Accounting is said to be the language of business. In order to be successful in the business world, one must know this language. After the Great Depression, the Securities and Exchange Commission (SEC) was started in order to regulate the accounting world. They enforced the Generally Accepted Accounting Principles, also known as GAAP, to be used among the United States public companies. In 2001 the International Accounting Standards Board (IASB) was started to create accounting principles to be used internationally. Thus the International Financial Reporting Standards (IFRS) was created, which is used by over 100 countries today.
Since globalization began, countries have become more linked through businesses. Many companies, both American and foreign, are traveling overseas in order to open up new franchises in order to increase the expansion and survival of their business. However, a problem these companies have encountered is the difference in accounting principles. The United States has been debating whether to switch from GAAP to IFRS. Currently, the SEC is debating the pros and cons to this change.
A large company with many sectors in different parts of the world would find switching to IFRS very useful. They would be using the same accounting principles as the country they are doing business in which would simplify their accounting procedures. Also, this switch would allow better comparability of their financial statements. If it is easy to compare financial statements between competing companies, investors are able to decide where they should invest their money.
IFRS uses a principle-based approach while GAAP uses a rule-based approach. This can be seen as an advantage to companies if the United States were to switch to IFRS. Instead of following specific rules to reach a final valuation, a company has some leeway. Companies would be able to reach a final valuation in a few different ways instead of using a predetermined route. This would be able to set certain companies apart from one another and could potentially help them gain more money from investors.
However, there is a downside to this flexibility. Fraud has become more prominent in today’s society. The SEC has had to enforce many regulations to help prevent fraud, but it is still occurring. If the United States switched to IFRS, companies would use the principle-based approach, which could allow more opportunities for the financial statements to be manipulated. Companies would be able to show investors what they want to see as opposed to what is actually true. If the United States were to switch to IFRS, they would have to consider such disadvantages.
Another disadvantage to consider is the cost of switching from GAAP to IFRS. Accountants have always been educated with GAAP and if the switch occurred, all accountants would have to be re-educated. This would raise debates on whether companies would have to pay for the re-education for their staff or if it would be up the individual to pay for this expense. Many companies and individuals cannot afford to fund new education since the cost of education is continuously rising. If IFRS was going to become used among companies in the United States, the SEC would have to consider this cost and find ways to make it more affordable.
While the SEC is currently debating the switch from GAAP to IFRS, the conversion will eventually be unavoidable. In order for companies to expand internationally and continue their success they will have to switch to IFRS to be more efficient. The United States can use this change to their advantage. Since the recent recession of the United States economy, companies have been expanding overseas in order to stay in business. If the SEC were to allow the use of IFRS, the United States government could benefit from the expansion of these companies.
While the debate to switch from GAAP to IFRS has been going on for many years, the SEC has still not reached a conclusion. There are a couple advantages to consider such as, better comparability of financial statements and flexibility. These advantages could benefit companies, since American investors and international investors would be able to decide where they wish to put their money. Some disadvantages to consider are more opportunities for the manipulation of financial statements to occur, which encourages fraud to be committed. Also, the cost of switching from GAAP to IFRS would be very high. Current accountants would need to be re-educated and all financial statements would need to be changed to match IFRS regulations. Once the SEC considers all of these factors, they will be able to decide when the best time to make the change will be, since it is unavoidable.