International Financial Reporting Standards: The Pros and Cons

Paper Type:  Essay
Pages:  4
Wordcount:  972 Words
Date:  2022-03-29

High Costs of Implementation

The United States is yet to fully adopt international accounting standards. The main reason why the largest economy of the world is reluctant to fully use such standards as identified by Ball, (2006), is the high cost it perceives the country would suffer (p.6). The SEC estimated the total cost of implementing international accounting standards at 12 percent of the total revenue across the country. Consequently, there would be additional costs in implementing compatibility of the standards to the current accounting principle being used. Such a move would slowly drain the country's economy. Notably, IFRS has not been tested in any other country such as the U.S. one can only imagine if the greatest economy fears the costs of implementing the principles, what would happen to the nations already having economic problems? Again, the United States' GAAP has over the years evolved to meet the various changes in the economy as well as stood the test of time. In the same sense, countries would like to continue using their traditional accounting principles.

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Disproportionate Effect of the Cost Burden

As discussed above, no matter how reasonable the proposed international accounting standards may be, countries will have to incur considerable costs in the transitions. However, the burden of the costs may be shared disproportionately to affect small to mid-sized companies more than large corporations. While these large businesses will incur costs in training employees and setting new practices, due to their huge size of operations, the costs may not be prohibitive. On the other hand, small and mid-sized companies will easily find these cost burden overwhelming (Kaya, & Koch, 2015) In most instances, new regulations have always impacted the operations of smaller businesses more than the larger companies. And this is not to mention that small businesses are already at a competitive disadvantage to their large multinational counterparts as they continue to spend a greater percentage of their revenue on regulatory compliance. Integrating international accounting standards will, therefore, result in higher costs for the small businesses thereby limiting their ability to expand and grow.

Integration Problems

The major economies of the world including the U.S, England, Japan, and Canada have already resisted implementing International Accounting Standards in their economies. Reason? The countries maintain that changing their current system into the IAS is an issue of complexity. In the U.S. for instance, its General Accepted Accounting Principle (GAAP) has proven efficient and effective for use. Substituting GAAP with IAS would mean that the Securities and Exchange Commission (SEC) evaluate how publicly traded companies will follow the IAS. Additionally, as the IAS is intended for global use, the differences in their financial reporting practices, economic, and political systems among the countries would bring challenges in the enforcement of the IAS (Bushman, & Landsman, 2010). Again, the fact that countries such as the United States, England, Canada, and Japan are yet to adopt the IAS makes accounting by foreign-based companies complicated as they have to prepare their financial reports using the IFRS and the accepted system in that country.

Prone to Manipulation

One of the identified advantages of adopting international accounting standards is that it would allow flexibility of accounting information. There is a flipside to this advantage. The accounting principles make it possible for companies to make use of the accounting methods they wish to use. This allows the financial statements to show only what the companies desire the public to see. Therefore, revenue and profit manipulation are possible under the international accounting standards as companies can hide their financial problems in their books. Jeanjean & Stolowy, (2008), write that IAS makes it easy to commit fraud. For instance, a company can change its method of inventory valuation so that it brings more income into the current year's profit and loss statement which will make the company to appear more profitable than it really is. IFRS states that where changes to the application of the rules must be justified. But it is often possible for companies to "invent" reasons for the changes they make to the application of the rules.

International Sovereignty Issues

In an article regarding accounting standards integration in the Journal of Accounting, Auditing, and Finance, Marra (2016), acknowledges that in the United States, the Financial Accounting Standards Board (FASB) is responsible for setting the accounting standards in the country (p.582). To set the best accounting standards, FASB relies primarily on Federal securities laws and state CPA licensing laws. Most countries follow a similar system to set their specific securities laws, tax laws, banking and financial regulations to dictate their accounting standards. Implementing international accounting standards would bring conflicts in the different standards by the different countries. In the United States, the various states have their own state laws to regulate business, banking, and financial activities. Therefore, if the U.S. were to implement the international accounting standards, it would not only conflict with the Federal law but also the statute law (Ball, 2006). Perhaps, this is the reason why it would be more complicated for the United States to adopt the international accounting standards than any other country.

References

Ball, R. (2006). International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and business research, 36(sup1), 5-27.

Bushman, R., & Landsman, W. R. (2010). The pros and cons of regulating corporate reporting: A critical review of the arguments. Accounting and Business Research, 40(3), 259-273.

Jeanjean, T., & Stolowy, H. (2008). Do accounting standards matter? An exploratory analysis of earnings management before and after IFRS adoption. Journal of accounting and public policy, 27(6), 480-494.

Kaya, D., & Koch, M. (2015). Countries' adoption of the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs)-early empirical evidence. Accounting and Business Research, 45(1), 93-120.

Marra, A. (2016). The Pros and Cons of Fair Value Accounting in a Globalized Economy: A Never Ending Debate. Journal of Accounting, Auditing & Finance, 31(4), 582-591.

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International Financial Reporting Standards: The Pros and Cons. (2022, Mar 29). Retrieved from https://proessays.net/essays/international-financial-reporting-standards-the-pros-and-cons

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