Adapting to The International Financial Reporting Standards
More and more companies around the United States are starting to follow the International Financial Reporting Standards (IFRS). As companies expand, they find themselves dealing with foreign companies and have to adapt so that the accounting standards can remain consistent across the board. The United States is among many countries that have not yet adopted IFRS as it abides by the Generally Accepted Accounting Principles (GAAP) instead. While creating unity between countries’ accounting standards may be beneficial, we must consider the consequences that can occur within our country by switching reporting standards.
The main difference between GAAP and IFRS is the methodology of the two principles. GAAP relies on research and rules within financial reporting, while IFRS is more principled based. GAAP determines individual specified circumstances based on reliability, understanding, comparability, and relevance. While IFRS also uses those characteristics to make decisions; their determinations on circumstances are not specified by the user, but instead through overall principles. These principles have been built up over time and rely on the accountability of the company.
The implementation of IFRS would allow some companies, which already comply with IFRS, to save money, but could potentially hurt small or medium sized companies. Companies using IFRS and GAAP would no longer need to keep two sets of books to record their financials as the reporting methods would be the same. By eliminating the need for two book records, companies would be able to save money by eliminating the excess time used to record the same transactions twice. Not every company uses IFRS though. If the United States were to switch from GAAP to IFRS, smaller companies would be required to switch as well and incur costs they may not be able to afford. Most business schools in the United States focus on GAAP as it is the United States’ main form of financial reporting. This means that many companies would have to pay for their employees to be trained to comply with the changes. This would cause the companies to pay more money than necessary in training.
Switching to IFRS could require the companies to alter their business models to adapt to the different revenue recognition method. While the standards of revenue recognition are more straightforward under IFRS, they have a sizeable impact on both net income and the financial ratios, both of which are used to measure a company’s performance. To adjust to the change companies may need to alter their entire business pricing or payment models to maintain their ratios. This would take time for the company to fully embrace a change in their system and it may cause problems with companies’ contacts that already are used to working with the business model in place. The changes may not be well received.
IFRS allows for more flexibility within financial reporting. As IFRS is more principle based, it allows for companies to create more legible and useful statements by utilizing the principles of fair value accounting. While this flexibility may seem like an advantage, it can quickly lead to manipulation and fraud within a company’s books. IFRS does not require the transparency of full disclosure like GAAP does, which leaves an opening for white collar crime to occur. One example of this type of manipulation is the changing of the inventory method. Companies may change it to make it look as if they are experiencing more turnover than they are and as long as they can come up with a justifiable reason, they are able to do as they please. While companies may need to switch their business models for IFRS, this does not mean that companies should take advantage and change their method to make it seem like more activity is occurring within the business than is actually taking place.
In conclusion, though many companies are using International Financial Reporting Standards, the United States needs to think hard before fully converting from the Generally Accepted Accounting Principles. The change would have a large effect on small and medium businesses, alter business practices, and allows for easier manipulation within the financials. These consequences must be seriously considered before any decisions are made regarding the switch from GAAP to IFRS.
Ball, Ray. “International Financing Reporting Standards (IFRS): Pros and Cons for Investors.” Accounting and Business Research, 2006, pp. 5–27.
Damant, D. (2006). Discussion of 'International Financing Reporting Standards (IFRS): Pros and cons for investors'. Accounting and Business Research, 29-30.
The Globalization of Accounting and Auditing Standards. (2016, December 01). Retrieved October 05, 2017, from https://www.accountingtoday.com/news/the-globalization-of-accounting-and-auditing-standards