Introduction
The International Financial Reporting Standards (IFRS) is a set of common rules that ensure the consistency, comparability, and transparency of financial reports all across the world. The IFRS specify how companies should maintain and report their accounts including transactions and other events with financial implications. Issued by the International accounting Board, the IFRS has replaced the American developed Generally Accepted Accounting Principles (GAAP) in most countries of Europe and Asia. However, while other countries continue to adopt the IFRS, the US has kept its GAAP turning the issue into a perennial debate. To understand the potential of the IFRS and its benefits over the GAAP, the US should consider the pros and cons of this reporting standard.
Background
The debate on whether the US should abandon the Robinson Crusue GAAP is mainly based on a number of factors. First, the US government has been keen to get involved in the economy despite of the orientation towards a free market. The legislature, Court and the SEC play an important role in enactment of financial laws and enforcement to protect shareholders as seen in the Sarbanes-Oxley act of 2002 which is an important standard in the country ( Egege, 2015) . Consequently, the US has some significant peculiarities which are effectively tackled by homemade GAAP standards.
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The US economy therefore presents a significant challenge towards a change in the current mode of doing this in this front. Moreover, while the US financial market is strong, it faces strong competition from those of London and china. However, while GAAP has some quality attributes, it should be subjected to review and compared to the internationally accepted IFRS. This should involve the understanding of the IFRS including its benefits and setbacks and measuring against potential disadvantages and risks.
Benefits of adopting the IFRS
Low Cost
The first and most important benefit of the IFRS is that it is cheap to implement. While apologist of USGAAP argue that the cost of implementing IFRS in the country is too demanding for the economy, studies shows that maintaining the GAAP has much cost compared to IFRS. Smith, (2009) noted that the implementation and running of IFRS by far outweighs that of the GAAP. Both companies and the government would hence reduce the cost of financial reporting if the IFRS replaces the GAAP. The consequence of this is a reduction in overall cost of financial reporting and business operations in general.
Promoting the Capital Market
Secondly, the IFRS has a strong orientation towards the capital market as it was made in its view. The IFRS is inclined towards easing the work of capital market regulators. While the GAAP was also created with the same intentions, it has the potential of being amended by the Courts, SEC and other regional powers to make regulations easier. However, as the IFRS does not allow for the controlling and amending by regional regulation powers, it provides an opportunity and ease of integration and hence competition with other financial markets in the world ( Egege, 2015) . As a growing body of standards, the IFRS allows for a worldwide reach and control for the US financial markets.
Allows cost Saving among US Multinationals
Thirdly, the adoption of the IFRS is good for US multinationals as it help them in saving costs. For US multinationals with subsidiaries in other parts of the world, the adoption of IFRS would help save costs related with financial reporting. Today, such companies as Chevron use uses the reducing balance method in depreciation in the US while in other countries it uses straight line method ( Egege, 2015) . The discrepancies and discrimination makes the preparation of a consolidated statement not only hectic but also costly. By adopting the IFRS, such a company would only use the straight-line method hence eliminate the cost of using two approaches. Consequently, the adoption of IFRS would allow for economic growth by increasing international businesses.
It is Principle Based
The IFRS is also principle based and does not result in consequences for anyone. The IFRS was created as a proactive check and creative accounting practices to ensure that financial statements represents the fair and true value of transactions taking place in every financial year. It recognizes the uniqueness in structure, environment, and corporate governance of firms giving them a room to provide and true and fair value of their transactions in unique circumstances ( Egege, 2015) . There are no rule based approaches such as those of the GAAP which makes it universally acceptable.
Allows for Comparison
The adoption of IFRS in the US will also make the comparison and make effective decisions for multinational companies. Today, an investor weighing between investing in an American European or Chinese company will have trouble comparing the financial statements of these companies. The present of financial statements prepared using common standards help investors understand their opportunities and risks of investing in different parts of the world ( Egege, 2015) . Consequently, by adopting the IFRS, the US makes it easier for international investors to make investment decisions using similar financial statement. Moreover, US industries can be able to raise capital from foreign markets as it creates confidence in the mind of investors on its economy. This will not only boost investment within the US but also has the potential of attracting more international investment by US companies.
