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Why the United States Should Adopt IFRS

Accounting practices have long been the topic of debate in the United States. Currently, the United States requires companies to follow the GAAP method of financial reporting. GAAP, or Generally Accepted Accounting Principles, has served this country well for years. However, with the growth of cross-border financial activity, the time has come to adopt a new set of rules. IFRS, or International Financial Reporting Standards, is currently the standard for many countries across the world. Presently, approximately 120 countries and jurisdictions require or permit the use of IFRS as the standard accounting practice (IFRS FAQ). Most of the world's top economies require the use of IFRS, with the exception of the United States, Japan, India, and China. However, Japan currently allows for volunteer use of IFRS, and India and China both have plans for full convergence into the use of IFRS as well (“IFRS in the US”). The SEC has long discussed and supported the change to IFRS, and it is finally time to take action.

The United States should adopt the IFRS method in order to harmonize financial activities globally. Companies no longer stay within the constraints of their own borders. Now, more than ever, there is a demand for cohesion across the world when it comes to accounting practices. In order for the United States and its' companies to stay competitive, they must take part in this global commerce. However, without a standard of financial reporting, it will be difficult for companies to keep up (Iwata). Comparisons cannot be easily made between companies on the two different methods. Foreign investors may be weary of companies who currently report with GAAP, as it has different reporting regulations that are long and complicated to understand. Mergers and acquisitions involving foreign companies most likely will require the use of IFRS. Companies who conduct business globally, or companies with foreign investors, may already be required to convert part of their business financing to IFRS, depending on the country or location of subsidiaries. Switching to IFRS will also benefit companies who are interested in raising capital globally. For many, this is currently an untapped market that can be very lucrative for business (IFRS FAQ).

In the past, opposition to adopting IFRS has come from those who are concerned with the undertaking of re-educating a population of accountants. While this may be true, most accountants are likely already been exposed to IFRS. Many accountants may already be required to use IFRS for some activities, and the growing population of accountants and other financers coming out of college are already being educated on IFRS. Business schools across the country teach students about both accounting principles, and how to work under both standards. Similarly, changes made to US GAAP have often followed IFRS, streamlining the eventual switch to the international standard (“IFRS in the US”).

The financial implication on United States companies and investors, if there was an adoption of IFRS, has also been debated. However, many studies have been conducted that have concluded numerous positives for US companies and investors. Hail, Leuz, and Wysocki found that a unified accounting standard can lead to greater market liquidity, lower cost of capital, and greater allocation of capital. They found that over the long-term, comparability benefits continue to increase (Hail, Leuz, and Wysocki). Aside from financial benefits, Hail, Leuz, and Wysocki found other large-scale benefits. For one, the adoption of IFRS has political benefits, as it is a signal of the United States harmonizing and cooperating internationally (Hail, Leuz, and Wysocki).

Overall, there are many benefits to the United States adopting IFRS. The use of IFRS will benefit companies who wish to compete and operate globally without having to work between to different sets of accounting principles. Students and professionals are already being educated on the use of IFRS, which makes for a much smoother transition out of GAAP. Finally, there are many financial and political advantages to an international standard of accounting. In addition, many leaders in the industry have voiced a need for unity in accounting principles. Sir David Tweedie, former chairman of the International Accounting Standard Board, was adamant on his support for one global accounting system (Iwata). In addition, companies like accounting firm powerhouse Price Waterhouse Cooper have also expressed a need for standard accounting principles (“IFRS in the US”). The time has come for the United States to finally listen and adopt IFRS.

References

Hail, Luzi, Christian Leuz, and Peter Wysocki. “Global Accounting Convergence And The Potential Adoption Of IFRS By The U.S. (Part II): Political Factors And Future Scenarios For U.S. Accounting Standards.” Accounting Horizons 24.4 (2010): 567-588. Business Source Complete. Web. 10 Nov. 2015.

“IFRS FAQ.” IFRS Resources. AICPA, 2015. Web. 10 November 2015.

“IFRS in the US: The importance of being financially bilingual.” PwC. PwC, February 2014. Web. 10 November 2015.

Iwata, Edward. “U.S. considers costly switch to international accounting rules.” USA Today. USA Today., 6 Jan. 2009. Web. 10 Nov. 2015.



Source by Caley Gallagher

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