The Transition from U.S. GAAP to IFRS: A Strength or Weakness for U.S. Business?

In 1973 the Financial Accounting Standards Board (FASB) was organized to establish standards of financial accounting and reporting.  They created the Generally Accepted Accounting Principles (GAAP) that are used today in the United States.  These standards are essential for comparable financial reports that are credible for use by investors, creditors, and auditors.  The International Accounting Standards Board (IASB) took this a step further when it began operations in 2001.  The IASB works with national standard creators, such as the FASB, to achieve global uniformity in accounting standards (NEWS RELEASE).

In October of 2002 the FASB and IASB announced the issuance of a memorandum of understanding known as the Norwalk Agreement (Convergence).  This was a significant step toward the future convergence of U.S. GAAP and International Financial Reporting Standards (IFRS).  This switch will have both negative and positive impacts on U.S. business.  Weaknesses of the transition include the time and money spent on training, reduced quality of financial statements, and questionable international enforcement.  Strengths of the switch include the elimination of political influence over the FASB, and the implications of increased international comparability of financial statements (Persons).

The switch from U.S. GAAP to IFRS will present a number of drawbacks to today’s business markets. The American Institute of Certified Public Accountants’ senior vice president for member competency and development, Arlene Thomas, says the acceptance of IFRS as a basis for financial reporting represents a “fundamental challenge" (Anderson).  Switching to something new is always a challenge.  According to Paul Allen, chief executive of the largest accounting firm in Wichita, there is a trickle-down effect that will escalate the price of doing business as a result of the numerous changes that must be made when such a system is implemented (Anderson).

U.S. investors and accountants will have to spend a considerable amount of time and money in training to learn IFRS (Persons).  This switch will upend professionals’ familiarity with the current system.  This training will need to reach not only accounting professionals and investors, but must also reach college-level courses (Anderson).  If adequate time is not given for this kind of a restructuring, then a gap could form in the availability of adequately skilled college graduates.

The use of IFRS could also reduce the quality of financial reports and impede comparability.  As compared to U.S. GAAP, IFRS has more alternative accounting treatments, which could provide more opportunities for earnings management.  Companies will choose the treatment that makes their company look most profitable.  In doing so, financial statements using different treatments will not be as comparable.  IFRS is being developed for a diverse group of companies across different countries, and may not reflect U.S. culture and its business environment (Persons).

There is apprehension pertaining to the IASB’s inability to enforce its international standards.  If an individual country does not approve of one of the IASB’s principles, then that country may undermine IFRS on that principle.  In this case the IASB will have no control over the issue. While this political issue may arise, others may be eliminated (Persons).

A concern with U.S. GAAP is the ability of special interest groups to influence politicians to pressure the FASB in its decisions.  The regulation of IFRS by the IASB will make this kind of influence more difficult.  This is one of many positive aspects of the switch (Persons).

The transition from U.S. GAAP to IFRS will be a strength for the United States economy as international comparability of financial statements will become possible.  It will make U.S. businesses more competitive abroad, and U.S. markets more attractive to international investor and foreign countries.  Over one hundred countries currently use IFRS (Niemela).  The adoption of these uniform standards in the U.S. will simplify international business.  U.S. GAAP is rule-based with many details, which are difficult to understand by investors without accounting expertise.  It will allow those who were previously unfamiliar with U.S. GAAP to interpret and use financial information prepared in the United States (Anderson).  

Weaknesses of the transition from U.S. GAAP to IFRS include the time and money spent on training, reduced quality of financial statements, and questionable international enforcement.  Strengths of the switch include the elimination of political influence over the FASB, and the implications of increased international comparability of financial statements.  It may seem at first, that moving from U.S. GAAP to IFRS is a bad idea; however most of the negative aspects of the transition are short-term obstacles.  They are being fed by fear surrounding the unknown.  In the long term, the switch to IFRS will invite the United States to become a team player in global markets.

                                                                      References                                         

  Anderson, Kelly L. “SEC’s switch from GAAP system will affect private businesses too." Witchita Business Journal 16 May 2008. 23 July 2008 < http://www.bizjournals.com /wichita/stories/2008/05/19/story5.html?ana=from_rss>.

  “Convergence with the International Accounting Standards Board (IASB)." Financial Accounting Standards Board 23 July 2008 < http://www.fasb.org/intl/convergence_ iasb.shtml>.

  “NEWS RELEASE-FASB and IASB Reaffirm Commitment to Enhance Consistency, Comparability and Efficiency in Global Capital Markets." Financial Accounting Standards Board 27 Feb 2006. 23 July 2008 < http://www.fasb.org/news/nr022706. shtml>.

  Niemela, Jennifer. “Good-Bye, GAAP? Companies weigh switch to new standard." Minneapolis/ St. Paul Business Journal 18 July 2008. 23 July 2008 <http://twincities.bizjournals.com/twincities/stories/2008/07/21/story10.html>.

  Persons, Obeua S. “Accounting Harmonization Case and Debate." Journal of Business Case Studies 2005. 23 July 2008< http://www.cluteinstitute-onlinejournals.com/PDFs/ 200516.pdf>.