Should the US fully adopt IFRS? Why or Why Not? Unit

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Shouldthe US fully adopt IFRS? Why or Why Not?

Unit

Shouldthe US fully adopt IFRS? Why or Why Not?

The term international financialreporting standards refer to the modern set of procurement that theIASB separate from the previous release by the internationalaccounting standards (IASs).The globalization effects have triggeredmost public firms to change their financial approaches, especially inthe accounting sector. Most public firms are opting to adopt newfinancial accounting strategies for auditing reason, which may leadto transparency in the company’s transactions. “In America,globalization has increased both opportunities for the businesstransaction and the influx of foreign public firms among publicfirms”1.Due to technological growth, public firms can receive informationabout the company’s financial positions through the internet.Moreover, the internet portrays the financial positions of theAmerican public firms to various public firms around the world. Forthat reason, the urge of investing in the U.S public firms amongpublic firms has tremendously increased. “Most states are proposingthe adoption of the international financial report standards invarious American public firms”2.Moreover, most nations are thinking of implementing the policy. TheU.S, being the largest economy in the world, has indicated itsconcern about the implementation of the policy. “If the U.S adoptsthe policy, more countries will be willing to do the same”3.For instance, the decision of the European Union to adopt the policyattracted most nations towards implementing IFRS. For that reason,the paper will give arguments approving and disapproving the adoptionof IFRS by the American public firms. Furthermore, the paperillustrates the writer’s stand on the introduction of IFRS amongthe American public firms.

Argumentsfor the US adoption of the IFRS

Most states have declared theirconfidence on the IFRS. They consider IFRS as a good supplement toGAAP, although the U.S.GAAP still maintains the golden standardreputation. “The public is considering IFRS because it isinternational recognized and has some benefit”4.Additionally, the adoption of the IFRS is encouraging since it willenable public firms to achieve a single set of global financialreporting standards leading to easier comparability of publiccompanies’ financial statements. An obvious advantage of IFRS isthe fact that it is more focused towards the capital market and thusmore beneficial to investors. “The fact that IFRS is morecomprehensive especially in regard to disclosure compared to otherlocal GAAP, gives it an added advantage. The improvement in these twoparameters namely corporate reporting and disclosure has been greatlylinked to enhanced market liquidity and consequently reduced cost ofcapital for public companies. The international standards board andthe financial accounting standards board have severally endorsed theidea since they perceive the idea an appropriate way of increasingthe number of public firms in the nation”5.“The IFRS is the chief way most organizations will cross bordersand increase their raising ambitions as required by the IFRS”6.“The most crucial reason for the adoption of IFRS is greatercomparability given that firms can accurately compare their financialreports without any flaw. IFRS is crucial when comparing thefinancial statements of organizations based in different nationsaround the globe. Hence, most nations may use the approach as abenchmark platform. Most firms can enhance their knowledge on thedifferent mechanisms of preparing financial statement through IFRS.The comparability enables the company to compare its financialachievements with that of other leading financial multinationals inthe world. The increase in comparability has enabled public firms todetermine the appropriate sector to invest. Furthermore, it hasreduced loss making among public firms since they understand thecorrect industry to invest. The firm will benefit from lowinformation processing costs”7.

IFRS is crucial because it enhancesthe standardization of accounting and financial reports. “Thestandardization of the accounting and financial report is beneficialbecause it improves the comparability of the firm in major financialmarkets. Therefore, this removes the trade barriers among nations.The elimination of trade barriers will enable the Americancorporations to trade freely without any restrictions in the worldmarkets”8.“Equally, the American multinationals will benefit through IFRSsince they will gain from accessing the foreign market information,which may enable them to understand the appropriate overseas businessto transact. Further, it will enable the American organizations tocompare their financial statements with their foreign subsidiariesorganizations which are beneficial for easing the consolidation oftheir financial statements. The harmonization of accounting standardswill further lead to increased cross-border investment andconsequently, global capital markets integration”9.

