Accounting profession is changing significantly due to the continued use of international financial reporting standards (American Institute of CPAs, 2011). It is continuously replacing generally accepted accounting standards. The main purpose of IFRS is to ensure that public companies or organizations get a strategy of preparing and disclosing their financial statements (Deeper, 2010). It provides general guidelines on how to prepare and disclose financial statements but does not give specific rules which are uses for specific disclosure (Deeper, 2010). In this context, IFRS is a guideline and does not provide the specific way in which an organization should prepare its reports. All an organization needs to do is follow the guidelines and come up with their unique report rather than being too specific like before her organization were required to produce almost the same reports.
The adoption on international financial reporting standards kicked off in 2005 when most states stopped using the U.S GAAP (Miller, 2010). Many states in the European Union started using the techniques which came with the new international standards. There were so many countries that were planning to start adopting to the United States Generally Accepted Accounting principles. However, when the new standards were developed, they switched to that (Miller, 2010). Example of countries which have adapted to IFRS include; New Zealand, Canada and Australia. Japan was planning to start to implement its IFRS by 2011 (Miller, 2010). United States was aiming to start implementing the IFRS by 2014. The adoption and implementation of IFRS is likely to cause a lot of changes which will impact every one.
One might wonder if there are any differences between international financial reporting standards and generally accepted for accounting principles or not (American Institute of CPAs, 2011). The main differences between the two are that IFRS do not use Last in First out (LIPO) principle which is commonly used by GAAP. IFRS permits that assets can be reevaluated under some special circumstances (American Institute of CPAs, 2011). IFRS applies a single step method for impairment write downs instead of the two method used by U.S GAAP (American Institute of CPAs, 2011). IFRS needs capitalization of development costs if a particular criterion has been met (American Institute of CPAs, 2011). The difference which comes clearly between the two is that IFRS is general and does not give industry specific details.
Role of Securities and Exchange Commission in IFRS
Securities and Exchange Commission was first developed in 1934 by the Act of Congress and was majorly charged with the responsibility of enforcing the federal securities law and ensuring that security is observed in all industries and even in the stock markets (AICPA, 2010). In addition to this, it has widely been involved in ensuring that accounting standards are developed which are to be applied world wide (AICPA, 2010). The Securities and Exchange Commission (SEC) has been a strong contributor for many years in developing the accounting standards which could be used in financial reporting. SEC has been found to support IFRS. It has a big role to play when it comes to accounting. They voted to ask the public to start using international financial reporting standards (IFRS). They are charged with the responsibility of creating a conducive environment where IFRS could be adopted. It provided a timetable in which companies could follow to adopt to IFSR. According to that timetable, approximately one hundred and ten large companies were likely to start using IFRS out of their own will in 2010. They would vote in the consecutive years to know if companies in United States should adopt IFRS or not. In other word their role in IFRS was to vote and convince companies and the public to adopt the use of IFRS. If their vote won, it will be compulsory for all the companies to start using IFRS. It played a role of setting the road map for IFRS.
In preparing the strategic plan which supported IFRS, it had different goals which if achieved will play crucial role to IFRS. First it aimed at ensuring compliance to federal securities law. Second it aimed at developing a good environment in which companies can operate from. Third is to ensure that investors get information conveniently which will help them in making decisions about investments. Fourth is to improve the commission performance by proper use of information and finances. Out of these goals we can see its commitment to the accounting field.
SEC played a major role in pushing for IFRS as it believed that it was a high quality accounting standards. It expressed IFRS as a method which companies and investors are able to apply and compare financial information. It thought of making adoption of IFRS a compulsory issue for each company. Then it went ahead to set milestones which if fully achieved could pave way for use of IFRS by all companies in the United States. The milestones included; improvement in accounting standards, accountability and funding of the IASC foundation, improvement in the ability to use interactive data for IFRS reporting, education and training relating to IFRS, limited early use of IFRS where this would enhance comparability for U.S, anticipated timing of future rulemaking by commission and implementation of the mandatory use of IFRS by U.S issuers (Harmon, 2008).
