As the world continues to shrink through the use of technology, companies have the need to conduct their businesses internationally. This need increases for any company that wishes to enter into a new global market. This new global market demands a simple and unique international accounting standard. However, an innovation has been occurring across borders in how businesses are reporting in a single accounting standard. This innovation is called International Financial Reporting Standard (IFRS).
Today, U.S. Securities and Exchange Commission (SEC) has faced a dilemma in making IFRS an option or even mandatory. It could affect some components of Generally Accepted Accounting Principles (US GAAP) mostly in the areas of revenue recognition, inventory (no LIFO), equity, and statement of cash flow. However, it could benefit U.S companies to obtain an international accounting standard due to the increase in globalization. In other words, it could help businesses to expand and grow globally. Should SEC consider it? Like all changes, moving over to IFRS has its proponents and opponents.
IFRS is a set of accounting standards originated in London by the International Accounting Standards Board (IASB). IFRS began operations in 2001. Since then, approximately 120 countries allow or require the use of IFRS, which is expected to be implemented in other countries as well. Many proponents consider the switch to IFRS to be inevitable. Why is this? With the globalization, IFRS could be beneficial to make a single worldwide accounting standard. This means that companies can submit their financial statements in the same way that their foreign competitors do, making comparisons easier to interpret across borders. Another significant point is that IFRS helps to reduce the time of preparing financial reports according to different standards and regulations.
IFRS might also cut costs, especially for multinational companies that must file financial reports under different systems. In fact, it proves a lower cost of capital. According to IFRS, its principal objective is being a single accounting framework or “language” aiding companies to prepare, display, and disclose their financial statements in a simpler manner. For example, if all companies report under IFRS, this would create one “language” that can be used worldwide. Because more countries have been reporting under IFRS, U.S companies are able to obtain financing and sources from other countries.
However, the switch to IFRS is a great challenge. While the proponents indicate that IFRS is a positive change, the opponents say that it is unnecessary. First, Financial Accounting Standards Board (FASB) and SEC could be considered as secondary, transferring the authority to the IASB. As a result, the US government does not prefer this option. Second, if U.S. GAAP is replaced, it leads to higher costs, such as re-education, re-training of employees, and implementing a new system. Opponents indicate that companies should have a training plan not limited to the accounting department, which could be costly. The transition would take months to complete, and it is more complex and lengthier than anticipated, such as the experience of some European countries. Among other issues, the larger the company is, so the greater cost is expected during the transition.
One great difference is that US GAAP is rule-based while IFRS is principle-based. According to the opponents, US GAAP delivers a high quality of securities regulations and accounting standards in its financial reporting. In other words, the GAAP is a “room of interpretation” which is better to project the performance of a company. To be GAAP rule-based, it might minimize the threat of lawsuits to accounting firms. IFRS does not guarantee a modification of the US legal system; consequently, accounting firms might be more prone to lawsuits according to the opponents. They indicate that unless the legal system changes, accounting firms need guarantees of protection to avoid lawsuits when accounting firms integrate IFRS.
I am not for or against switching to IFRS. As a future accountant, if changes come, I must adapt to these changes. First, if the benefits exceed the costs, then IFRS should be a good option. Second, if companies have the same system of preparing their financial reports, then this system could be attractive for any US companies that seek to attract foreign investors. Third, I agree with opponents when indicating that accountants need guarantees not to be threatened of future lawsuits. In addition, if the change occurs, I need a re-education. Then my questions are: Should I pay for my re-education? How many months or years do I need to complete my re-education?
SEC has a great challenge on its hands. There is no timeline when IFRS could replace US GAAP. However, one thing for certain is that each year more countries allow or require IFRS, conducting their businesses internationally. Should IFRS implementation be voluntary or obligatory? I do not know. However, any decision that the SEC takes is because that decision is the best for the U.S economy and accounting firms.