There has been a debate about the change from GAAP to IFRS in the United States for many years. It is not yet clear whether convergence or harmonization is the way to go with accounting standards, but there are many benefits and drawbacks to the change. IFRS have advantages, such as the ease of doing business with international corporations, cost effectiveness, and flexibility of standards. While these sound very tempting, the pros come with cons, including that IFRS is not taught in many schools in the United States, the many inconsistencies in the implementation of the standards, and the additional costs and hurdles that small businesses must overcome. and medium-sized companies that do not necessarily need IFRS. By weighing the pros and cons of IFRS, a conclusion can be reached about convergence or not.
One of the advantages of converging to IFRS, as presented in Peter Galuszka’s Pros and Cons of IFRS, is that many companies have two different sets of books when they go global and have to perform IFRS and GAAP financial statements. (Galuszka, 2008). This is a considerable cost, since the company would need two teams working with two different accounting standards. By having a standard, the company could allocate more money to a specific sector and not focus on two separate sectors. This makes the company more profitable and more focused on following a standard.
Also, the advantage of converging on a single set of standards would improve the simplicity of trading and investing with foreign companies. The ability to compare international markets on a single basis would make it much easier to analyze the financial statements of many companies at the same time and would improve the quality and timeliness of work. Transparency, reliability and ease are three attributes of convergence that sound very attractive.
One advantage of IFRS being principle-based is that it is more flexible. Epstein gives this example: “Historical cost or revaluation models can be used in long-lived asset accounting.” (Epstein, 2009.) Not only is the vocabulary of financial statement items flexible, but also the way they are accounted for. The rules-based system creates a regulated and specific way for one to account for certain items, while the principle-based system allows companies a little more freedom because many companies are different and need diversified accounts.
The disadvantages of IFRS being principled are that it can have some gray areas and can sometimes be very lenient. Financial statements are intended to be as transparent as possible, due to the Sarbanes-Oxley Act. Brian Kim, author of the Harvard Journal on Legislation, states that “The Sarbanes-Oxley Act creates the Public Company Accounting Oversight Board (“Oversight Board”) which will oversee the accounting process.” (Kim, 2003.) With this law in place, companies are closely watched for indiscretions or foul play, which in turn makes them much more transparent. Even with this law, IRFS has a bit more room to hide or misrepresent, so “IFRS implementation will only be as good as the leaders who implement it.” (“Business: Ask the CPA”, 2008, pB 4.) To have fair representation and value in a business, implementation is key.
The other disadvantage of IFRS is related to small and medium-sized companies. Small and medium businesses may incur additional costs that may not be necessary for their businesses. (Galuszka, 2008). This won’t affect them completely negatively, but it could cause some problems. “The main difference that small businesses will see will be the presentation of financial statements. The presentation of financial statements under IFRS can vary greatly compared to their GAAP counterparts.” (“Business: Ask the CPA,” 2008, pB 4.) Small businesses don’t need all the various accounting terms, due to their simplicity, so learning the new accounting standards would greatly change their financial statements.
The pros and cons of IFRS are very interesting depending on how you look at it. This research shows that many people are undecided about IFRS, due to the many advantages and disadvantages associated with it. It’s fascinating that I can see how some pros can be seen as cons and vice versa. For example, IFRS being principle-based could be a good thing or a bad thing. In general, I think the advantages of IFRS outweigh the disadvantages. By having one set of standards for both domestic and foreign companies, there will be no confusion or more time spent trying to figure out the meaning or reason behind other companies’ financial statements.
Reference page
Anonymous, (2008). Businesses: Ask the CPA. The Record (Bergen County, NJ), Retrieved from http://www.lexisnexis.com/hottopics/lnacademic
Epstein, B. (2009). The economic effects of adopting IFRS. CPA Magazine, 79(3), 26-31
Galuszka, P. (2008). Pros and cons of IFRS. Retrieved September 22, 2014 from http://www.cbsnews.com/news/pros-and-cons-of-ifrs/
Kim, B. (2003). Sarbanes-Oxley. Harvard Journal on Legislation, 40, 235-579.
