In our class and in last semester's Accounting class, we have discussed the importance of standardization of the reporting of financial information through GAAP. We have also discussed situations where GAAP can challenge corporate leaders, as they work to present investors with the true value and dynamics of their enterprises.
As the globalization of the economy continues, we are faced with these dynamic issues on a much broader scale. As FASB guides GAAP in the US, the IASB (International Accounting Standards Board) guides IFRS (International Financial Reporting Standards) throughout the world.
According to the AICPA, approximately 120 nations and reporting jurisdictions permit or require IFRS for domestic listed companies, and approximately 90 countries have fully conformed with IFRS as promulgated by the IASB and include a statement acknowledging such conformity in audit reports.
US Securities and Exchange Chairman Schapiro's comments set the stage for the US dialog on this issue. Consult the AICPA's guidance at http://www.ifrs.com/.
What does IFRS mean for the United States, for US companies and investors, and for GAAP-- the gold standard of financial reporting?
MSBA511 - Applied Financial Management, exploring our vocations in business with a vision of service to God and community.
The URL in your blog doesn't work. But to address the video, incorporating IFRS in the reporting systems in US companies would be a huge undertaking for the United States. Is it really for the best interest of investors and accountants? Obviously it would eventually be easier for international and global corporate relations and trading. I think the difficulty in all of this is the transitioning process that Shapiro briefly recognizes in her speech. This transition would take years to fully perfect, depending on how we plan on incorporating IFRS into our accounting standards. GAAP is awesome, but as global commerce increases, it will definitely become more and more difficult for investors to rely on certain accounting standards of different countries. So depending on how we choose to incorporate IFRS into our standards, should we choose to do so, this process could just make things very confusing for a few years and eventually work out smoothly, OR we could be stuck in this IFRS/GAAP limbo where some people use one thing while other people use something different. This has potential to create great inefficiency in communication, prolonging decisions and frustrating all of those who use accounting information. I believe a very strong, succinct, and solid plan could avoid all of these potential obstacles as long as it is executed correctly. If not, people may end up using both IFRS and GAAP and could be doing twice the amount of work than they previously have done, again causing inefficiency. So again, I believe it's all about execution.
ReplyDeleteWere the United States to fully switch to IFRS, this could mean that our poor GAAP becomes irrelevant and all accountants who have been working for 30 years are going to be angry. That, and our accounting books will finally be out of date. If we do NOT incorporate IFRS into our standards, we may end up either falling behind in global trade, inefficient and ineffective decision making, and a lot of confusion in business deals. This is something I'm on the fence about but there are potential risks for both sides of the argument...
But this whole thing reminds me of the USA not using the metric system as its primary measurement system BUT we teach it as an aside in high schools. I think it shows that we are capable of doing both and using both but that it takes longer to get things done if we choose to stick with both instead of transitioning fully into one method.
The link from the posting is corrected. I urge you to take a look.
ReplyDeleteI agree with Amelia’s comment in regard to inefficiency, doubling the workload, and ensuring an execution plan in order for success. I think all three of these bullet points are potential risks for the financial world. Although both methods, GAAP and IFRS, are both effective forms of accounting methods, I think the transition from GAAP to IFRS would be a more than difficult for the United States.
ReplyDeleteNonetheless, with the increase of global commerce, I support the notion of the US only using one form: IFRS. In order to remain a super power and compete with other nations financially, the US needs to use the same measures as their competitors. Logically this makes sense, but this transition will take years and upset many people. Whenever I travel abroad, I am always amazed at some countries ability to govern, and support cohesion. For example in Switzerland—a country of only 7 million people—there are 5 ruling political parties, 26 cantons (regions), and 6 national languages. Despite the differences, the citizens follow regimented rules which have been put into place for varying reasons. Yes, when comparing 7 million people to 330 million people, the ability to govern cohesively is much harder. Therefore, even though the US might implement new accounting rules, not everyone may decide to implement them.
I sometimes wonder if our country is not only too big to govern, but also too secular. In theory, the transition from GAAP to IFRS might be beneficial for the US in order to remain competitive and rebuild our financial system, but it might be easier said than done.
