Costs and Benefits of Adopting the International Financial Reporting Standards

Costs and Benefits of Adopting the International Financial Reporting Standards

The world is a changing place, especially in the business world. Technology has revolutionized the way everyone does business. Our markets have grown from being largely domestic in nature to being global; this change has required many aspects of businesses to change, including the way that their financials are reported. The need for a unified accounting format has never been more prevalent than the present. The current candidate unifying the accountants of the world is the International Financial Reporting Standards. There are a few advantages with switching to the International Financial Reporting Standards (iFRS), but those advantages can be outweighed by the disadvantages.

The one major advantage to be derived from the new system would be an enhanced method of comparability worldwide. A unified system of accounting information would provide better financial information for shareholders and investors. Even when companies are in the same industry, different accounting standards lead to a difficulty in comparing their financial data. A unified method would increase the investor's confidence because it would allow them to confidently compare when they are familiar with the terminology. Certain methods of accounting, like the last in first out inventory valuation method are not accepted by iFRS. This could be problematic when comparing companies that use conflicting inventory valuation systems, one company may be at a competitive advantage because of the way they value inventories. Ultimately the change would allow for investor confidence and a better idea of the competitive environment companies are operating in.

One of the major problems with switching to the iFRS is the cost associated with the change. Accountants and other financial professionals have been being trained using the Generally Accepted Accounting Principles (GAAP) for over 70 years. It would take a considerable amount of money to retrain all the financial professionals; entire corporate finance departments would be required to learn the new standards. There would also be a loss of efficiency due to the time it would take to fully understand and implement the new standards. Entire textbooks would also have to be rewritten and students would have to learn the new method, or potentially retake certain classes to acclimate them to the new standards.

Another problem with the iFRS is that it has no source of funding which could leave it susceptible to political influence. Unlike the Financial Accounting Standards Board and other regulatory agencies in the United States the iFRS is not self-sustaining or government funded. The major source of funding for the iFRS is through corporate donations. This alone opens up a whole string of problems, most notably the likely-hood for iFRS's agenda to be dictated by the agenda of the contributors. Combine that with the fact that the iFRS is still in an infant stage makes the surrounding skepticism warranted.

Finally, the United States' GAAP is significantly better than the iFRS. GAAP has drawn its current iteration from the Financial Accounting Standards Board (FASB), Accounting Principles Board (APB), Committee on Accounting Procedures (CAP), and the American Institute of Certified Public Accountants (AICPA) meaning that the current iteration of GAAP has been being tweaked and refined, for the past 70 years, to fix any major flaws. GAAP is widely considered the gold standard of the world and seems like a much better candidate for a unified, global set of accounting principles. It would also make significantly more sense to adopt a set of principles based out of the United States because in 2009 the U.S. had the highest Gross Domestic Product of over $14 trillion. GAAP does not necessarily have to be the best alternative, but the fact that there seem to be better alternatives out there should provide a solid basis for rethinking the proposal.

The switch from GAAP to the iFRS will undoubtedly be a difficult one; there are many barriers that will need to be addressed before a competent, useful version of international accounting standards can be a reality. There are certain advantages to be had from a uniform set of accounting principles. However, at this point, the disadvantages seem to outweigh the advantages. At some point in time the world will need to adopt a coherent and useful system of accounting, however at this point alternatives should be considered. If iFRS is the standard of the future there will need to be numerous revisions and iterations before it can be fully accepted.

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