IFRS: An opportunity or an obstacle?
IFRS: An opportunity or an obstacle?
IFRS: An opportunity or an obstacle?
As international business flourishes, a growing need for a global set of accounting standards has become prevalent. To alleviate the differences in financial reporting that vary throughout individual countries, the International Financial Reporting Standards (IFRS) have intent to provide consistency and uniformity worldwide. There are currently over 100 countries that already require or permit the use of IFRS standards, leading the United States to view the adoption of IFRS as an opportunity for the country to become parallel with the many other nations participating in the transition. However, the differences between the United States Generally Accepted Accounting Principles (GAAP) and IFRS have brought about unresolved issues that have delayed the finalization of the standards. Hence, the U.S. compliance to the global standards has become an obstacle for the boards, and created some uneasiness amongst business and investors as they wait for the final decisions to come together.
The U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) pledged to create a high-quality set of standards that will allow for full compatibility of GAAP and IFRS to improve domestic and cross-border relations. The commitment between the FASB and IASB is projected to promote international business growth and eliminate international differences. Originally, the boards aimed for standard completion by 2011 and adoption by 2014, however, the prevailing differences have prevented this goal from being held attainable, as the standards are slowly progressing toward convergence. Ideally, the standards will reach finalization by 2014, and compliance will be required the following year. The challenges, however, that have arisen in the convergence process are due to a number of differences between IFRS and GAAP, including: the general orientation of principles; definition, recognition, and measurement differences; alternatives, requirements and guidance; presentation and disclosure differences. With the variance in these areas, and potentially in other aspects as well, the FASB and IASB have encountered difficulty in attempting to make ends meet.
The general orientation of principles varies between GAAP and IFRS, as GAAP is a rules-based system with strict guidelines for all levels of business and individual business sectors. IFRS, on the other hand, is a principles-based system, that requires greater judgment in decision making and in applying standards due to its lack of detail. As a result, IFRS tends to be much more flexible than GAAP. For the most part, the concepts are similar for both standards, but there are definition differences that may lead to recognition or measurement differences in reporting. Also, the availability of alternatives under IFRS allows businesses to choose a method of reporting that suits the organization in some circumstances, whereas GAAP provides a specific method that is followed, usually without exception. This option may give some businesses too much freedom, and enable them to make decisions that may benefit the appearance of financial statements, but may not necessarily be the best fit for the business operations, such as inventory methods and measurement practices. And lastly, some variations exist in the presentation of financial statements and the disclosure methods that will take some time to adapt. GAAP may cover issues that IFRS does not, and visa versa, but over time it is expected that the last of these issues will be resolved.
The most crucial point in the transition is the ability of businesses to conform. This is mainly due to the immediate impact if businesses do not begin to prepare in advance. There is a "Big Bang Theory" relative to the adoption of IFRS, that warns of the implications that may hinder operations and potentially create a business crisis if gradual adjustments are not made in the meantime (MAZARS, 2009). It is encouraged that businesses analyze, and gradually implement the necessary operational changes to prevent the them from being overbearing at the official changeover. Alternatively, companies may face the threats of not having enough time to understand the resources required for conversion, realize the financial impact that will occur, account for the costs associated with the conversion, and/or be able to resolve any problems that may arise before they hit the reporting deadlines. In preparation, proper modifications to business practices must be considered early, so that businesses may get a head start on the conversion process and avoid the "big bang" effect that may otherwise frighten their investors and associates.
The transition to IFRS can be a long and complicated process with many technical and accounting challenges to consider. With the effects ranging from accounting, financing, and operating activities to auditing, investing, and marketing, multinational entities must consider the implications of the vast changes that are underway. Both internally and externally, businesses and investors will determine the outcome of the conversion through their acceptance and participation on a global level. With the complications that are currently under review, it may prove difficult to welcome the IFRS standards, and it will be costly and time consuming, however, the changes are imminent and must be endured. The earlier the international entity acts to associate its business with the standards, the more efficiently and effectively the convergence will be managed. The advantageous aspects of the eventual adoption can only be gained through the cooperation of businesses in the transition, otherwise, the state of the economy may be in for a rude awakening over the years of change that are pending final approval.
Work Cited
"IFRS and US GAAP Similarities and Differences." PWC.com PriceWaterHouseCoopers, September. 2010. Web. 13 Nov. 2010. .
MAZARS. "Coverting to IFRS: Project Management Guide." Moss Adams LLP, 2009. Web. 12 Nov. 2010. .
Timoth Doupnik and Hector Perera. "International Financial Reporting Standards," International Accounting. McGraw-Hill/Irwing, 2009. Pp. 114-161.
"US GAAP & IFRS Convergence." PWC US: Building Relationships, Creating Value. PriceWaterHouseCoopers, 2010. Web. 16 Nov. 2010. .
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