The Transition from GAAP to IFRS: Advantages vs. Disadvantages

The Transition from GAAP to IFRS: Advantages vs

. Disadvantages

The standards, interpretations, and the framework adopted by the International Accounting Standards Board (IASB) are called International Financial Reporting Standards (IFRS). The system of IFRS is used in many parts of the world, including the European Union, Hong Kong, Australia, Malaysia, Pakistan, Russia, South Africa, Singapore, and Turkey. As of August 27, 2008, more than 113 countries require or permit IFRS reporting. Most notably absent from the practice of these standards is the U.S., who's recent interest has been unwavering. In 2002, the IASB and the U.S. agreed to work towards reducing differences between IFRS and U.S. GAAP. In August 2008, the Securities Exchange Commission announced a timetable that would allow some companies to report under IFRS and require it of all companies in the near future. With this adoption, U.S. financial reporting will change considerably requiring professional environments to adapt.

It is important to realize the purpose of these new changes. The international standard-setting process began several decades ago as an effort by industrialized nations to create standards that could be used by developing and smaller nations unable to establish their own accounting principles. As the business world has become more global, many have realized the importance of having these standards in all areas of the financial reporting process.

The IFRS standard has been gaining worldwide support and the globalization of business has accelerated its acceptance. In a survey conducted in late 2007 by the International Federation of Accountants (IFAC), a large majority of accounting leaders from around the world said that a single set of international standards is important for economic growth. Many people within capital markets are supportive of the move. They believe that the use of common standards will make it easier to compare financial results of reporting from different countries. Investors would be able to understand opportunities better and be able to use one company-wide, accounting language. The ability to present financial statements on the same level as competitors creates fewer headaches.

Nevertheless, many people think that U.S. GAAP is the gold standard, and something will be lost with the full acceptance of IFRS. Others suggest that trying to establish a uniform set of global standards would run the risk of overlooking the unique economic, political, cultural, legal, and regulatory realities that exist in different nations and regions. But, recent SEC involvement and global trends have increased awareness of the need to address possible acceptance. According to a survey conducted in the first half of 2008 by Deloitte & Touche among chief financial officers and other financial professionals, U.S. companies have an interest in adopting IFRS and this interest is growing. This significant shift has many companies preparing for the transition.

There are several challenges that need to be evaluated prior to the potential adoption of IFRS in the U.S. One of those issues that the IFRS seeks to address is those countries that claim to be converging to international standards and making sure they comply one hundred percent with the idea. Modifying standards they do not consider in their best interest will lead to incomparability. It is important that the IFRS standards are applied and enforced in a consistent manner. Similarly, overtime there must be improved coordination of global regulatory review. Absent those changes, we would never reach the full potential of a more uniform global reporting system.

The success of IFRS as a high quality set of global accounting standards depends upon the IASB functioning as a truly independent standard setting body. The IASB needs to have a secure, stable funding mechanism, expert staffing and appropriate governance structure to ensure the standard-setting process is free from undue influence from various constituents. To address some of these concerns, in January 2009 a monitoring board was made up of representatives to enhance public accountability while at the same time maintaining the independence of the standard setting process.

But in order for the U.S. to successfully transition to IFRS, it will require a significant amount of effort and money from all market participants in the capital markets system. Transition to IFRS will increase the need for training and education for investors, accountants, auditors, and others involved in the preparation and use of financial statements. For example the CPA exam would need to be adjustments to reflect knowledge of IFRS material. Businesses would need to also implement new software platforms and adjust their reporting processes to reflect the requirements of new standards. It is evident that costs will increase if a change is made in accounting standards, which could decrease many companies's willingness to accept the IFRS new principles.

Other improvements or changes consist of regulators need to adjust oversight and disclosure requirements from the current system based on GAAP to new standards based on IFRS. It is essential to achieve international cooperation and coordination, which could be difficult. Investors (both individuals and institutions) and lenders would need to become familiar with financial reports prepared in accordance with IFRS. For example, lending agreements would need to be modified to allow for and consider reporting under IFRS. As well as investors, members of the U.S. legal system, including lawyers, judges, and lawmakers, would need to work through a variety of tax issues and other applications of law. Adopting such a global practice effects the chain of command, thus requiring everyone to commit to modifications that, at first, will be tough to handle.

While the concerns outlined above warrant consideration, there are more factors that support the idea of adopting or accepting the IFRS standards. A single set of standards would increase the ability of companies to raise capital around the world while also allowing investors to more efficiently compare global investment opportunities. It would also align the U.S. with the rest of the world who have accepted the principles and put them into action. Most importantly, the adoption would protect the long-term future competitiveness of U.S. capital markets. If the U.S. doesn't, investors and businesses could shift to other financial centers. The adoption of IFRS standards will occur and be successful; moreover, it will provide the U.S. with transparency, long term growth, and global advantages not yet fully experienced under U.S. GAAP.

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