I think a switch to IFRS or at least a sort of convergence between the two is necessary in such a global economy. I agree with both Amelia and Stephanie that it is not an easy process. Such a transition would take time and a lot of getting used to, but many other countries have switched to IFRS so the US should be able to as well. The switch would make accounting easier for multinational companies since they would be following one standard of reporting instead of having to deal with two. I agree with Stephanie when she says that the US needs to use the same standards as their competitors, it would make the companies easier to compare. In regards to people getting upset about the change, business standards are always changing and that is just something that people have to deal with.
ReplyDeleteThe International Financial Reporting Standards are a framework, principles-based standards, and interpretations adopted by the International Accounting Standards Board. Since the GAAP is based in the US and has developed and responded to the needs of US citizens and corporations, it is important to compare and contrast how the IFRS, according to an American perspective, progress or take away from the standards provided by the GAAP. It is good that the IASB and the US FASB boards have undertaken the IFRS project together. It is important that financial statements show the accurate view of the business because these statements are used by society. As we merge globally into one society, it is important that we are all playing the same business game together, which means going by the same rules and understandings. Therefore, the qualitative traits that should be met include: understandability, reliability, comparability, relevance, and true/fair presentation. In order to be on the same page, the following requirements are made by IFRS standards, which, seem fair, and, seem to make sense to me in order to really know the general financial position of a business regardless of geographical location: 1. A statement of changes in equity 2. A cash flow statement 3. A statement of comprehensive income 4. A statement of financial position 5. Notes, which include a summary of the important accounting policies.
ReplyDeleteBenefits of using this system globally may include increasing the information quality and reducing the cost of comparing alternative investments. In this way, investors may be more willing to finance companies. It is important however that the enforcement of the standards is strong globally. The IFRS means that if the US wants to remain a world power, the US will have to conform to these standards. If a business in the US simply does business on a small, local level with other businesses who only have every used the GAAP however, then, perhaps these businesses may not need to adopt the IFRS way.
I agree with Amelia, Stephanie, and Sara as I really like their reasons. I like the insight Stephanie shared from her experience in Switzerland and her conclusions because I also "wonder if our country is not only too big to govern, but also too secular", which means addressing the individual at the more local level, still, while balancing the need to be able to compete globally efficiently and in an inviting way.
In this ever shrinking world, it would be beneficial for all businesses to follow one standard of accounting practices. Commerce continues to grow, communication is almost effortless and boundaries are being erased. Globalization will continue to affect how everyone lives, so why not make things easier by abiding by the same accounting principals? Granted, the process may be arduous in the beginning, but in the long run, having a common way to conduct business will benefit everyone.
ReplyDeleteWhether the US abides by IFRS, or a new set of standards that combines GAAP and IFRS is created, business people around the world will have a better understanding of world commerce and the status of different countries.
Amelia, your comment about the metric system is a great example. I've always wondered why the US has not adopted it. It simply doesn't make sense.
Accounting, as we know, is the language of business. Why not all sound the same?
There are benefits to both systems, I suppose. One has strict guidelines; the other is more open to ethical interpretation.
ReplyDeleteOne of the key differences between IFRS and GAAP is that IFRS is not as "rules-based" as GAAP. In theory, this will allow more ethical judgment calls than GAAP allows. However, one can play that both ways.
Unlike GAAP, IFRS can be open to interpretation and, as such, it can be open to incorrect interpretations. GAAP has clear guidelines that don't exactly allow one to "think outside of the box,” but it seems that having a rigid set of rules would make it easier for transparency and smoking out corruption.
Furthermore, one of the biggest differences involving IFRS and U.S. GAAP, and probably the most difficult standard to convert between the two, "is revenue recognition." As defined by Articlebase:
". . . revenue recognition under U.S. GAAP only occurs when it is realized or when earned. Revenue is considered earned when a transaction has taken place between two parties. Under the U.S. GAAP framework, a company can only recognize revenue in the period it was earned, regardless of the time in which they actually receive the revenue. On the other hand, IFRS recognizes revenue in an unusual way. Revenue recognition under IFRS records revenue for that period based on a percentage of completion of all revenue earned. In addition, the guidance of revenue recognition within specific industries exists under U.S. GAAP but not in IFRS. Among the two standards an individual can see where one is rule-based and other is principle in nature." [emphasis added]
Like the comments made earlier, it would seem to me that these "loosey-goosey" IFRS standards would invite a portion of dishonesty and more easily allow an accountant to "fudge" the line between fact and fiction.
