The Adoption and Convergence of IFRS

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Recently, International Financial Accounting Standards (IFRS) has been accepted by many countries all over the world. As for the U.S., there are two factors leading FASB from not authorizing IFRS to supporting IASC to set up universal high quality accounting standards.

As for the external factors, with persistent efforts of IASC, the success of the Comparability and Improvement projects enhanced the quality of standards set by IASC. IFRS has quickly become the lingua franca of accounting. Besides, the International Organization of Securities Commissions (IOSCO) has been supporting the preparation of IASC standards since 1993 and examined core standards and recommended them to its members in 2000. In addition, since 2005, all companies incorporated and listed in a member state of the European Union have been required to use it.

There are also internal factors. On one hand, the rules-based GAAP is very specific and detailed so it's difficult for beginners and it means a lot of work for foreign public companies in the U.S. to adjust to GAAP. The more profound influence behind the characteristics of GAAP is that it may weaken attractiveness and competitive edge of the American capital market. On the other hand, GAAP lags behind economic climate, and thus there are loopholes, which may be taken advantage of by some interested parties intentionally, bringing loss to investors. GAAP was also challenged by Enron's collapse in 2001, and the spearhead was directed to GAAP by the SEC and Arthur Anderson.

Adoption of IFRS will bring benefits to companies, investors and regulation departments:

"For global companies, converting to IFRS will afford them the opportunity to improve processes, eliminate parallel accounting across international jurisdictions, and streamline accounting reporting" (Marshall). Secondly, IFRS reporting would help U.S. issuers to enhance their ability to compete for global capital because financial results would be more widely accepted and comparable. Thirdly, early IFRS adoption may offer companies a leading edge. They can experience all the benefits of conversion before their competitors.

For investors, improved management information helps clarify financial risk and operational risk, directly influencing investment decision-making. IFRS conversion helps interested investors and analysts to picture clearly how the business really works and how its operations are translated into reported financial results.

For accounting control, an issuer can benefit from using the reevaluation of its accounting systems and controls to improve them. What the management found from its IFRS conversion may allow it to reduce organizational inefficiencies and other costs.

At the same time, there are also many concerns about IFRS adoption:

Conversion to IFRS is costly for companies because accounting department employees are supposed to be trained to prepare financial statements and documents required by IFRS, or the organization will likely need to add finance personnel who have the requisite IFRS reporting knowledge. On top of that, companies will likely face the need to upgrade and adapt information technology (IT) systems across the enterprise. They will need to renegotiate current business contracts and debt agreements under IFRS instead of U.S. GAAP.

It may be difficult for regulators to supervise companies, because certain U.S. issuers have few significant customers or operations overseas and thus they may resist IFRS because there is no market incentive to prepare IFRS financial statements. On top of that, research suggests that cultural differences cause accountants in different countries to interpret and apply accounting standards differently (Tsakumis, 35) and many countries modified IFRS as issued by IASB to facilitate domestic situations and national interest, which would lead to incomparability.   

Since IFRS is a set of principles-based accounting standards, there is much room of discretion when accounting policies are drafted, where great carefulness is required. Therefore, management is supposed to clearly explain why it accounts for transactions as it does and how different accounting policies would affect the issuer's results. An issuer that converts to IFRS reporting should pay close attention to its MD&A disclosure, especially as it relates to critical accounting policies (Jones Day).

Part 2 Conversion and Convergence of IFRS

Many countries have issued standards modifying IFRS issued by the IASB. However, the SEC insists that such modifications would undermine the uniformity, which is emphasized by IFRS. The SEC has also proposed that public U.S. issuers report financial results in accordance with IFRS and expects a period of voluntary conversion beginning with fiscal year 2009 and mandatory conversion beginning with fiscal year 2014.

In 2002, the IASB and FASB agreed to coordinate to reduce the differences between IFRS and U.S. GAAP (referred to as "the Norwalk Agreement"). At that meeting, both the FASB and IASB pledged to use their best efforts to "(a) make their existing financial reporting standards fully compatible as soon as is practicable and (b) to coordinate their future work programs to ensure that once achieved, compatibility is maintained" (Memorandum of Understanding). Convergence will bring the US GAAP and IFRS closer together, as IASB and FASB seek to issue new, aligned standards such as for revenue recognition and lease accounting, as well as for the principles governing how financial statements are presented. As standard setters issue updates, US companies will adjust to ongoing changes in U.S. GAAP, thereby gradually converging with IFRS (Marshall).

The SEC has been encouraging the convergence of U.S. GAAP and IFRS accounting standards. What's more, FASB has recently issued or revised accounting statements with a view toward eventual convergence. These commitments to convergence ensure that U.S. GAAP and IFRS will be crossed and integrated, although IFRS may never supplant U.S. GAAP. Therefore, the rise of IFRS is best viewed as another step in the gradual globalization of financial regulatory regimes.

On November 14, 2008, the SEC published its "Roadmap for the Potential Use of Financial Statements Prepared in Accordance with IFRS by US Issuers". Issuance of the proposed roadmap affirmed the SEC's focus on moving towards a single set of high-quality global accounting standards (Kimball). The comment period for the SEC's proposed roadmap ended on April 20, 2009. The SEC proposed voluntary application of IFRS permitted for some US registrants for fiscal years ending after December 15, 2009. During 2011 the SEC is scheduled to decide whether a mandatory conversion date should be set. In addition, as for the proposed potential mandatory adoption of IFRS, the SEC asked US registrants to change in 2014 and all domestic companies are required to file statements using IFRS by 2016.