Argumentsagainst the adoption of IFRS in the U.S

Although IFRS is beneficial,Companies can’t just decide to use IFRS or not. If the SEC requiresthe US to adopt IFRS as promulgated by the IASB, the public firmswould have to adopt it, as the SEC has the absolute power forenforcement. Some cons of adopting IFRS include: “IFRS may lead tolower information quality among public firms. The American firms’financial reporting will be greatly hampered due to the increment inthe cost of capital”10. Therefore, the move will put most investors away because of the fearof making losses in their ventures. “Additionally, withconvergence, America will lose its autonomy over the setting of theaccounting rules. The FASB is required to set accounts standards inAmerica with the aid of the Congress, the SEC, and court precedents.“With the acceptance of IFRS, the power to make crucial accountinglegislature will be transferred from the FASB to the IASB, and,therefore, other organizations will lose their autonomy of makingcrucial accounting contributions. The American public firms will losepower to influence the accounting legislature because the IASBconsiders the interests of public firms while the FASB considers onlythe American public firms”11.This selective consideration is ineffective since it may hampercompatibility. “The problem of switching costs may incur to mostAmerican firms if the IFRS policy is implemented. If the IFRSaccounting standard is implemented in the American firms, most firmswill be prone to manipulation of their financial statements under theapproach at the expense of the shareholders”12.“Moreover, the shift from U.S. GAAP to IFRS may likely cause publicfirms a lot of money connected to transition costs. Firms adoptingIFRS are forced to accounting processes and systems, to meet theSarbanes-Oxley Act (SOX), as well as update internal controlprocesses documentation. Furthermore, American firms may be compelledto train their financial and accounting staff in the preparation offinancial statements adhering to IFRS. Other stakeholders such asanalysts and investors will also have to be accustomed to IFRSnumbers at the cost of the transitioning firms. Government-regulatedindustries such as financial institutions and telecommunications thathave to submit their statements to their regulators may be greatlyaffected. In addition there are other recurring costs that areinvolved for instance related to the incompatibilities with the U.S.institutional and legal system”13.

Position taken

The U.S should avoid fullyimplementing the IFRS to support the public trading companies, butshould continue with the convergence. Reasons that make me take thisstance include a couple of arguments. Firstly, “since firms canonly manage measurable goals, once measurement rules are changedthere can be a potential change in macro-economic factors and theresultant management styles”14. Secondly, accounting standards require supporting infrastructuresince they cannot operate in a vacuum. “These supportinginfrastructures add a significant cost component to the process ofadopting IFRS system which may negatively impact on the cash flows offirms”15.In addition, “accounting standards and the infrastructure relatedto its implementation are most probably co-determined”16.“Moreover, there is no guarantee that the adoption of IFRS willprobably produce comparable data. Even after adopting IFRS, financialdata across various countries may still possess inconsistencies inthe manner of reporting”17.Lastly, since numerous countries are nowadays adopting the IFRSsystem, it may pose a huge challenge to IASB as the governing body tosatisfy all the countries using this standard and the only thing thatmay enable IASB to function optimally is continued participation.

Bibliography

Hester, Lam. Why does the U.S continue to use GAAP and will itever converge to IFRS. Claremont Mckenna college. P5-71.

Hail, Luzi., Leuz, Christian., and Wysocki. Global accountingconvergence and the potential adopting of IFRS by the U.S (part I):political factors and future scenarios for U.S. Accounting standards.Accounting Horizons. 24(4). pp 355-394.

Hail, Luzi., Leuz, Christian., and Wysocki. Global accountingconvergence and the potential adopting of IFRS by the U.S (part II):political factors and future scenarios for U.S. Accounting standards.Accounting Horizons. 24(4). pp567-588.

Leuz, Christian. Different approaches to corporate reportingregulation: How jurisdictions Differ and Why. ECGI working paperseries in law. Pp2-49.

1 Hester, Lam. Why does the U.S continue to use GAAP and will it ever converge to IFRS. Claremont Mckenna college. P5-71.

2 Hester, Why does the U.S continue to use GAAP, P5-71.

3 Hail, Luzi., Leuz, Christian., and Wysocki. Global accounting convergence and the potential adopting of IFRS by the U.S (part II): political factors and future scenarios for U.S. Accounting standards. Accounting Horizons. 24(4). pp567-588.

4 Leuz, Christian. Different approaches to corporate reporting regulation: How jurisdictions Differ and Why. ECGI working paper series in law. Pp2-49.

5 Hail, Luzi.,Leuz, Christian., and Wysocki. Global accounting convergence and the potential adopting of IFRS by the U.S (part I): political factors and future scenarios for U.S. Accounting standards. Accounting Horizons. 24(4).pp 355-394.

6 Leuz, Christian. Different approaches to corporate reporting regulation, Pp2-49.

7 Hail, Global accounting convergence and the potential adopting of IFRS by the U.S (part I), pp 355-394.

8 Leuz, Different approaches to corporate reporting regulation, Pp2-49.

9 Hail, Global accounting convergence and the potential adopting of IFRS by the U.S (part II), pp567-588.

10 Leuz, Different approaches to corporate reporting regulation, Pp2-49

11 Hail, Global accounting convergence and the potential adopting of IFRS by the U.S (part II), pp567-588.

12 Hail, Global accounting convergence and the potential adopting of IFRS by the U.S (part II), pp567-588.

13 Hail, Global accounting convergence and the potential adopting of IFRS by the U.S (part I), pp 355-394.

14 Hail, Global accounting convergence and the potential adopting of IFRS by the U.S (part I). pp 355-394.

15 Hail, Global accounting convergence and the potential adopting of IFRS by the U.S (part I). pp 355-394.

16 Hail, Global accounting convergence and the potential adopting of IFRS by the U.S (part I). pp 355-394.

17 Hail, Global accounting convergence and the potential adopting of IFRS by the U.S (part I). pp 355-394.