International Financial Reporting Standards - Dissertation Example

?Introduction International Financial Reporting Standards were implemented after the overall complexity of business organizations as well as the nature of accounting relatively changed. International Financial Reporting Standards (IFRS), therefore, have been considered as an effort by the world accounting governance bodies to ensure that uniform reporting standards are adapted across the whole world. Due to the globalization process, organizations have become truly global in nature with their presence in different countries of the world. However, due to different accounting standards prevailing in each country, international organizations have to report their financial performance according to different standards. This, therefore, created the issue of uniformity of the accounting reporting and disclosure requirements. The rapid internationalization of the business activities necessitated the creation of a uniform set of accounting standards to improve the disclosure requirements. It is critical to note that not all countries have adopted the IFRS and the overall process is still considered as challenging for most of the countries. One of the most notable omissions is US which has not yet adapted the standards for different reasons. This literature review will discuss the issues and concerns which are preventing US from adapting the IFRS. International Financial Reporting Standards It is argued that financial accounting standards are necessary because they allow investors and other stakeholders to have access to the information which is consistent as well as understandable. Following a uniform set of accounting standards is considered as important from the view point of consistency (Cangemi, 2008). Globalization should be considered as one of the beginning points towards the development of IFRS. It was the increase in the overall complexity of businesses at the international level that has resulted in the development of IFRS at the global level. The process of globalization is considered so strong that it requires revamping of existing regulatory frameworks in order to help globalization to take its roots. The unrestricted movement and flow of capital across the borders have resulted in the movement of goods, services and investments across the markets. This has also triggered further expansion of international businesses as organizations shifted their headquarters to places where accounting standards were different. Due to the relocation of business operations, organizations had to prepare accounting statements according to the prevailing local accounting standards. The internationalization of the accounting standards and introduction of IFRS, therefore, are considered as part of the same process to allow the development of a uniform set of standards (Daske & Gibhardt, 2006). Various research studies have actually highlighted the importance of adapting IFRS as it is believed that a uniform set of accounting standards can improve the quality of reporting. Having same reporting standards would allow investors to better understand and evaluate the performance of the global firms and develop a unique insight. Though it has been suggested that estimating the overall importance and how a uniform set of standards can actually improve the quality of reporting may be too early (Jacob & Madu, 2009). It has also been argued that fair value accounting practices under the IFRS have also created much fear at the organizational level. It has been argued that fair accounting revaluation of assets under the IFRS has resulted in a drastic reduction in the values of the assets. This reduction in the value of assets, therefore, has diluted the balanced sheets of the firms and further resulted in worsening of financial crisis in developed countries. Accounting standards made under the historical cost concepts may have been more suitable in order to allow organizations to report their assets and liabilities at the right values (Smith, Boje, & Melendrez, 2010). At the global level, there are two sets of accounting standards, i.e., US GAAP and the other sets of standards which are followed by countries such UK. International organizations either prepare their financial statements according to US GAAP or the international accounting standards followed by UK and other countries. The IFRS have been seen as an effort to actually achieve the convergence of various accounting standards in order to ensure that a uniform set of accounting standards is followed by all the organizations at the global level. Though IFRS as well as US GAAP are closer or similar in many respects, there are still some gaps which need to be reconciled. The overall process of convergence is on; however, critical differences in certain areas still exist. One of the key differences is the fact that US GAAP are rule based whereas IFRS are considered as principle based standards. US GAAP also differ from industry to industry whereas IFRS attempt to provide a uniform approach to recording and presenting accounting information. Almost all the trading partners of US including Japan, China and Mexico have adapted IFRS for domestically traded public companies; however, US has not yet adapted the same. Over the period of time, standard setters, practioners as well as regulators have made efforts to reconcile the differences in US GAAP and international accounting standards; despite the efforts of SEC, the same have not been reconciled yet. In 2002, a general understanding was developed between IASB and FASB to actually