The adoption of IFRS in the U.S
- By adopting IFRS, it allows comparability and improves transparency of financial information across countries and industries even if there are differences level among the country such as developed country and developing country (Brown, 2010). Each country has their own GAAP rely on the culture and institutional factor, but there are still exists drawback and obstruction. IFRS provides a platform to numerous countries that create professional, flexible and transparent accounting values. Furthermore, it will help investors to compare difference company performance and make better decision making of investment. In addition, adopting one set of global accounting system can reduce the level of uncertainty that boost the investor’s confidence.
- The comparability of firms reporting is increasingly in the recent year between U.S. firms under U.S. GAAP and non-U.S. firms under IFRS (Barth et al, 2012). With the increased level of comparability, it is beneficial to the ‘foreign counterparts’ that improve U.S. trade and investment internationally (Ball, 2006: Hail et al., 2010a). ACCA (nd) outline that it will brings more ‘international portfolios’ for the investors since reports are more comparable and professional by adopting IFRS. As a result, US market will be more attractive since it allows investor to compare financial statements and to make the best decisions of investment.
- IFRS use the principle basis which is more flexibility because it provides reasonable valuation that means having enough freedom to companies by adopting IFRS. Furthermore, the accounting complexity will decrease and risk of errors will weaken. On the other hand, US use rules-based that Cabrera (2008) states that both of government and Securities and Exchange Commission (SEC) maintain “good faith” and ‘trust auditor’s’ view ‘on public companies during assurance projects’. Therefore, it will lead potential problem and risk like scandals and fraudulent that we can see in the recent year.
- Moreover, it is beneficial to the cross-border investment because it helps to avoid the barriers with eliminating the inconsistencies of financial reporting methods and decreasing the preparation costs (Tarca, nd). It can raise the efficiency of capital allocation on a global basis and reduce overall cost of capital by adopting IFRS. Indeed, it will brings more significant market benefits of the firms from code law countries than firms from common law countries if adopting IFRS (Prather-Kinsey et al, 2008). It will beneficial to participants in capital market when implementing IFRS as the ‘higher quality information’ will be provided and improve decision-making (Tarca, nd). Consequently, it is more efficiently allocating funds in the market and firms that can decrease cost of capital as mention before. Brown (2011) also states that adopting IFRS “promote the development of national capital markets and the integration of markets internationally”. Thus, it will have potential influence to individual investor that enhancing more foreign equity investments (Tarca, nd). Besides, the cost of capital is relatively low when the company uses IFRS to be list in overseas stock exchange market comparing with the company get inflow of foreign capital in local market. Adopting the IFRS will also beneficial to the potential acquisition strategies, since cross border listing can improve the efficiency of company takeovers.
- Furthermore, the status will be increased as US companies and its capital markets are becoming more competitive by decreasing barriers. PWC (2007) states that the most important purpose of FASB is to assist SEC protecting investors by meeting their responsibility that IFRS can also meets FASB’s objectives in the meanwhile. Then, if using capital market model under IFRS, it will decrease ‘misalignment’ risk between firms and outside investors.
- The accounting ‘quality’ will be improved by following the adoption of IFRS, for instance, it will improves the accuracy of forecasting Earning Per Share (Brown, 2010). More exactly, IFRS emphasise presenting accounting information in true and fair views and highlight substance over form. Barth, Landsman and Lang (2008) records that it will brings ‘lower levels of earnings management’ and ‘more timely loss recognition’ comparing the firms adopting IFRS voluntarily to the firms using local GAAP. Additionally, as we can see from IASB (2010), there are two major factors of qualitative characteristics when presenting financial statements, which need to satisfy ‘relevance’ and ‘faithful presentation’. More precisely, the information of relevance “has confirmatory or predictive value” and information of faithful representation express the economic situation in the real world (Palea, nd).
