IFRS Implementation in the US
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IFRS is a set of accounting principles and standards, which are developed by the International Accounting Standards Board (IASB, 2009). It has been applied by over 12,000 companies in more than 120 countries worldwide. It is ever becoming a globally agreed system for the preparation of all financial statements for all public companies worldwide. In the US, US.GAAP is majorly used by companies. Recently, however, the G20 group of leaders had decided for an application of significant direction towards the use of one universally accepted accounting standard. US president Obama also reiterated the fact that it is vital for all nations to adopt a single accounting standard. Therefore, the Stock Exchange Commission is busy designing the road plan or roadmap for propelling USA towards the adoption of IFRS.
I will discuss the ‘pros’ and ‘cons’ of IFRS implementation in the USA and also its costs and benefits almost simultaneously. On the ‘pro’ side, I will be touching on the fact that with the implementation of IFRS standards in the USA, success in the development of high quality and comprehensive accounting standards have been achieved. The con side will be costs related; whereby there is an underlying concern the financial reporting principles have been drastically pushed downwards and later concealed by obscure uniformity. The conclusion that the uniform financial reporting will enhance inter-firm and cross border comparisons seems immature as it ignores the existing economic and political factors that greatly affect the financial statement preparers incentives, which will then affect the eventual reporting practices (D'Atri &Braccini, 2010).
The IFRS implementation in the USA is mandatory after the SEC officially reviewed all the regulations and made them to be part of the reporting standards. The accounting standards reviewed have focused on the determinants of relevance, reliability, and quality. The existing accounting standards –FASB and IASB are laying strong emphasis only on reliability but IFRS cuts through all the determinants.
The first pro of the adoption of IFRS in the US has direct positive effect on both institutional and local investors. This is because IFRS will promote a more comprehensive, accurate and timely information concerning the financial statement, relative to the accepted accoutnitng standards. To the point that these financial statements are not sourced elsewhere, it should enhance a comprehensive valuation of all equity markets hence, making investors to have low risks. Small institutional investors, unlike the professional ones, would be able to confirm the financial statement reports from external sources. Enhancing reporting quality enables these investors to compete favorably with the established investors and thereby reducing risk that they may be engaged with (Jameson, 2010).
Through the elimination of global differences in accounting standards and standardization of all reporting formats, the IFRS will eliminate many changes and re-evaluations, which the financial analysts have made in the past to make the company’s financial reports comparable internationally. The implementation of IFRS in the US, therefore, will reduce the costs incurred by investors in preparing the financial information. An added gain is that, lowering the costs of preparing the financial reports will increase the efficiency in which the stock markets can incorporate them in prices. Investors are thus expected to benefit from enhanced market efficiency.
IFRS implementation will also lower international differences in accounting policies and standards, which aids in the removal of barriers existing in cross-border mergers and acquisitions, as they in theory, reward investors with enhanced takeover premiums. Generally, IFRS implementation offers increased and rewarding comparability and thus lowering the information costs due to asymmetric information. It is very important to discuss its evolution from the time it was first implemented. This will enable individuals to appreciate how these accounting standards have transformed the business picture in the US and the rest of the world. Something worth noting is that all companies are supposed to have strict compliance to universally accepted accounting principles (Thomas et al, 2008).
The eventual transition of US accounting policy from US.GAAP is basically a factor to be highly regarded by most individuals in the corporate world. The road map to IFRS was initially an idea of Stock Exchange Commission. More than 200 professional letters were eventually handed over to the SEC from users, preparers, analysts, academia, auditors, professional organizations, and other people. Facts and opinions relating the IFRS issues like implementation costs, compatibility, quality, and convergence versus adoption were laid across the spectrum, despite the fact that most individuals realized the importance of quality financial reporting standards for both domestic and external reporting (Wolfgang & Piera, 2010).
The roadmap reveals a vision or target, that if achieved, would result to the recommended use of IFRS for all US issuers before 2014. This year, the SEC has decided to move with the 2009’s proposed plan, which was based on the eventual achievements of marked milestones. During that year, the SEC published many articles revolving around possible effects of IFRS adoption and addressing critical issues raised by academia and authors concerning the mode of implementation. A single set of accounting principles will enhance greater comparability of performance between firms and can enable companies from different locations in the world to use the same standards (Thomas et al, 2008). It also increases transparency, encourages cross-border investment activities, which come with greater liquidity and low capital costs. Adoption of IFRS will also reduce time and costs accrued when preparing financial statements using different standards and policies hence achieving huge savings of investment capital in the end.
The implementation of the IFRS will remove the inconsistency of accounting information as a result of applying different accounting standards. This will help investors to continue pursuing various strategic policies like global investment diversification. Detailed explanation of these benefits will be handled when I will be dealing with the weight of cost –benefit analysis of the implementation of IFRS in the USA.IFRS have varied indirect merits to investors. Since greater information details reduce all risks accruing to less informed investors and those owning shares, it eventually lead to the reduction of the company’s cost of capital. This will then increase share prices and make new firm’s investments to be attractive, keeping all other factors constant.
