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The field of financial information and the question of its normalization have experienced a lot of changes in the past five years. The rather weak track of the International Accounting Standards Committee (IASC), surrounded by many enemies, has been transformed into the International Accounting Standards Board (IASB), a regulator of bright colors willing to play a predominant role. Indeed, the European Union hopes that the IASB can help it to build a single financial market, and others see it as the ultimate hope of restoring the credibility of financial reporting after the disastrous events that have occurred in the United States. The IASB is quite different from the IASC, both in its weight vis-a-vis governments and companies, and in its standardization process. The IASB is still going through, however, its honeymoon period. It remains to be seen whether the IASB will be able to produce reliable standards and whether the supervisory boards will be able to demand uniform compliance with these standards. We will analyze the international accounting standards first by studying its historical evolution, then by explaining pros and cons of international accounting standards, developments of International Financial Reporting Stands (IFRS), and finally present the current status of International Accounting Standards in U.S.

Historical developments of IAS

The International Accounting Standards board (IASB) was formed in the year of 2001 and has changed over these few years, it has not been around that long. It replaced “The International Accounting Standards Committee”, which started in 1973. These changes, which will be discussed later, were to create an even stronger foundation for the IASB, its primary responsibility has been to develop International Financial Reporting Standards (IFRS). Establishing International Accounting Standards is necessary for all accountants to abide by, these boards like the IASB is one of many to help establish good accounting practices and to try and prevent issues like fraud or the manipulation of financial statements. There are several scandals that occurred throughout the early 2000’s alone, which will be discussed and why they impacted many of the regulations that were implemented on after.

To begin, it is important to understand the foundation of where it began. The international Accounting Standards Committee (IASC), dates to 1973, it was an agreement between accountants that various states, initially 10, joined such as USA, Mexico, Germany, France and the UK. Interesting fact, the committee started with 9 members which were a variation of mixed backgrounds and increased their members over the year until it went back to the solid number of 14 members until today’s date. There are two main objectives that derive from International reporting and they are one, “to formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and two to promote their worldwide acceptance and observation; and to work for the improvement and harmonization of regulation accounting standards and procedures relating to the presentation of financial statements.” The members on the board hold important roles as they are the ones overseeing the IFRS. Prior to the year of 1973, the idea of establishing some principles first arose in the early 1950’s following World War II, economic integration and its related increases in cross-border capital flows. There intentions were to be able to create harmony and to try and reduce all the different accounting concepts that were being used in capital markets around the world. Soon after, around the 1960’s, they replaced harmonization with the idea of convergence or a unified set of accounting standards that could be applied to all or most of the capital markets. There is many events, prior to the formation of the IASC. In the year of 1962, there was an international congress of accountants meeting, it was the 8th meeting, hosted by The American Institute of public Accountants (AICPA), those who attended really pushed forward the idea to develop or create some set of standards for auditing, accounting and reporting. Countries such as the United Kingdom and Canada, along with the AICPA worked together to discuss differences they each shared and continued to do this for about ten years, even discussing what they believed to be the best practices. “International Accounting (New York: Macmillan, 1967) was the first textbook on international accounting. It was written by Professor Gerhard G. Mueller, who later became an FASB member by the mid-1980s, international standards (IAS) seemed to lack clear objectives and guiding principles for structuring their content, but a new stage would begin in the life of the organization. Indeed, the IASC was going to conclude an agreement with the International Organization of Securities Commissions (IOSCO), whereby the standard setter agreed to review its standards so that they could become the globally recognized reference framework for the presentation of the financial information published by companies seeking a listing on several stock exchanges. IOSCO wanted to standardize the rules for listing companies in countries other than their country of origin, or secondary listing rules. For the first time in its history, the IASC had a specific goal to guide its decisions and a direct role in a regulatory structure. In addition, with the support of IOSCO, the IASC could become the dominant standard setter globally.

The partnership with IOSCO resulted in a draft of amendments and improvements, the objective of which was to eliminate accounting policy choices and reduce the flexibility of standards. While the project encountered difficulties, it ended in 1993, when, to the great disappointment of the IASC, the range of standards developed was rejected by IOSCO. The official argument was that a lack of rigor remained in the revised standards. Some noted, however, that the German company Daimler-Benz went public in the United States in 1993, becoming the first German company listed in New York. It is possible that the interest shown in international standards by the Americans, who had a very strong influence in IOSCO, was in fact motivated by the desire to attract European companies to American stock exchanges. The arrival of Daimler had changed the game, the recognition of IAS standards, which was only a means, no longer seem necessary to achieve the goal.