reduce the number of differences between IFRS and US GAAP. These efforts were followed by signing up of a memorandum between the two in 2006. This memorandum was aimed at improving the accounting standards as well as designing comprehensive methodology for convergence of IFRS and US GAAP. Further efforts were taken in 2008 and 2009 wherein the Securities and Exchange Commission took comprehensive efforts to complete the convergence of standards by the end of 2014 (Derstine & Bremser, 2010). Foreign firms having offices in United States have actually reported according to IFRS as per the directives of SEC. However, most of the firms reporting under IFRS are either European or Australian in nature. Response from the Asian firms listed on the stock exchanges of US has been relatively slow. Studies have also reported very low benefits for the adaption of IFRS for the Chinese firms listed on the New York Stock Exchange. There is also a degree of effort on the part of the practioners to actually make themselves aware of the new changes to be implemented through IFRS. Considering the overall complexity of the organizations as well as the global nature of their operations, many practioners believe that developing the knowledge and understanding of the same would actually result in providing them with a competitive advantage when change will actually occur (Dulitz, 2009). Despite all the efforts at the regulator level, there has been a slow start and the overall acceptability of the transition towards IFRS may not be up to the mark. There are various issues and concerns which may effectively restrict the use of IFRS at the local level in United States. SEC has allowed foreign firms incorporated in US to report their financial statements according to IFRS. Issues and Concerns One of the key issues to be dealt with and one of the significant challenges to meet is to assess whether US firms are really ready for making this transition. Firms with subsidiaries reporting according to IFRS may find it easier to make the transition; however, those firms with no subsidiaries neither have complete understanding of the same nor are willing to make the transition. The limited accounting knowledge about the implementation of IFRS as well as the lack of willingness of the small firms to adapt to the new standards are considered as one of the key constraints on the firms adapting the same. It has been argued that each implementation of IFRS would require education of employees, and there is a need to take measures to actually train employees internally in order to improve their overall understanding of IFRS and how they can make the transition from US GAAP to IFRS (Epstein, 2009). The overall practioners’ view about the adaptation of the standards is relatively mixed in nature as various surveys suggested the inability of the CPAs to actually prepare for this transition. Uncertainty of the overall cost involved in making this transition is also considered as one of the key factors discouraging the practioners to be ready for this transition. It is generally believed that the cost may well exceed the overall benefits of adapting the standards; therefore, the transition to IFRS may be costlier as compared to the overall benefits to be gained. The uncertainty regarding the cost is also a key factor for the international firms in US to adapt to these standards on the global level across their all operations. Cost is a significant issue because, considering the existing economic situation, firms do not have excess funds to actually commit themselves towards the transition. Many smaller firms are facing cost constraints and are not willing to invest funds in the education as well as infrastructure development to complete the transition. Without having active support from government, it may be relatively not possible for American firms to commit their resources and time to educating their employees to learn about IFRS and how to implement the same within the organization. There are two important issues in terms of cost, i.e., one time cost as well as cost saving which could be due to convergence. US GAAP are mostly based upon cost and benefit analysis and it is, therefore, suggested that the overall onetime and recurring costs may be higher than the overall cost saved plus other benefits to be offered if transition is made to IFRS. System-wide infrastructure issues are also cited as one of the reasons as to why the regulators are still not ready to adapt the standards. The widespread gaps between US GAAP and IFRS indicate that US may have to actually serve as one of the key factors deterring regulators in US to not adapt to the new set of standards (Heffes, 2009). Faithfull adapting of IFRS is also another important issue which has empirically suggested that the firms tend to prefer their local standards. Evidence from other countries has critically outlined that the firms, when making judgments, tend to prefer their local standards as compared to IFRS. It is believed that US firms may also follow the same principle and may prefer the local standards to international ones. This may not result in true compatibility of IFRS and local standards and smaller firms may not adapt to IFRS. It is also critical to note that there are different stakeholders involved in the overall process of making the transition. On the one hand, the Federal Accounting Standards Board is one of the key stakeholders whereas the Securities and Exchange Commission is another key stakeholder. Due to the diverse nature of stakeholders, it may be relatively difficult for all the