These indirect advantages come from increasing the usefulness of the financial statements in two or more contracting parties. Enhance level of transparency makes managers to act in consistency with the shareholders’ interests and aspirations. Moreover, timely recognition of losses in the prepared financial statements enhances the managers’ incentives to pay attention to the unsuccessful or unprofitable but operational investments more quickly, and thus reduce the undertaking of firms with negative NPVs in future like ‘trophy’ acquisitions and ‘pet’ projects. The enhanced transparency and timeliness in loss recognition enabled by IFRS thus, raise the efficiency and suitability of contracting between managers and firms, reducing the agency costs existing between shareholders and managers therefore, ensuring that corporate governance is enhanced (Wolfgang & Piera,F2010). The investor’s gain arises from the fact that managers are improving on their welfare. The indirect demerits accruing to investors come from enhancing the usefulness or utility of the financial statements in some firms, which have entered into a contract with other third parties.
Adoption of IFRS will lead to positive cash flows to investors. The positive cash flow effects include contracting costs and lowered cost of managerial rent extraction, which is associated with enhanced financial reporting transparency. Investors will be able to get convergence benefits. This will lead to the firms reducing forecast errors and satisfying investor confidence. The more improved transparency assured by the implementation of IFRS would lead to increased efficiency of firms and lenders under contract. This will ensure a constant efficiency of operations in the intra-firm and inter-firm developments (Barry & Eva, 2010).
On the costs-benefits analysis, IFRS seems to have more benefits than costs if implemented. First, IFRS increases the liquidity of capital markets. Moreover, it reduces the firm’s capital costs by ensuring the provision of comprehensive information to shareholders about corporate governance. Nevertheless, most scholars argue that the above point is only applicable if the adoption of the IFRS rules and standards will lead to the improvement of reporting quality and the comparability of all reporting practices world wide.
Finance and accounting scholars suggest that it is less certain that a transition to the IFRS will bring about substantial effects on the quality of reporting in the USA. US companies have a required obligation to report their figures in a procedure or a given format that is not determined by the accounting standards but also determined by the country’s enforcement effects and legal institutions. All these issues have resulted in high quality reporting in the US. If the factors will not be changed, it is less likely that most US companies reporting issues would become better due to IFRS adoption. The scholars have also concluded that it is not so certain that transition to IFRS will adversely affect the quality and standard of reporting by the American companies since the other forces will take effect (Bruggemann, 2001).
The proponents of IFRS implementation suggest that upon the adoption of IFRS in the US, it will result in better comparability of financial reports with other companies in the world. However, the accounting standards are among the factors that influence the company’s reporting incentives, hence it will become more doubtful if the implementation of IFRS would lead to tangible economic benefits. If some factors within the firm are different across countries and firms, then the firm’s reporting policies will be different in some aspects either with or without the implementation of the IFRS standards.
Evidence got from other countries and firms shows that there exists a wide difference in the way firms apply and use IFRS and that most firms show a likelihood to use their local GAAP when dealing with accounting formulations and judgments. What is interesting ,however, is the fact that US companies have tried so much to harmonize the difference existing between US/GAAP and IFRS thus, enabling them to make comparisons with other countries’ financial reporting activities (Commerce Clearing House, 1984).
When it comes to costs side, the implementation of IFRS will need support from auditors, regulators, investors, and investors. At the transitional stage, most firms usually make their accounting procedures and policies and provide financial information, which are comparative in nature between the previously used US/GAAP report and the adopted IFRS compliant financial reports. Moreover, companies usually train their employees and other stakeholders like investors and analysts in the preparation and use of the financial reports. The financial contracts with the elements, which are tied to accounting figures would be revisited. In the economic situation prevailing currently, most companies are unwilling to incur all these expenses and costs.
One should also consider the long run benefits of IFRS implementation. For instance, most US firms operational world wide would economize a great deal of money by avoiding the costs and expenses of translating all the financial reports into many accounting languages. Therefore, transition to IFRS would ensure that multinational firms belonging to the US maintain and follow a single class of accounts. Even though US multinational firms would reap a lot of benefits due to the implementation of IFRS, it is not so certain that all domestic US firms would garner a great cost savings if they agree to implement IFRS. Additionally, most large firms would be able and willing to absorb all the costs of implementation or adoption of IFRS because these costs are part of fixed component. Firms with the Big Four auditing team will gain because these auditing firms have vat experience in the formulation and implementation of IFRS reports and they rely mostly on global professional network.