Finally, the IASC survived this failure, and under a new Secretary General relations with IOSCO resumed. At the IOSCO Annual Congress in Paris in 1995, the two organizations concluded a second agreement and launched a second program to revise international standards. This new program not only proposed the improvement of existing standards, but also the promulgation of new standards dealing with subjects such as provisions, permanent depreciation and, of course, financial instruments.

In addition, the IASC became the IASB and many rules and regulations have been added or modified over the course of its existence due to fraud, accounting malpractices or other situations, which have increased over the years. Let’s briefly discuss a scandal that occurred in early 2001, known as the “WorldCom Scandal.” This scandal was very publicized by the media. It involved a telecommunication company named WorldCom, their CEO at the time Bernie Ebbers was one of the involved personnel. They would inflate their assets for as much as $11 Billion, which eventually lead to 30,000 jobs being lost and a total of $180 Billion dollar lost for investors. It was such a huge blow for the company, losing so much. They hid it from the books for a few years by “underreporting line costs by capitalizing rather than expensing it and inflated their revenues with fake accounting entries.” It was their internal auditors who eventually found the fraud and uncovered the truth of falsifying and manipulating statements to appear otherwise. It is after this scandal that congress passed the Sarbanes-Oxley act, which was another new regulation to help prevent scandals like these from reoccurring. The Sarbanes-Oxley act was approved and passed in 2002, one year after the IASB was formed. The acts intention was to simply “to protect investors from the possibility of fraudulent accounting activities by corporations. The SOX Act mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud.” Many investors invest in a company because they believe in its success and profitable returns, by analyzing statements that auditors prepare, and it is unfair for investors to have lost so much in the WorldCom scandal. If they had known of the situation, they would have never invested in the company.

Developments of IFRS

The International Financial Reporting Standards (IFRS) is continually developing and growing since the formation of the Accounting Standards Committee in 1973. The IFRS include existing IAS and interpretations issued by the IASC, as well as standards and interpretations issued by the IASB (Albrecht, David). The main mission and goal of the IFRS was and is to create a set of principle based standards that overrides any one nation’s set of standards in order to be unbiased and equitable to all. Compliance to these standards are voluntary, since the International Accounting Standards Board has no authority to enforce them. More and more countries are basing their national accounting standards on international accounting standards. Many countries are still in the transition phase in terms of adopting IFRS. The United States remains as the only major world power that has not adopted the IFRS.

IFRS provides general guidance in preparing financial statements which is extremely important for large companies that have subsidiaries in different countries. The advantages of achieving convergence with the IFRS would be numerous. The economy will benefit because of the increase in growth of international business. Financial statements prepared by using a common set of accounting standards would further help investors better understand investment opportunities. This could encourage international investors to invest which would ultimately lead to an increased flow of capital. The comparability of financial statements under IFRS will be improved if the adoption of IFRS expands (Bogopolsky, Alex).

One may argue that disadvantages of the IFRS would be that even if IFRS was implemented, differences in financial reporting will continue to exist. This is because financial statements would not be identical in different countries because of differences in national laws, economic conditions, and objectives. Properly evaluating investment opportunities in any country requires that the investor understand the culture of that culture. Countries could interpret IFRS differently than other countries which would completely negate any comparability. The most noteworthy disadvantage of IFRS is the cost of application by companies. The costs would include the change in internal systems to be compatible with the new reporting standards.

Overall, there are more advantages to IFRS than there are disadvantages. As businesses continue to grow and expand, a thorough knowledge and understanding of IFRS is essential. The world’s economy is becoming more integrated by having a common accounting language. The major difference between IFRS and GAAP is that research and development costs are expensed in the US GAAP. IFRS expenses research costs and capitalizes development costs. IFRS has a different probability threshold and measurements are objective for contingencies. IFRS also relies more heavily on fair values and has less specific requirements when it comes to recognizing revenue. The conceptual difference between IFRS and U.S GAAP with respect to accounting for research and development activities is the fact that IAS assumes that in certain instances the business is able to identify expenditures during the development phase of the project that fulfill the requirements to be recognized as an intangible asset.

Status of IAS in U.S.

“Adoption is the only way to achieve a single set of global financial reporting standards - an objective that both the International Accounting Standards Board and Financial Accounting Standards Board have publicly endorsed on many occasions” - IASB Board of Trustees. Although the IASB wants the U.S. to adopt IFRS, it is unlikely that the U.S. will as it tends to be much more costly than convergence. Adoption would mean that the SEC would set a specific timetable when publicly listed companies would be required to use IFRS as issued by the IASB. Convergence would mean that the U.S FASB and the IASB would work together to develop compatible accounting standards over time. More convergence will make adoption easier and less costly. The United States has claimed to be working toward developing a single set of high quality financial statements for all investors. However, the United States developed and expanded their own set of standards in line with its people’s need instead of converging with international standards. Supporters of adoption believe that convergence alone will never completely eliminate all the differences between the two sets of standards.

