IFRS - New King of American Accounting?

Introduction

The International Financial Reporting Standards, commonly referred to as IFRS, is emerging as the dominant global accounting model. Traditionally, the United States has been the worldwide model for accounting procedure with their use of GAAP (Generally Accepted Accounting Principles). Today, more than 100 countries worldwide accept IFRS as their primary accounting standards or permit its use. This trend has led to much speculation about whether or not the United States will move away from their traditional use of GAAP and also adopt IFRS for its accounting guidelines. This would have a tremendous impact on American businesses as well as accountants, financial planners, and investors in the United States and abroad.

Adoption of IFRS

Many experts speculate the United States is on track to switch to IFRS as early as 2014. Ultimately, the SEC, government, and FASB (Financial Accounting Standards Board) are the controlling powers as far as the adoption of IFRS. Some large multi-national corporations with foreign subsidiaries have begun using IFRS. The FASB has stated that it will include IFRS questions on their CPA exams starting in 2011. Also, businesses and institutions of higher education are already training accountants in IFRS procedure. American multi-national conglomerates are pushing for IFRS because they will not have to keep two sets of accounting books - one for GAAP and one for international subsidiaries that are required to use IFRS. Considering all of Europe and the leading economic powers of Asia, South American, and Africa have all adopted IFRS, it seems as though the United States will, too.

Advantages of IFRS

If the United States switches to IFRS as their accounting principle standard, all publicly traded companies would report on the new international standard. This change would not affect not-for-profit institutions and small businesses. By switching to IFRS, American international businesses would become more competitive because global investors would be able to decipher companies financial statements with less difficulty and with greater confidence. Because they would already be familiar with the accounting standards of IFRS, investors may be more likely to invest in companies since they have an understanding of accounting principles of revenue, inventory, liabilities, etc. For example, GAAP and IFRS report inventories differently. So a prospective investor familiar with IFRS more clearly understands the financial position of a company. This benefit is on a smaller scale. One must also consider investments on a larger scale. Foreign corporations are also more likely to invest in US businesses if everyone was adhering by the same standards. Studies have shown a convergence from GAAP to IFRS, more often than not, improves a companies financial statements with IFRS. This is good news for businesses as well as investors.

Disadvantages of IFRS

Implementing a new accounting standard nation-wide could potentially be expensive and frustrating. Accountants, CPA's, and businesses who are accustomed to GAAP are forced to learn new principles under the international system. This will require training and re-education of the workforce in order to implement a new accounting system. There are certificate programs as well as other education programs currently available for people to gain knowledge and experience with IFRS. Some experts believe IFRS is the biggest change in accounting policy since GAAP was established in the 1930's.
Also, IFRS is more broadly defined as to its guidelines. GAAP on the other hand, is much more specific in its overall principles and constraints. It may be easier for accountants to use IFRS because it allows for some objective decision making in regards to how businesses interpret IFRS. This fact may cause some distrust among American investors who are unfamiliar with IFRS. A key reason for the success of GAAP is its detailed, rule oriented approach to accounting.

Conclusion

Because of the international acceptance of IFRS, it seems inevitable that the United States will be adopting IFRS sooner, rather than later. The groundwork is being laid for the transition away from GAAP. The market today truly is a global economy and this is proof of that fact. IFRS has been tested around the world and the majority agrees it has been successful. This is a progressive way of thinking and being innovative in today's worldwide market place. Although the transition ultimately will not be seamless, groundwork for adoption is being presented by FASB and other accounting foundations. The re-education of current accountants along with educating and training new accountants is crucial to the success of businesses using IFRS. Since IFRS questions will be on the CPA exam starting in 2011, IFRS education has already begun with the next generation of CPA's. After the transition period from GAAP to IFRS, the United States will benefit from a global, homogenous accounting system in today's global economy.

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