There has been a debate over switching from GAAP to IFRS in the United States for many years now. It is still not clear if converging or harmonizing is the way to go with accounting standards, but there are many advantages and disadvantages to the switch. There are pros to IFRS like the ease of trading with international corporations, cost efficiency, and flexibility in the standards. Though these seem very tempting, with pros come cons, which include IFRS not being taught in many schools in the United States, the many inconsistencies on implementation of the standards, and extra costs and hoops to jump through for small to mid-sized firms that do not necessarily need IFRS. By weighing the pros and cons of IFRS, one can come to a conclusion on whether to converge or not.
One of the pros 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 conduct financial statements in IFRS and GAAP. (Galuszka, 2008.) This is a hefty cost to have, since the company would need two teams working with two different accounting standards. By having one standard the company could allocate more money to one specific sector and not focus on two separate ones. This makes the company more cost efficient and more concentrated on following one standard.
Additionally, the advantage of converging into a single set of standards, would improve to simplicity of trading and investments with foreign companies. The ability to compare international markets on a single basis would make analysis of many companies’ financial statements at one time much easier and improve quality and timeliness of work. Transparency, reliability, and easiness are three attributes of converging that sound very appealing.
An advantage of IFRS being principles-based is that it is more flexible. Epstein gives this example: “Either historical cost or revaluation models can be used in accounting for long-lived assets.” (Epstein, 2009.) Not only is the vocabulary of financial statement items flexible, but so is the way of accounting for them. The rules-based system creates a regulated and specific way for one to account for certain items, while the principles-based allows for companies to have a little more leeway because many companies are different and have a necessity for diversified accounts.
The cons involved with IFRS being principles-based are that it can have some gray areas and it can be very lenient at times. Financial statements are meant to be as transparent as possible, due to the Sarbanes-Oxley Act. Brian Kim, author of the Harvard Journal on Legislation, expresses that “The Sarbanes-Oxley Act creates the Public Company Accounting Oversight Board (“Oversight Board”) that will supervise the accounting process.” (Kim, 2003.) With this act in place, companies are strictly observed for indiscretions, or foul-play, in turn making them much more transparent. Even with this act, IRFS has a little more room for hiding or misrepresentation, so “implementation of IFRS will only be as good as the leaders implementing it.” (“Business: Ask the CPA,” 2008, p.B 4.) In order to have a fair representation and value of a company, implementation is key.
The another disadvantage of IFRS is related to small and mid-sized companies. Small and middle-sized firms may incur extra costs that may not be necessary for their firms. (Galuszka, 2008.) This will not affect them in a completely negative way, but it could cause some issues. “The main difference small companies will see will be the financial statement presentation. IFRS statement presentation can vary greatly as compared with their GAAP counterparties.” (“Business: Ask the CPA,” 2008, p.B 4.) Small businesses do not need all of the varied terms for accounts, due to their simplicity, so learning the new accounting standards would change a lot on their financial statements.
The pros and cons of IFRS are very interesting depending on the way you look at it. This research shows that there are many people on the fence about IFRS, due to the many pros and cons associated with it. It’s fascinating that I can see how some pros can be viewed as cons, and vice-versa. For example, IFRS being principles-based could be a good thing or a bad thing. In general, I believe that the pros of IFRS outweigh the cons. By having one set of standards for foreign and domestic companies, there will be no confusion or extra time spent on trying to figure out the meaning or reason behind other companies’ financial statements.
Reference Page
Anonymous, (2008). Business: Ask the CPA. The Record (Bergen County, NJ), Retrieved from http://www.lexisnexis.com/hottopics/lnacademic
Epstein, B. (2009). The Economic Effects of IFRS Adoption. CPA Journal, 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 Act. Harvard Journal on Legislation, 40, 235-579.