Reasons Hindering the Adoption of IFRS Standards

Although there are many proponents for making a switch to IFRS standards within the United States, this move would be marked by a number of considerable challenges. Change is not always welcome, particularly because the U.S. GAAP approach has been used for a long period of time. Carrying out the changes that will ensure that IFRS is entirely instituted is arguably the most challenging issue that corporations have to overcome. Publicly listed companies will also have to incur expenses in order to make the transition possible. Operations at the workplace are likely to be affected adversely as a result of adjusting the means of partaking operations (Byard, 2011). Corporations in the United States do not have to dig very deep to find solutions to some of the problems they experience during such a transition. The case of the European Union is one that offers guidance. Time is one of the solutions to most of the problems that may arise. The switch to IFRS started in 2002 and ended in 2005 in the EU (Christopher & Armstrong, 2010). Adequate time allocation for the evolution solves issues such as change resistance and expenses are stretched out. Other solutions include use of expertise workforce and incessant monitoring of the entire process. Using knowledgeable employees to facilitate the switch is a broad topic but involves strategies such as offering training. Continued assessment of the corporation in regards of adopting the new standards ensures that progress is maintained as it is not an abrupt switch.

Using IFRS Standards

For the United States to consider adopting the IFRS standards, it has to appreciate some of the unique differences that exist.

Inventory Costs

IFRS does not allow the last in, first out (LIFO) technique for accounting for inventory costs. Both LIFO and FIFO (first in, first out) estimates are used the predominant accounting standards in the United States (GAAP). The IFRS standards approach is more inclined towards inventory costing since it allows for enhanced comparability between corporations in different countries.

Accounting for Intangibles

IFRS is proven to be “principle based” in the way that it treats acquired intangible assets. The same types of assets are recognized at fair value under U.S. GAAP, while IFRS standards only recognize if such assets will possess future fiscal benefit, or it has measured and verifiable reliability. The latter approach is more revealing of the nature of the assets that a public company owns.

Accounting for Write Downs

If inventory is written down using IFRS standards, the action can be reversed by following specified criteria. The GAAP standards predominantly used within the United States does not allow for this and inventory written down cannot be reversed. IFRS standards allow for rectifications to be made where found necessary, and is hence a better accounting approach.

Deferred Tax on Asset or Liability

United States’ GAAP recognizes daggered tax on asset or liability as current/non-current depending on the asset/liability for which the tax has been deferred. On the other hand, IFRS standards distinguish all deferred taxes as current. In this case, U.S. GAAP is the better technique since it is more thorough although the ultimate effect is not significant (Cunningham, 2009).

Current Agreements and progress

The Securities Exchange Commission (SEC) announcement to shift U.S. based companies from the Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS) caused a lot of debate on the accounting standards used within the United states. Many accountants held the view that such a switch would most likely be based on good judgment (Annita Florou, 2012). It is evident that there are numerous benefits of using IFRS over U.S. GAAP and this is adequate to form an argument for exclusively using the approach (IFRS). The United States is a leader in global trade and hence requires companies set up to compete at such a stage. Using techniques that are utilized in such a level is one of the steps that may endow a company with the potency to not only survive, but also to thrive. The global market is also larger than the American one and this means that IFRS offers more opportunities for success as compared to U.S. GAAP.

Furthermore, the code of professional conduct has been implemented and practiced by many accountants across the world. An agreement of rules and principles for which accountants in public practice, business and academia agree to follow. “The IFAC code relevance for U.S. practitioners has grown as business has become increasingly global and as the AICPA has begun the process of converging its Code of Professional Conduct with the IFAC guidance (Allen, 2008).”

Pros and Cons of IAS

The International Accounting Standards (IAS) has set a path since the 1970s to make business around the world an easier process. Through IAS, the International Financial Reporting Standards (IFRS) has been an international comparability set of standards for companies worldwide. IFRS has been adopted in more than 100 nations and has been the foundation for public companies. Recently, former President Obama claimed for a high-quality process of global accounting standards. As US companies move forward, the Securities Exchange Commission will develop a roadmap to make international comparability easier for US public companies. From the possible adaptation of IFRS in US business’, there are several pros and cons that will be dealt with as a result. These included global comparability, cost barriers, and enforcement among companies and nations.

