Presentation Discussion
Beast8484
their_group_-_against_convergence.pptxThe Disadvantages of Converging U.S. GAAP with IFRS
Diann Delnicki
Lindsey Garcia
Brian post
Dennis roth
Why convergence isn’t viable
Financial impact on small and medium sized enterprises (SMEs) and domestic corporations
Issues resulting from differences in interpretation and application of principles-based standards
Cultural differences between countries that result in inherent differences in accounting standards
Inability of boards to agree on how to converge in several critical areas
Impact on constituents (i.e. investors, corporate management, etc.)
Granting of monopoly-like power to the IASB
Will never truly create the ability to compare financial results of companies in different countries
Financial impact on SMEs and domestic corporations
Total cost of transition for U.S. companies could exceed $8 billion
Transition costs for SMEs will average $420,000
Increased annual costs of .125% to .13% (IFRS.com)
Imposition of standards on domestic corporation that do not have access to or need for foreign capital
2008 SEC study showed that the “largest U.S. registrants that adopt IFRS early would incur about $32 million per company in additional costs for their first IFRS-prepared annual reports” (IFRS.com)
Employee reeducation and training costs
Financial impact of changing accounting systems and procedures
Differences in interpretation and application of principles-based standards
Creates inconsistencies of reporting even within the same industry with similar information, for example, with timing of revenue recognition (Anderson).
IFRS standards are more open to interpretation which can cause differences in the way those standards are applied by accountants
Creates difficulty when comparing results for businesses within industries
More substantial disclosures will be required so users can assess how standards were applied
U.S. GAAP is considered the gold standard of financial reporting, known for its rules and guidelines, whereas IFRS is less detailed due to the effort to achieve global standards
Cultural differences between countries
Cultural differences create inherent differences in accounting standards
Individual country’s reporting structure is deeply tied to its culture, and with that comes a feeling of nationalism
Countries do not necessarily want to take direction from international organization
Due to cultural factors, reporting requirements may vary, and each country should have the ability to establish its own standards
Can be impacted by sources of capital within a country, i.e. private vs. public
Even FASB Chairman Russell Golden notes that “differences in cultural, business, legal, and regulatory environments in different jurisdictions inevitably will result in some differences in standards” (Katz).
Inability of boards to agree in several critical areas
IFRS has stressed the high importance of use of fair value as primary basis of asset and liability measurements; U.S. GAAP requires historical cost
IFRS standard could result in increased volatility in financial results for U.S. companies
LIFO method of valuing inventory not allowed under IFRS but is utilized by some of the largest U.S. corporations
Two major issues have caused a stalemate
Reporting of results involving financial instrument holdings
Reporting of leases
Impact on constituents
Corporate management
Restructuring of software systems
Reeducation of financial managers
Investors
Reeducation or professional guidance required to understand financial reports
Stock market
Financial impact to net income of corporations when following new standards
Accounting professionals
Reeducation required to follow or interpret new standards
Accounting standards setters and agencies
Granting of power to IASB
Use of one set of standards world-wide (IFRS) conveys monopoly-like powers to IASB
With this power, the IASB would have fewer reasons to expedite changing of guidelines based on changes within marketplace
FASB would lose majority of control over setting or revising standards
International standards could be subject to political influence from other countries, which could result in standards not suitable for U.S. businesses
IFRS standard setters have demonstrated weak enforcement
Creates reduction in power of Securities and Exchange Commission (SEC) to oversee standards, enforce guidelines, and protect investors
Convergence would cause the U.S. to give up control of how they manage these guidelines
IFRS rules generally protect creditors and employees of companies, rather than investors
Global comparability will never ultimately be achieved
In an effort to achieve global standards that are acceptable to all, the IASB has had to sacrifice a level of detail that national standards currently utilize. Countries have little incentive to adopt IFRS for sake of global consistency.
An estimated 29 countries that use IFRS have added their own exceptions to the rules (Henry.) These varying adoptions have weakened comparability in the same framework.
The European Union has adopted IFRS with modifications, which affects the standards of all countries that are part of the EU.
Accounting standards will always vary around the world for both legal and cultural reasons, and the two boards should not be trying to create a one-size-fits-all set of standards (Cohn.)
It is unrealistic to think that financial statements users will ever be able to do a side-by-side comparison of reports prepared in different countries due to all of these reasons.
In closing:
Quote from SEC Commissioner Kara Stein, March 2015:
“with technology increasingly transforming our world and the financial crisis still fresh in our minds, now may be a good time to reimagine our approach globally. In other words, while convergence makes sense, the question for me is, what are we converging to . . . Is it so flexible that investors cannot use it to compare companies, and companies themselves do not have the certainty they need to withstand scrutiny?” (Cohn)
Resources
Resources (Dennis):
AICPA: IFRS Resources. Updates. "International Financial Reporting Standards - Questions ... - IFRS.com. 2008. Requested at: <http://www.ifrs.com/updates/aicpa/ifrs_faq.html>
Andersen, Sue. AccountingWEB. Principles vs Objectives-Based Accounting Systems. 2013 May 9. Requested at: http://www.accountingweb.com/community-voice/blogs/sue-anderson/principles-vs-objectives-based-accounting-systems.
Aubin, Dena. Analysis: Doubts emerge over U.S. move to global accounting. Reuters. 2011 Jul 25. Requested at: http://www.reuters.com/article/us-usa-tax-convergence-idUSTRE76O1N220110725.
Doupnik, T. S., & Perera, H. (2014). International accounting. New York, NY: McGraw-Hill Education.
Henry, David. Bloomberg. Global Accounting Rules: Simpler, Yes. But Better? 2008 Sep 4. Requested at: http://www.bloomberg.com/news/articles/2008-09-03/global-accounting-rules-simpler-yes-dot-but-better.
Resources (Brian):
Hail, L., Leuz, C., & Wysocki, P. (2010, September). Global Accounting Convergence and the Potential Adoption of IFRS by the U.S. (Part II): Political Factors and Future Scenarios for U.S. Accounting Standards. Accounting Horizons, 24(4), 567-588. Retrieved August 25, 2016, from http://moya.bus.miami.edu/~pwysocki/papers/HLW2010b.pdf
Resources (Lindsey):
Jordan , A. (2013). Advantages and Disadvantages of IFRS compared to GAAP. Retrieved 24 August, 2016, from http://research-methodology.net/advantages-and-disadvantages-of-ifrs-compared-to-gaap/
Pologeorgis, N. (2012). The Impact Of Combining The US GAAP And IFRS. Retrieved 24 August, 2016, from http://www.investopedia.com/articles/economics/12/impact-gaap-ifrs-convergence.asp
Resources (Diann):
Bloom, Robert & Cenko, William. December 31, 2008. The death of LIFO? Retrieved August 23, 2016 from, http://www.journalofaccountancy.com/issues/2009/jan/deathoflifo.html
Cohn, Michael. March 30, 2015. SEC commissioner rejects IFRS. Retrieved August 23, 2016 from, http://www.accountingtoday.com/news/audit-accounting/sec-commissioner-rejects-ifrs-74128-1.html
Financier Worldwide. November 2011. Accounting standards in the U.S. – convergence with IFRS. Retrieved August 23, 2016 from, http://www.financierworldwide.com/accounting-standards-in-the-us-convergence-with-ifrs/#.V746U6IjbE8
Katz, David. (October 17, 2014.) The split over convergence. Retrieved August 25, 2016 from, http://ww2.cfo.com/gaap-ifrs/2014/10/split-convergence/
