In a world where globalized business has become commonplace, the eventually harmonization of global accounting standards seems necessary. This evolution of accounting standards in the United States seems inevitable as the Securities and Exchange Commission moves toward adoption of the International Financial Reporting Standards. While, the shift may be necessary to address the needs of an increasing global market, there are concerns that the inherent problems with the adoption of the IFRS may outweigh the need for globalized accounting standards. The United States must give consideration to the unique characteristics that its market holds, and assess the implications of these characteristics when adapting to meet international standards.
In order to address the issues of IFRS adoption it is important to consider the unique factors of the United States accounting environment and their conflict with the IFRS. In a 2012 study, Shima and Yang, examined the factors of deterrence to the adoption of the IFRS including the United States. Their analysis found statistically significant results to back up hypotheses on characteristics "influencing accounting system development. For instance, they look at the effects of equity and debt financing markets. In a nation like the United States, that maintains extensive equity markets, internal accounting standards will cater to regulating these markets. The IFRS must consider a variety of different market types and will likely provide limited guidance on such matters. While Shima and Yang also find national characteristics, such as education levels, which favor adoption, the differentiation of market characteristics play an important role in IFRS adoption.
This difference in standards brings to light another issue in adoption of the IFRS. The IFRS provides what is deemed principles-based guidance in contrast to the GAAP's rules-based guidance. Though the IFRS does have some rules-based influence, it has the possibility of being vague in some areas of financial reporting. In these areas of financial reporting that lack authoritative guidance under the IFRS, accountants must revert to previous standards, which essentially eliminates the supposed benefits of adopting IFRS in the first place (Jones, 2010).
The principles-based accounting system also presents other issues to U.S. firms. Without firm codification of rules for the development of financial statements it is likely that such releases will be subject to the litigation (Rahr, Karim and Rutledge, 2010). In this system, compliance will become more difficult as accounts must adjust for the convergence of two sets of standards. In this transition, legitimacy of financial reporting will be held at the discretion of regulators. In order for firms to avoid the costs of litigation, they must instead opt for expedited education in new regulations. This results in a trade-off of costs, which must be borne by firms in order to comply with international standards regardless of their participation in international markets.
The issue of transitioning to the IFRS has also caused derision domestically in the United States. With a diversity of firms needing to meet compliance, smaller entities have raised concerns that it stifles their ability to compete. Larger firms with resources to overhaul reporting standards may do so regardless of the eventually outcome decided by the SEC. Some large entities have already begun to transition to the IFRS, while smaller firms must wait and absorb the costs of convergence when it is necessary and feasible. This problem is further exacerbated as global economic turmoil, causes reforms within the IFRS itself. Compliance in a changing regulatory environment will prove difficult for all firms and further increase the costs of convergence (Rahr, Karim and Rutledge, 2010).
Despite the problems presented by the adoption of the IFRS, it seems that U.S. firms must begin to adapt for this transition. In an effort to better adapt to the coming change in regulation, some firms have already begun the transition process. Though there are challenges in the transition, the eventually adoption will be done on the basis of benefiting the United States position in the world economy. Though it may translate to short term costs the SEC believes that adoption will benefit U.S. investors by allowing for internationally comparable financial data and a "greater opportunity to compete in global capital markets" (Rahr, Karim and Rutledge, 2010). By working with regulators, firms can ease the transition into the globally harmonized accounting cultural and reap its benefits at the lowest possible cost.
References
Jones, R. C. (2010). IFRS Adoption: Some General Issues to Remember. CPA Journal, 80(7), 36-38.
Rahr, K., Karim, K. E., & Rutledge, R. W. (2010). Transitioning to IFRS. CPA Journal, 80(3), 6-8.
Shima, K. M., & Yang, D. C. (2012). Factors Affecting the Adoption of IFRS. International Journal Of Business, 17(3), 276-298.
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