SEC’s role in IFRS can also be clearly seen in its work plan where it emphasis on adoption of IFRS as the effective method of financial reporting. In its timeline, it is seen that in 1988, SEC issued a policy statement which demonstrated the need for a mutually acceptable international accounting standards (American Institute of CPAs, 2011). In 1997 SEC continued to push for international accounting standards committee which was supposed to be charged with the responsibility of setting the standards for accounting (American Institute of CPAs, 2011). These standards which were to be developed are now called the international financial reporting standards. In 2002, declared that it supported the Norwalk Agreement between financial accounting standards board (FASB) and international accounting standards board (American Institute of CPAs, 2011). In 2007, SEC members voted in agreement of foreign private issuers financial statements which were made in line with IFRS and not considering the GAAP which was used in United States at that time (American Institute of CPAs, 2011). In 2008 SEC produced the road map which consisted of a timeline and the crucial milestones which were to be achieved for IFRS to be adopted (American Institute of CPAs, 2011). It also came up with a criterion which allowed the U.S public companies to adopt it early enough. In 2010 fully declared its support for convergence and global accounting standards (American Institute of CPAs, 2011). It also asks for a work plan which it issued on October 29th, 2010 (American Institute of CPAs, 2011). All these activities show clearly how SEC contributed to the adoption of IFRS.
Due to the roles performed by SEC, recently, more than one hundred countries allow or have a need for IFRS for their public companies. It is forecasted that by 2015, more countries will have adopted it (Deeper, 2010).
Pros and Cons of Having Just One Standard GAAP
At the rate which globalization is occurring, it is important for countries to implement one standard GAAP. This is because globalization gives every one the opportunity to sell or buy everywhere in the world. It is recommended that countries adopt a GAAP which can be understood by every person wherever they come from. This problem has been resolved by the invention of IFRS by the help of the SEC. it will reduce the use of United States GAAP which cannot be understood by every one. Both U.S GAAP and IFRS are accounting standards but there is a very wide disparity between them. Due to the fact that markets are growing complex and global, these disparities pose a problem because both consumers and producers need a reform.
Specifically, due to globalization, having just one standard is important. However, the adoption of one standard GAAP has its own advantages and disadvantages. In this case the advantages and disadvantages of having one GAAP is going to be discussed in relation to the disadvantages and advantages which are brought about by international financial recording standards. This is due to the fact that IFRS is one standard which is to be adopted by all counties around the world. This is difference by the standards which many countries adopted but they were United States based, the U.S GAAP. IFRS is important because it has rules that are supposed to be applied equally by all countries in doing their financial reporting.
Pros of Having One Standard GAAP.
The first advantage is uniformity which brings about its own advantages. When the standards are uniform, they only need to be invented and countries can go ahead to implement them. Due to uniformity any body can understand them without depending on which country they have come from. When they are uniform, they protect auditors against managers who may want to impose their own rules. If accountants are required to use the same rules, the managers do not get the chance of threatening to hire an accountant who can conform to his/her rules. The other advantage which is brought about by is removal of informational externalities which are liked to come up due to absence of comparability. Therefore, use of one GAAP reduces the issue of ambiguity which can arise due to different GAAPs.
One GAAP will also increase the level of comparability making it easier to access different organizations all over the world (Center, 2009). It will make financial reports more comparable hence the number of investors in the market is likely to increase. One GAAP will help to reduce diversities of accounting which occur from one country to another. When the GAAP is one, it reduces the costs which are used in conversions (Center, 2009). This is because if the GAAPs are different, investors must convert theirs each time they go to another country. It also reduces the cost of training. This is due to the fact that if the GAAPs are different, employees have to be trained any time they are applying a different one. This means that if the GAAP is one, employers only need to train their employees once.
Use of one GAAP reduces the time which investors use in making their financial reports meet international standards or meet the standard required by a particular country. This is so because all organizations will be able to use GAAP which is recognized by every one in the world. It encourages equity between the countries because if each country or continent is allowed to have their own GAAP, there are possibilities that some will be credited for having the best which bring about discrimination as some countries might criticize those of their fellow countries. One GAAP has been found to also have the advantage of helping investors and their accountants to make accurate, comprehensive and timely financial reports using information which will be internationally recognized. They will also eliminate international differences which occur in accounting. This comes about by reducing adjustments which might have otherwise been made to meet international standards. Having one GAAP will also help organizations present their financial statements based on the same principles as those of their competitors hence making comparison easier. Some other advantages which come with one GAAP include improving the use of financial statement information, it improves the transparency which helps managers do according to how stakeholders want them to act, hence create value to accountancy.
Cons of Having One GAAP.
