The IFRS and the generally accepted accounting principles (GAAP) differ significantly since the GAAP is rule-based while the IFRS is principle-based (Jeter & Chaney, 2016). Businesses that use IFRS are characterized by extensive disclosures in their financial statements since different interpretations of similar transactions are possible. Therefore, there are fewer exceptions in IFRS than GAAP (Georgescu & Afrăsinei, 2015). The extensive disclosures result in increased transparency in financial reporting, which attracts external investors, thus increasing business revenue. The IFRS also supports a more thorough review of the facts pattern, which supports a timelier loss acknowledgment and ensures that accounting amounts are more relevant.
Another impact of using IFRS instead of GAAP is that it increases earnings management. Earnings management results from the application of intentional judgment in financial reporting with the aim of being meaningfully deceptive and concealing or spinning data (Baig & Khan, 2016). The principle-based standard provides businesses greater accounting flexibility in terms of choice choices since it allows ambiguous criteria, subjective estimates, and overt and covert options (Capkun et al., 2016). The characteristic flexibility increases earnings management in businesses.
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The Convergence of Accounting Standards
I believe that there should be a worldwide convergence of accounting standards. One of the chief reasons why I take this position is that an increase in globalization has led to increased cross-border acquisitions and transactions. Additionally, firms are increasingly raising funds internationally, which further necessitates the need to converge accounting standards (Jeter & Chaney, 2016). The funds are available at lower interest rates, hence lowering the risk and cost of running a business. Therefore, the international flow of capital would increase. The convergence of accounting standards results in simpler streamlined standards, that benefit corporate management. Investors will also benefit from the convergence since it will eliminate the need for financial statement conversions, hence simplifying the cross-border transaction process. The consistency in accounting practices will allow markets to compete globally for investment opportunities.
References
Baig, M., & Khan, S. A. (2016). Impact of IFRS on earnings management: Comparison of pre-post IFRS era in Pakistan. Procedia - Social and Behavioral Sciences 230 (2016), 343–350. 10.1016/j.sbspro.2016.09.043
Capkun, V., Collins, D., & Jeanjean, T. (2016). The effect of IAS/IFRS adoption on earnings management (smoothing): A closer look at competing explanations. Journal of Accounting and Public Policy 35 (4), 352-395. https://doi.org/10.1016/j.jaccpubpol.2016.04.002
Georgescu, I. E., & Afrăsinei, M. B. (2015). Analysis of the impact of adopting the IFRS by the companies listed on BVB. Procedia Economics and Finance , 20 , 259-267. https://doi.org/10.1016/S2212-5671(15)00073-8
Jeter, D. C., & Chaney, P. K. (2016). Advanced accounting. John Wiley & Sons.