Easy to Comprehend
Also, the IFRS is easy to comprehend and apply compared to the GAAP. Egege, (2015) argues that IRFS is precise and within months, users can easily make statements using it. This is unlike the GAAP that is extremely complex and detailed with over 25000 pages of rules and standards. The GAAP has caused worry among some foreign investors who feel it is too complex to comprehend and use. Also, the IFRS has a strong institutional support in the US (Epstein, 2009) . Among major firs that champion the adoption of the IFRS include the American Accounting Association, KPMG, PWC, EY and AICPA.
Promotes Uniformity across the World
Finally, the adoption of IFRS by the US will promote uniformity and transparency in global financial reporting. As a major political and economic power in the world, failure to adopt the IFRS delays the creation of a uniform and transparent reporting standard ( Egege, 2015) . If the US adopts the IFRS, most countries that have not adopted it will be forced to come on board. This will promote uniformity and increase transparency in accounting.
Limitations of IFRS Standards
IFRS is prone to manipulation
One of the most significant limitation of the IFRS is that it is prone to manipulation. As noted, unlike the GAAP that is rigid, the IFRS allows businesses to tailor financial reports according to corporate governance, structure and its environment ( Maurya, 2017) . This flexibility brings along the possibility of manipulation of financial standards to only show desired results. Some organizations may manipulate the statements to increase profits. Others might eliminate loss in their financial statement to attract investors. While there are a requirement for changing the rules, it is possible for organizations to come with unjustifiable reasons for making these changes hence making the method subject to error. There is hence a need to implement stricter rules to ensure similarity in representing company’s value.
High Cost of Implementation
Secondly, the cost of implementation of IFRS is high. The adoption of IFRS standards in the US would have impacts on both small and large organizations. While large companies may easily overcome these challenges small organizations may find it hard to implement. According to Maurya, (2017) , the requirements of IFRS are more complex than they seem from a simplistic perspective. Moreover, there are a number of hidden dangers such as data capture, burden of resources, possible system changes, and embedded derivatives. These factors require caution in adopting the new system of financial reporting.
Challenging Implementation
Finally, the process of adoption of the IFRS can have a lot of challenges in the US especially in the transition period. The IFRS have not been implemented in a country with such a large economy as the US ( Maurya, 2017) . The scope and magnitude of the of application of the standards in a big economy is not known. The consequences of the application may pose significant threat to not only the US but also the world economy.
Summary
In conclusion, the adoption of the IFRS poses both threats and opportunities to the US. On one hand, the adoption of the IFRS will bring comparability, increase audit efficiency, reduce information misunderstanding and help in saving cost of financial reporting. This will lead to improvement in the ability of US multinationals to invest and boost the economy as a whole. Moreover, most companies such as the KPMG and the PWC support the adoption in the US. However, considering the potential negatives such as the possibility of high cost of implementation and possibility of miss-reporting, care needs to be taken while adopting IFRS in the US.
References
Egege. J. (2015). 21 Reasons The United States Should Adopt IFRS. LinkedIn. https://www.linkedin.com/pulse/21-reasons-united-states-should-adopt-ifrs-justice-egege
Maurya, R. (2017). The Pros and Cons of Adopting IFRS. Fundamentals of Accounting. Accounting and Finance Repository. https://www.fundamentalsofaccounting.org/the-pros-and-cons-of-adopting-ifrs/
Smith, K. (2009). A Cost-Benefit Analysis of the Transition from GAAP to IFRS in the United States. Honors Projects in Economics , 9 . https://digitalcommons.bryant.edu/cgi/viewcontent.cgi?article=1008&context=honors_economics
Wingfield, B. (2007). Going Global With Accounting. Forbes. https://www.forbes.com/2007/03/05/sec-accounting-standards-biz-washington-cx_bw_0306sec.html#101aceeb5dbc