Despite the fact that, having one GAAP has many advantages, it does not miss some disadvantages. Use of one GAAP may be disadvantageous in that it may not include all necessities of different countries. Different countries have different structure and incorporating everything in one GAAP may not be very easy (Center, 2009). Though the GAAP is one, practices and enforcements may differ from one country to another making it different all together. This can be explained by the diversities found in different countries which make it difficult to incorporate all these components. It is not easy to have a comprehensive one GAAP. This is because for a financial report to be comprehensive, it has to incorporate so much information. Therefore to include all that information may not be that easy. Different stakeholders in preparing the one GAAP will present different information. Therefore conflict may arise as different information is being presented. It is disadvantageous in that, most influential countries may have a large contribution to the information being included. The U.S GAAP has been successful for many years. Its success has been associated to details. The disadvantage which can arise from one GAAP is lack of detail which can show some sense of lack of transparency because all the information is not included. Use of one GAAP can lead to lose of some standards and values which can be incorporated. For instance, those aspect included in the U.S GAAP may be lost.
Will IFRS Be Adopted
According to my predictions IFRS will be adopted by almost all the countries mostly because it allows comparability. This can be proved by the fact that countries like New Zealand, Canada and Australia have already adopted IFRS, Japan is planning to adopt it and U.S which already has its own U.S GAAP, is planning to adopt IFRS by 2014. It is going to be adopted because there are many changes which are taking place in the finance and accounting departments. Many economies recently are on their way to adopt IFRS. Almost one hundred countries have changed their economies to adapt to the accounting standards which are in line with IFRS. The other reason as to why countries are going to adapt the issue of IFRS is the advantages which come with it. Before IFRS was invented, countries used to develop their own GAAPs locally but which did not follow any international guidelines. With the invention of IFRS, countries can use accounting standards which are globally accepted.
IFRS helps to remove subjectivity in financial statement and provide a better basis for presenting financial information. Another reason as to why IFRS will be adopted is because it brings about convergent of accounting standards which helps to attract more investors as it comes with increased transparency (Jackson, 2008). Since investors are seeking to compare themselves with international competitors, adoption of IFRS will solve this problem.
The adoption of IFRS is happening very fast and by 2016 most of the countries will have adopted it. According to IASC by the end of 2011, 150 countries will have implemented IFRS (Jackson, 2008). This is in inclusion of U.S. the adoption of IFRS is a positive move to make as it will help the capital markets become more competitive. It will give companies compete with companies from other countries. It will also help in reducing cost and complexity which comes with operating in other countries if they have their own standards. IFRS will improve the understanding and confidence among international investors since they will be following the same standards (Jackson, 2008). It will also come with increased comparability and transparency among investors.
Its benefits to different stakeholders will also contribute to its adoption. Multinational companies will find it easy meet standards because they will not be required to make any revisions. This will also make it easier for governments to get tax liabilities from these multinational companies (Jackson, 2008). The adoption of IFRS is like a mandatory issue. After all every country is doing and none wants to be left behind. The European Union was able to adapt it in 2005. Australia, Russia, China, South Africa and GCC countries are in the process of adopting it. Canada has the plans of adopting IFRS by 2011 (Jackson, 2008). This means that IFRS will be adapted to its advantages and benefits and each country will adapt it at its own convenient time.
Why Public Companies will Require IFRS
IFRS is mostly important for public companies due to the fact that they will need to compare themselves of public companies all over the world. It will make it possible for governments to compare their companies. IFRS will also be required by public companies because it provides standards on how accountants will be preparing their financial statements worldwide. Especially for public companies, they have been accused of very limited transparency. With the adoption of IFRS they will be able to improve their level of transparency. They will also have to adopt them to enhance global consistency. The rate at which globalization is occurring does not give public companies any choice rather than adapt to IFRS. Public companies will also have to adapt IFRS since it increases cost effectiveness. This is achieved through reducing the cost required to train employees on different standards depending on the country and cost which could occur due to conversions accountants would need to make to fit the standards of various countries.
The will also require it due to its benefits which come with the use of similar language in making financial statements. It will improve the competitive advantage of these companies, it will make comparability easy among these companies, and capital market allocation for these companies will also improve, and avoid complexity and errors which might come with specific GAAPs for each country. Mostly governments decide on which standards are going to be applied. Additionally, public companies are mostly government companies or entities. Therefore if a government decides to apply IFRS, the public companies will be forced to do so. For them to ensure that their performance is ranked worldwide, they will have to adapt to IFRS.
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