One immediate effect that I can see from the adaptation from U.S. GAAP to IFRS will the benefits of consistency between U.S. and foreign corporations' financial statements(as Steph had mentioned).
Merging the two accounts will streamline the process and it will allow for better communication between both foreign and domestic investors. However, the downside of this is that implementing any type of practice after several years of a specific method it like pulling teeth. Good luck with that.
Adopting the IFRS will make comparisons easier. Businesses can present financial statements on the same basis as foreign competitors, and they can raise capital abroad. Disadvantages seem to be related to the level of quality care services the IFRS will provide and the cost of implementing IFRS practices… they will far surpass the benefits.
ReplyDeleteSo there’s concern with convergence and adoption… I think convergence is the better route. Convergence will make adoption easier if all works out, and it could reduce costs and save some money. With all of these standards, there isn’t one perfect way to eliminate all of the differences and result in smooth sailing.
I think corporate readiness is a huge issue. Adoption wouldn’t allow for total corporate readiness… adoption is likely to be market driven. In the short term, investors may benefit, but in the long run, the cost of compliance with multiple standards may negatively affect U.S. company competitiveness.
I watched this clip http://www.pwc.com/us/en/issues/ifrsreporting/index.jhtml
… PricewaterhouseCoopers' Views on the implications of IFRS conversion. It’s worth checking out.
Enron and other companies have managed to manipulate their financial statements regardless of accounting principles. Companies that wish to manipulate their statements typically find a way to do it legally by finding loopholes in current regulations. Attempting to keep up with these businesses is like attempting to keep up with new technology, there is always someone on the cutting edge that is more advanced than you are. Therefore, having two accounting standards and boards to review financial statements is a way to ensure financial statements are constantly under scrutiny. Especially since the IASB is a new organization that was established in 2001. The regulations are still relatively new and in the process of gaining global recognition. Therefore, having both regulations is a way the U.S. can grandfather in the new principals without causing havoc.
ReplyDeleteAs Amelia mentioned, the U.S. still have not converted to the metric system. Therefore, the fact that we have not completely converted to a new accounting standards that were just set in 2001 is quite logical. However, the U.S. was a founding member of the IASB which shows they support the notion of international accounting standards. As the IASB grows and more countries adopt IFRS standards, their level of efficiency and control will increase and encourage the U.S. to completely adopt the new standards. Currently, 120 nations permit or require IFRS regulations. Further, Mexico and Canada will soon be adopting the IFRS standards by 2012. The momentum behind the movement is substantial enough to create change, and hopefully an institution with the ability to monitor financial statements on the “cutting edge”.
I read an article that outlined the main differences between GAAP and IFRS. These differences are:
ReplyDelete-GAAP is more detailed and industry specific when it comes to revenue recognition
-When an expense should be recognized and how much should be recognized differs
-Financial instruments that were recognized as equity by GAAP will be recognized as debt under IFRS
-The IFRS allows consolidation based on the power exercised by the company on the financial and operational policies of the other entity
-The IFRS does not allow LIFO
Resource: http://www.differencebetween.net/business/difference-between-gaap-and-ifrs/
I think there is alot to promote here given the convergence of the two. Both have their strengths for domestic reasons and international reasons. To compete in this global economy, I feel a country needs to have both strengths. It seems as though we are not rushing into any agreement and are taking the time to figure out if this convergence would really work for out country and what the best way would be to implement it into our society.