There are two ways that IAS has made this process a reality to businesses in the United States. The first of the paths that has set forth in IAS is contributed to global comparability. Global comparability has made it possible by reducing barriers from businesses internationally. Through this process, there are pros and cons that come through this rule. Companies through IAS are now able to keep their two sets of books to comply with countries worldwide. On the other side, this task may be difficult for smaller business. This is due to the high cost of international compliance. Secondly, global comparability has allowed a cross-border investment. This compliance of documentation worldwide has made it a consistency among investors that have paved the way through the financial reports. To restate, IAS has made it easier for investors to share financial reports. Since doing all these new changes in one's own business, it does increase the cost that companies have to spend on the financial statements. Although this con of cross-border investment might seem like as if the companies spends too much money on financial reporting, but, in reality it opens up the gate to many investors that may want a part of a certain company. But, in comparing the pros and cons of IAS, once can conclude that there is a major difference between US GAAP and IFRS. Since the GAAP is used solely in the United States, it is more rule based rather than IFRS which has less regulations due to the compliance of worldwide companies. In conclusion, the optimal target IAS inclines towards providing outstanding consistent reports worldwide.

The International Accounting Standards has also allowed for cost barriers to be implemented from company to company. These cost are associated mostly with small to midsize companies since the new accounting regulations may be overwhelming. On the other hand, for large corporations, these costs are implement with the training and develop of the company values. For them, such cost are not as material and may not be as cost prohibited. Another barrier that been implemented through IAS deals with the flow of capitals for investors and stakeholders. These investors and stakeholders find it convenient to compare business conduct. To some investors, they may find re-educating themselves on accounting reports and statements as a con but in reality they are learning the new baseline in which companies globally will be administered. A cost barrier that has not been as disputed among professionals is ideology that these adaptations will increase the work and the growing education among accountants. For this adaptation, we may see this as having a positive outcome rather than negative views. For instance, this shift in education new accountants on the same page among the world by leading consistent accounting regulations. In general, the adaptation of these ideas for young professionals will ultimately benefit companies in the future by asserting that new accountants be in line with regulation. On the other hand, these new changes in the accounting method for IAS will make audit fees increase as well as many new errors. This is highly due to the fact that many rules under US GAAP cannot or are different with those under IFRS. This will provide some errors for the audit when performing an audit that has changed from US GAAP to IFRS. As a result, the take away from cost barriers deals with the single fact that changing to an international accounting remote, will untimely raise cost at the begging, but will eventually benefit companies when comparing books internationally.

Advantages of using IFRS Standards

Easier to compare Performance

One of the reasons for the interest within the United States in IFRSs is that the global economy has largely done the same. Europe has already made the transition, and other significant economies such as Canada, China, Japan and India are making similar advances. Corporations in the United States would benefit from taking up IFRSs since they would be in a position to easily compare their accounts with other organizations across the globe that are using the same standards.

Widely Understood

A public company can easily be understood on the global economy as IFRS standards have become extensively utilized in most regions of the world. In addition, the continued adoption of IFRS standards means that a large portion of the investor pools will use these standards when deliberating about investment options. Ease of comparison hence presents more investment opportunities (Annita Florou, 2012).

Up-to-Date Accounting Standards

Using similar standards with other corporations on a global scale means that all players use updated accounting techniques that enhance individual competitiveness in the global market.

While adopting these international standards for the basis of worldwide understandability, we must now focus on the enforcement on these standards and would would come from it. While the US does have an effective strategy for using the GAAP as their base, other countries may find it difficult for the implementation due to the various differences among their political and economic system. From a culture perspective, these countries will view this factor due to the convergence of the financial reporting which will create more problems for companies trying to adapt. Reason behind the enforcement of US GAAP mainly draws back to the factor that this system creates values that other countries don't have which I why it made to said to be a more competitive factor among companies. In reality, their is not one single systems that will be fitted for all corporations. Rather, IFRS will be used interchangeably for all countries that will better suit their needs.

As a result, adopting IFRS will better global comparability, have cost barriers, and will lead to some enforcement problems. On the other hand, by creating IFRS compatibility around the world, it will decline the need for competition and different incentives that make business. Quality will suffer because of the compromises that have been made worldwide to achieve and negotiate with politics and economics. But in reality, many professionals continue to support the need for a single set of accounting standards that will ultimately revolve around IFRS.

References

Albrecht, David. “IFRS: Not Right for the U.S.” The Summa, WordPress,

profalbrecht.wordpress.com/2008/12/21/ifrs-not-right-for-the-us/.

Allen, Catherine & Bunting, Robert “A Global Standard for Professional Ethics”