Having indicated all these factors, determining the overall effect of IFRS implementation in the US reduces to a trade off between costs of implementing the new system and the recurrent benefits or gains of having the ability to do comparison of financial reports over different countries. It also includes the recurrent cost savings got from using a one-line reporting standard for some companies. Scholars show that it is not very clear what the impact of the cost-benefit trade-off will be for a specific company. To some scholars, IFRS implementation in the US is the right course of action to take if the companies are given choices or a transition criterion that is very dynamic and flexible. The scholars also devised two adoption processes or stages whereby the first stage involves a company voluntarily opting to transits to IFRS or maintain the previous standards. The second stage is where there is a mandatory and universal adoption of IFRS policies and stipulated framework. All the companies are required to switch to this policy(IASB, 2009).
The multi-stage process enables companies having low net costs of implementing the IFRS to quickly take the lead and this will furnish investors, regulators, companies and auditors a good opportunity to observe, learn and conclude about how the switching to IFRS affect their performance. For example, auditors or auditing firms will understand how to switch firms to adopt IFRS, which will alternatively lower the costs and expenses for firms that adopt the given standards in future. With time, a host of companies may find it rewarding to make transition, thereby making it less hard to ensure that all firms have followed suit (Barry & Eva, 2010).
The networks of benefits of one-line accounting standards will be fully achieved if large number of firms adopts the required standards. Thus, scholars observe that Stock Exchange Commission proposals that require a small number of companies to apply the required standards is self defeating, since most economies of scale together with network effects will not be clear for small groups. Given that global markets are ever interacting, the need for clearer and more consistent accounting standards become inevitable. The conversion of US accounting standards to IFRS will benefit the country in a global market perspective. It will enable companies to improve their processes, streamline accounting systems and prevent parallel accounting over the cross border jurisdictions.
The greatest concern, however, that arises from the implementation of IFRS is that both the institutional and external investors will be given misleading information to believe that there is a consistent uniformity in the reporting standards, which is not the case. Uneven implementation will lead to increase in the costs of processing the demands of multinational investors (Barry,2010). Another effect of cost-benefit analysis of the implementation of IFRS in the US is that of the implementation costs. According to Stock Exchange Commission, it will cost the government almost $ 8 billion dollars to implement IFRS nationwide. This cost is not reflective of the economic gains to be received as the ‘infant’ companies who are new to the policies will have to incur recurrent costs to keep the system working. From the cost-benefit point of view, some scholars believe that convergence is more important or is advisable than adoption. IFRS implementation will present many challenges to the US economy as it would result in cost- push inflation.
Enforcement of IFRS in the USA and in other countries could pose a serious challenge due to different political and economic settings. Different countries in the world have different political and economic factors and reporting standards hence, harmonizing these factors will be costly and time consuming. Investors look at the introduction of IFRS to be negatively affecting the quality of reporting. This can happen if investors believe that IFRS will not succeed in reflecting regional disparities in economies or maintain the countries’ varying economic and political features, which can lead to existing disparities in internal domestic standards. Some investors will also believe that upon the implementation of IFRS it may lead to rise in managerial discretions (Krishna & Palepu, 2007).
The pronounced effects of IFRS implementation in the US have lead to the redistributing consequences cutting across all firms. The effects of comparability of different financial statements prior to the implementation of IFRS will also pause a great challenge. Despite all the costs and cons I have explained, the US willingness to adopt IFRS shows that the country is willing to corporate with other countries for a common good (Abbas,2011). The cost, which could arise here, though insignificant, is that most countries in the world employ different financial reporting standards, which will give problems to harmonization of reporting policies. For nations that have not implemented these policies, it will be very difficult for US multinational firms to operate in these countries because of the existing financial reporting disparity.
When the IFRS is implemented in the US, it will increase or enhance corporate decision making. IFRS will lower the existing asymmetry of information, which could have otherwise negatively affected sourcing of external capital. Implementation of IFRS will reduce agency issues as it will provide a trustworthy benchmark, which enables the foreign investors to evaluate the efficiency of the firm(Barry et al, 2010). What needs to be understood is the transition costs incurred. USA will incur a great deal of expenses when formulating policies that will eventually result in the implementation of IFRS. Much as there are existing recurrent benefits, it is worth mentioning that for firms who initially were not conversant with IFRS principles, recurrent costs would also be incurred. This will cause a substantial financial drain to most US companies.
Companies will need to adjust their internal accounting framework, train all their accounting officers and ensure that the existing investors and shareholders are notified concerning the changes in accounting standards. For firms, which may not be able to catch up so easily, what is required is that they will have to outsource firms capable of preparing their financial reports commensurate to the IFRS rules and regulations(Krishna et al,2007). The projections indicate that the transition costs per firm average 0.31% of their sales revenue and the bigger firms’ average stands at approximately $ 700 million dollars. From these figures, it can be concluded that transition costs could average $ 8 billion nationally. These costs are bound to rise if the Stock Exchange Commission reports the data inclusive of all US/GAAP reconciliation costs (Wolfgang,2010).
In conclusion, the reflective idea is that US should consider adopting the IFRS policies since not only will it enable firms to have increased investment returns but makes the country to pose financial statistics, which are comparable to those of other countries. This will ensure that there is harmonization of all the accounting principles in order to ensure effective and efficient financial reporting.
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