There has been a debate about the change from GAAP to IFRS in the United States for many years. It is not yet clear whether converging or harmonizing is the way forward with accounting standards, but the change has many advantages and disadvantages. IFRS have advantages such as the ease of negotiating with international companies, profitability and the flexibility of the standards. Although these seem very tempting, the pros and cons include IFRSs that are not taught in many schools in the United States, the many inconsistencies in the implementation of the standards, and the additional costs and obstacles to overcome for small and medium-sized businesses that they do not necessarily need IFRS. By weighing the pros and cons of IFRS, a conclusion can be reached as to whether or not to converge.
One of the advantages of converging to IFRS, as presented in Pros and Cons of IFRS, by Peter Galuszka, is that many companies have two different sets of books when they go global and have to perform financial statements in IFRS and GAAP. (Galuszka, 2008.) This is a considerable cost, since the company would need two teams that work with two different accounting standards. By having a standard, the company could allocate more money to a specific sector and not focus on two different ones. This makes the company more profitable and more focused on following a standard.
Furthermore, the advantage of converging on a single set of standards would improve the simplicity of trading and investing with foreign companies. The ability to compare international markets on a single basis would greatly facilitate the analysis of the financial statements of many companies at the same time and improve the quality and timeliness of work. Transparency, reliability and ease are three attributes of convergence that sound very attractive.
One advantage of IFRS being principle-based is that it is more flexible. Epstein gives this example: “Historical cost or revaluation models can be used to account for long-lived assets.” (Epstein, 2009.) Not only is the vocabulary of financial statement items flexible, but also the way they are accounted for. The rule-based system creates a specific and regulated way for one to account for certain items, while the principle-based system allows companies a bit more leeway because many companies are different and have a need for diversified accounts.
The disadvantages of IFRS being principle-based are that it can have some gray areas and can be very lenient at times. Financial statements must be as transparent as possible, due to the Sarbanes-Oxley Act. Brian Kim, author of the Harvard Journal on Legislation, states that “The Sarbanes-Oxley Act creates the Public Companies Accounting Oversight Board (” Oversight Board “) that will oversee the accounting process.” (Kim, 2003.) With this law in force, companies are strictly observed for indiscretions or misconduct, which in turn makes them much more transparent. Even with this law, the IRFS has a bit more room for concealment or misrepresentation, so “the implementation of IFRS will be only as good as the leaders who implement it.” (“Business: Ask the CPA”, 2008, pB 4.) To have a fair representation and value of a company, implementation is key.
The other disadvantage of IFRS is related to small and medium-sized companies. Small and medium-sized businesses may incur additional costs that may not be necessary for their businesses. (Galuszka, 2008.) This will not affect them in a completely negative way, but it could cause some problems. “The main difference that small businesses will see will be the presentation of the financial statement. The presentation of the IFRS statement can vary greatly compared to their GAAP counterparts.” (“Business: Ask the CPA”, 2008, pB 4.) Small businesses do not need all the varied terms for accounts, due to their simplicity, so learning the new accounting standards would change a lot in their financial statements.
The pros and cons of IFRS are very interesting depending on how you look at it. This research shows that there are many people on the fringes of IFRS, due to the many pros and cons associated with them. It is fascinating that you can see how some pros can be seen as cons and vice versa. For example, Principle-based IFRSs can be a good thing or a bad thing. In general, I believe that the advantages of IFRS outweigh the disadvantages. By having a set of standards for foreign and domestic companies, there will be no confusion or additional time to try to figure out the meaning or reason behind the financial statements of other companies.
Anonymous, (2008). Business: Ask the CPA. The Record (Bergen County, NJ), retrieved from http://www.lexisnexis.com/hottopics/lnacademic
Epstein, B. (2009). The economic effects of adopting IFRS. CPA Magazine, 79 (3), 26-31
Galuszka, P. (2008). Pros and cons of IFRS. Retrieved September 22, 2014, from http://www.cbsnews.com/news/pros-and-cons-of-ifrs/
Kim, B. (2003). Sarbanes-Oxley. Harvard Journal on Legislation, 40, 235-579.