able to prepare statements in one, worldwide, universal accounting language understood by all. While it all sounds easier and less confusing, the only way IFRS will work is if firms comply one hundred percent. Not fully converting will eliminate the main goal- global comparability.
The main goal of global conversion may be hard to achieve. Many believe that U.S. Generally Accepted Accounting Principles is a tried and true standard, the foundation of U.S. accounting success. We have to question if something will be lost with the acceptance of International standards or if it could even work without complete convergence. Two problems exist that may present an issue to certain firms facing the question of whether to convert or not. Some companies may have to stick with GAAP by request of certain authorities or regulators. One would think regulations and authorities would change stance as well, but for now it is uncertain. Also, there will hardly be an incentive for companies to convert if they have no market incentive to prepare their statements this new way. For example, maybe the company deals solely in a small domestic industry. An incentive must be created. Hopefully, once a handful of firms convert, all others will follow for one reason or another.
Overall, the idea of instituting a worldwide set of standards is a bold and well thought out idea. If properly implemented, the global accounting language could entice foreign investors and create a greater interest in our economy possibly providing a stimulus. The advantages and disadvantages are quite clear; the only thing left to do is complete a global transformation. If IFRS fails and GAAP is readopted, economic instability may result. Certainly no one wants to invest in an unstable market.
Brandon Miller
IFRS FAQs
http://www.ifrs.com/ifrs_faqs.html
International Financial Reporting Standards (IFRS) - An AICPA Backgrounder
http://www.ifrs.com/updates/aicpa/Backgrounder_pdf.html
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