stakeholders to actually reconcile their differences and come up with the consensus on the issue. The quality of international standard setters and the quality of rules are a critical issue as well. The Securities and Exchange Commission is especially concerned about the quality of the standard setters and whether they will be actually able to anticipate and accommodate the challenges faced by American firms or not. The issue of quality, therefore, is one of the key issues preventing SEC from actually going ahead with the proposed program of making the transition towards IFRS. It has also been argued that diminishing the value of US GAAP will actually provide IFRS with a monopoly in terms of setting standards. Due to lack of innovation and slow response to the market changes, many fear that IFRS, once fully adapted, may not be able to cater to the needs of international organizations. As such, the competition among the standards may not take place at the local and regional levels. A full adaptation of IFRS is considered as providing monopoly to one set of standards (Jone, 2010). This also culminates into the overall attitude of the regulators and businesses in making real efforts to actually make a successful transition. Though there is a no clear link between the attitude and the adaption of standards, there exists a general mood within the practioners and firms suggesting reluctance to adapt to the new standards. Politics is also cited as one of the reasons why there has not been a general and uniform adoption of the standards at the global level. This attitude is also shaped by the on-going debate to replace the rule based accounting standards with IFRS which are principle based standards. The big difference between the two, therefore, is generating significant debate regarding the viability of IFRS for the American environment. It has also been argued that the new set of standards prepared under IFRS actually lacks uniform interpretation and enforcement. The subjective nature of the interpretation and the lack of applicability across all markets may be one of the key deterrents for policy makers in US not to allow transition towards IFRS. It has been considered as unrealistic to actually expect more than 100 countries to prepare their financial statements according to one set of rules. The transition towards the uniform set of rules is considered non-practical to implement any such standards. Research studies have also shown that there is a very little correlation between the non-convergence of accounting standards and the financial and economic indicators. As such, making transition may render the entire exercise futile as at the macro level, it may be very limited (Beuren, Hein, & Klann, 2008). Conclusion There are various themes which have been highlighted in the literature review regarding the adoption of IFRS in US. Though there is a general consensus that the standards will be implemented within the country, there are still certain challenges and concerns which are preventing full implementation and may further delay the process. Though there have been efforts by SEC to define a roadmap to implement IFRS by the end of 2014, there are still issues and concerns. One of the key concerns highlighted by the literature suggests that it is the cost which is not allowing firms to make a transition. American economy is still going through the after-shocks of the financial crisis and very few firms are actually willing to commit the required funds for the one time and recurring costs. Development of overall infrastructure and education of employees for the new IFRS are cited as the key costs for implementation. Apart from this, it has also been suggested that US regulators are concerned about the overall quality of the international setters. Further, implementation of IFRS would actually reduce the competition between the standards and would create the monopoly of IFRS on the overall accounting standards. Many US firms believe that one set of accounting standards would actually make it difficult to adapt to the new changes taking place in the market. Fair value accounting treatment under IFRS has also attracted much criticism for implementing IFRS as fair value accounting has been cited as one of the key reasons behind financial crisis. References Beuren, I. M., Hein, N., & Klann, R. C. (2008). Impact of the IFRS and US-GAAP on economic-financial indicators. Managerial Auditing Journal, 23(7), 632–649. Cangemi, M. (2008). Warning: U.S. GAAP likely headed for extinction. Financial Executive, 24(2), 6. Daske, H., & Gibhardt, G. (2006). International Financial Reporting Standards and experts's perception of quality. Abacus, 3(4), 42. Derstine, R., & Bremser, W. (2010). The journey toward IFRS in the United States. The CPA Journal, 6, 8-9. Dulitz, L. (2009). Be ready to lead your company's transition to IFRS. Journal of Accountancy, 207(4), 46-49. Epstein, B. (2009). The economic effects of IFRS Adoption. The CPA Journal, 79(3), 26-31. Heffes, E. (2009). When will the U.S. adopt/converge with IFRS? Financial Executive, 25(6), 12. Jacob, R. A., & Madu, C. (2009). International financial reporting standards: An indicator of high quality? International Journal of Quality & Reliability Management, 26(7), 712–722. Jone, R. (2010). IFRS adoption: Some general issues to remember. The CPA Journal, 7, 36-38. Smith, W. L., Boje, D., & Melendrez, K. (2010). The financial crisis and mark-to-market accounting: An analysis of cascading media rhetoric and storytelling. Qualitative Research in Accounting & Management, 7(3), 281–303. Read More