International Financial Reporting Standards (IFRS) are accounting requirements provided by the International Accounting Standards Board (IASB) to ensure a common language globally for business activities. Company accounts can, therefore, be understandable and comparable across international boundaries. The IFRS standards are widely applied around the world but have not replaced the accounting standards in the United States, where GAAP principles are used. The Generally Accepted Accounting Principles in the US are accounting rules used to organize and report financial statements for the assortment of organizations. The organizations may include privately owned entities, public traded companies, and non-profit organizations. The ultimate difference between the two systems is that the International Financial Reporting Standards are principles-based while the Generally Accepted Accounting Principles are rules-based (Choi & Meek, 2011). The IFRS principles are more logically thorough and offer a better representation of the economics of business transactions. United States Securities and Exchange Commission and the Financial Accounting Board issued a roadmap that may require the US companies to report under the IFRS rather than the generally accepted principles.
GAAP is arguably the better system due to its provision of detailed rules. However, years of accounting treatments and guidance from multiple standard-setting entities have made it challenging to navigate. In order to ease the complexity of the financial reporting environment, it is essential to apply a sophisticated and simplified system. The fact that IFRS standards are much simpler as compared to the GAAP will allow efficiency during problems solution. The IFRS is a work in progress and therefore offers a satisfactory global opportunity for further advancement. The standards provide the ability to apply better professional judgment in an attempt to improve the efficiency of business transactions. The high-quality principle-based structure substitutes the rules and exceptions, making it easier to use. The need to ensure transparency and provision of regular and comparable reporting will drive the required improvements in the IFRS.
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Globalization, the Security and Exchange Commission’s enactment of international standards and the economic meltdown due to the Great Recession have exerted pressure on the U.S to eliminate the gap between its accounting principles and those provided by the International Accounting Standards Board. However, the convergence of GAAP with IFRS has a significant impact on the standard setters of accounting, investors, accounting professionals, and the entire corporate management.
In the U.S, the involvement of boards and entities in the development of standards makes the entire process longer and time-consuming for the setters. The convergence of the systems will provide a faster and efficient way of developing and implementing accounting standards (Choi & Meek, 2011). The setters will no longer have to rely on agencies to make and ratify standards related decisions. The investors will require re-education to ensure they understand the new financial statements and accounting reports associated with international standards. The IFRS standards will ensure the provision of more credible information and an increase in a global flow of capital.
The convergence of the GAAP standards with the internationally accepted ones will require the accounting professionals to learn the new system, which will ensure consistency in accounting activities. The stock markets will undergo a reduction in the cost associated with entering foreign exchanges. The markets adhering to the new standards will engage in an international competition for global investment opportunities. The change will allow corporate management to increase its capital by lowering interest rates while reducing the cost of doing business. The management will benefit from more straightforward rules and streamlined standards that apply across international boundaries.
From its establishment, IFRS Foundation has emphasized that the accounting standards are developed to serve the interests of the public. Their mission is to create standards that ensure accountability, transparency, and efficiency to the financial markets across the world (Barth, Landsman, & Lang, 2008). Through the enhancement of global comparability of company accounts, the foundation has injected transparency during business transactions allowing the involved parties to make knowledgeable economic decisions. The IFRS invigorate accountability by ensuring that the information gap between the providers of capital and the individuals they have entrusted their money with is minimal. The management is held to account due to the information provided by the international standards.
Economic efficiency is crucial for the prosperity of business transactions across the world. Also, the interests of the public cannot be met in a weak economy. The ability of the IFRS to assist investors in identifying business opportunities and risks across the world ensures efficient capital allocation (Hail, Leuz, & Wysocki, 2010). The application of a common accounting language reduces the cost of capital and international reporting costs.
The three interrelated objectives allow the International Financial Reporting Standards to ensure the interests of the members of the public are catered for regardless of the country. The ease provided by the IFRS in the setting of standards allows the setters to develop measures that foster economic growth, long-term financial stability, and trust among the people. The system resonates with the citizens, thus ensuring the protection of their interests. The IFRS is open to the International Accounting Standards Board’ process and structure, which translates to the commitment it has to the public affairs.
In conclusion, the International Financial Reporting Standards should replace the U.S Generally Accepted Accounting Principles to ensure the prosperity of international business transactions. It will also alleviate the confusion and complexity brought about by inconsistency and absence of streamlined standards in financial reporting. According to research, firms that use the international standards experience higher cash flows as compared to the U.S firms that apply GAAP.
References
Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International accounting standards and accounting quality. Journal of Accounting Research , 46 (3), 467-498.
Choi, F. & Meek, G. (2011). International Accounting . Upper Saddle River, N.J: Prentice Hall/Pearson.
Hail, L., Leuz, C., & Wysocki, P. (2010). Global accounting convergence and the potential adoption of IFRS by the US (Part I): Conceptual underpinnings and economic analysis. Accounting Horizons , 24 (3), 355-394.