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- It is existing problems by adopting world-wide IFRS for small and medium sized companies (SMEs). Nowadays, SMEs plays a significant role in the economy especially in the field of employment. Indeed, Bohusova (2011) states that it is also crucial to most ‘developed’ and ‘developing economies’. More exactly, it is not feasible or desirable for various entities in the SMEs range by adopting IFRS, mainly to micro entities. According to Schiebel’s research (2008), IASB fail to satisfy the needs from external user of determining the information since the kinds of entities tends to taxation purposes when preparing financial statements. In addition, to some countries, it is time consuming and costly of first applying IFRS for SME as there are culture, principles and systems difference between IFRS and local GAAPs.
- U.S. GAAP is the rules base which include more detailed and specific in its application guidance and requirement. More exactly, there are requirements to company and its auditor under U.S. GAAP not only think about whether or not the ‘accounting suggested is consistent’, but also need to consider the ‘public interest’ in the practice of ‘professional judgment’ (FASB, 2003). U.S. GAAP also strongly requires a faithful representation when preparing financial statements and resistance from client’s pressures when doing audit, which the companies and auditors unable to do nothing under the detailed and clear principles. Instead, IFRS is the principles based which means more space for adopting under the principles to financial statement.
- The financial statement under US GAAP is more comparability in the same industry because the IFRS only have more comparability in the different industry (IFRSUSA, 2011). Due to backgrounds of people in different countries by implementing IFRS, it will cause different outcomes and explanation since their historical practices differently. Moreover, SEC Chairman Cox (2008) stated that, “Securities regulations can and should be converged to a far higher degree than we have already attained. But it is unrealistic to think we could or should make them identical, because of differences in national laws, economic conditions, and objectives”. Therefore, the flaw and shortcoming of comparability is obviously seen and the more subjective of IFRS will reduce the usefulness by converting to IFRS.
- It will lead to cost consuming If US adopt the approach of IFRS since it will create large transition costs, “including employee training and Internet technology systems, especially during a period of severe budget shortfalls and economic crisis” (Tyson, 2011, p. 26). It is necessary providing professional training in the workforce because people need to be knowledgeable to implement IFRS, which make the convert smoothly (Hansen, 2011). In addition, Diamond and Herrmann (2008) states that it will cost several years to convert IFRS as adopting IFRS will change ‘operational procedures’ and ‘information technology’. According to the SEC, it will cost US companies revenue in the initial year between 0.125% and 0.13% if transiting to IFRS (Johnson and Leone, 2008). Furthermore, Albrecht (2008) highlight that the cost savings from audit fees is ‘$100 billion’ if transiting to IFRS, but it will bring about ‘$1 trillion’ cost to companies. As we can see from that, the costs of switching to IFRS are needless and far exceed the benefits bringing to companies.
- If switching U.S. GAAP to IFRS, it will have shortage of ‘bright line tests’ that the reliable and accurate financial reporting is essential. It cannot present the accurate and reliable financial reporting if convert to IFRS principles “because of the shortage of ethical and economic principles in the current generation of management and auditors” (Bahnson and Miller, 2008 cited in Albrecht, 2008). Bright line rules not only can prevent the management altering financial statement but also help investor because the company needs to make financial report under more strict standards. U.S. GAAP can control the fraud to some extent during the accounting process although no basis of accounting can prohibit fraud.
According to the critical analysis above, US will not adopt IFRS. SEC predicts the effect of US in global standards that will be decrease by adopting IFRS (Street, 2012). As we can see from the staff report, implementing IFRS is not supported by “vast majority of participants in the US capital markets”, and “would not be consistent with the methods of incorporation followed by other major capital markets” (PWC, 2012). Additionally, it is not necessary to adopt IFRS, because US is the world’s largest capital market. There is a special phenomenon that IASB is funded by USA, therefore, the IFRS may be influenced by US congressional which represent benefits of different financial group. Moreover, there is strong and complex association between US GAAP and US laws so that it is unlikely to adopt IFRS in the short-term development (Erchinger, 2012).
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