I have often found arguments presented above interesting and am glad for the opportunity to think and write about the divergence or convergence of standards internationally. In the US this dichotomous pull is keenly felt- as a nation of immigrants do we fall in line with the nations we left or continue to forge our own path, free of pressure from overseas. The past century of American history has told this story- at the dawn of the 20th century America was somewhat isolationist with aspirations of controlling our borders and imposing order on this hemisphere and as the century matured the US grew increasingly interested in international affairs. There have been repeated attempts to codify standards internationally and largely they have met with acceptance by some and apathy bordering on disdain by the general American public. While Joe and Jane Average probably doesn't care about the existence of an international accounting standard, polls often show that he would likely not want the US to ascribe itself to those standards. This resistance to international standards is exemplified by American aversion to the metric system. The Metric Standard has existed for 211 years and is used extensively by the international community. Certainly a switch to metric would be good for Americans and American business say proponents- it would allow easy comparison between products and allow goods and measures produced to be sold and understood anywhere in the world, it would further integrate and forward the international economy and global integration, and it will avoid pesky measurement errors. To date, centimeters, kilometers and grams remain a mystery. Turns out 307,006,550 citizens (Jul 2009 census bureau estimate) fueling a 14.7 trillion dollar economy (http://www.bea.gov) constitute a large enough group to maintain its own standards and systems. Is there a real need for a market as large as the US to adopt an international standard? Proponents would say yes and that this will also help the international community however after an admittedly cursory search I was unable to find even a single foreign investor complaining about their inability to decipher American reporting and accounting standards.
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ReplyDeleteIASB, the body who endorses IFRS, was created in 2001, so if the metric system is any indication it would seem that this debate will continue for some time. Since its creation, endorsement and subsequent adoption IFRS has helped align accounting practices among the nations whom ascribe to its standards. The adoption and alignment hasn’t always worked very well. In 2007 Intangible Business released an article which concluded “we have researched this in depth and have found: the true value of intellectual property is being significantly under reported; the level of information given is so short of detail that it is of little use; and it underlines the inherent limitations within the IFRS 3 framework, although these are not articulated for users of accounts.” These issues continued and on 1/11/11 at a meeting of the House of Lords Economic Affairs Committee in England it was found that during the recent banking and credit crisis “Instead of highlighting problems, IFRS had exacerbated them, enabling banks to deceive their investors – enabling them to portray themselves as massively profitable when in fact they weren’t”. Iain Richards, head of corporate governance at Aviva Investors went as far as to say “IFRS is extremely pro-cyclical. It facilitated and exacerbated the credit bubble”. With recent trouble with our current, robust system like Enron, Tyco, Arthur Anderson and others perhaps adopting a newly created system that facilitates and exacerbates reporting errors and intentional deception shouldn’t be fast tracked.
IFRS will probably eventually be adopted, but the question of when is a value proposition. Consider the cost any change in accounting regulation or standards would entail. Altering forms, retraining accountants, retraining auditors, retraining and refocusing the IRS, educating the public and investors on the new reporting methods, the fluctuations caused by market uncertainty on Wall Street. When taken as a whole those costs and the many others make adoption the current, flawed incarnation of the IFRS seem a bit ridiculous. Time is needed not only to create a viable and reasonable switch to an international standard, but also for the international standard to prove worthy of the switch.
Globalization is the market of the future
ReplyDeleteand in many ways the market of the present. An international accounting standard would help the US further integrate into the global economy and allow our companies to gain competitive advantage by only having to do one set of books. Globalization would also allow a worldwide market for the companies and for the people there is more access to products of different countries. There would also be steady cash flow into the developing countries, which gradually decrease the dollar difference. Of course there would be a number of trials and tribulations to overcome, in order for globalization to be efficient and truly work- but its implementation could be one that may, in the long run, make the world a better place.
GAAP or IFRS? Both are accouting guidelines for reporting companies'economic standing. As my colleagues mentionned, both have their strengths and weaknesses. Again, anything good is worth the short-lived trials. Where am I going with this?
ReplyDeleteMy opinion is that the country should choose its path; embrace globalization or protect its uniqueness. We want the cake and eat it two, there will be a turning point when we will have to choose to be part of the global village or promote our distinctive ways. Until we can agree on this point, any strategies used will be a short-term solution.
I tend to want to lessen boundaries between countries, and reestablish a free-flow of people and ideas, including the acceptance of IFRS. However, I am only one of a few to think that way.