Introduction

Over 120 countries have adopted or are in the process of adopting International Financial Reporting Standards (IFRS). Among the most significant United States trading partners and political allies that have made the decision to abandon their accounting practices in favor of IFRS are Japan, Canada, and Mexico. For instance, there were plans requiring publicly listed companies to adopt IFRS in Mexico starting January 2012. A significant number of capital markets across the world have adopted and implemented IFRS, except for the United States.

The United States is among the few remaining nations that are yet to require the full adoption of IFRS by publicly traded US companies. As a result, the Securities and Exchange Commission (SEC) abandoned the provision that required foreign issues traded in the United States capital markets to use GAAP in reconciling their financial statements. Regulators, standard setters, and practitioners in the United States have been contemplating the likelihood of securities issuers doing away with the use of United States GAAP and transitioning to IFRS. Subsequently, the SEC took initiatives to meet the increasing challenges facing the acceptance of IFRS in the world.

Background

The FASB and IASB have been negating and discussing the transition of the United States towards global accounting rules for a number of years. Foreign firms allowed to trade their stocks in the United States are not prohibited from reporting their financial statements using IFRS. Meanwhile, a few United States multinationals have already adopted the use of IFRS for their subsidiaries in other countries (Iwata, 2009).

The United States has demonstrated that it intends to adopt IFRS, with a number of companies already adopting them and realizing the varied benefits from using these standards. Others are making preparations or planning to move from GAAP to IFRS. Meanwhile, a number of metric standards are in publication; the Canadian government is studying the impacts of adoption by private companies. As a result, Canadians are willing to adopt the change, but in lieu of economic factors, such an adoption will require cooperation with their counterparts in the United States (CICA, 2011).

While IFRS adoption initiatives are underway, the SEC recognizes the significance of a uniform financial reporting standard across the world. As a result, the SEC is analyzing the merits and drawbacks of adopting IFRS in the US. Consultations with various stakeholders have been undertaken by the SEC in order to evaluate the international accounting standards board (IASB) and analyze the technical aspects of the IFRS. Hence, the SEC is yet to state the United States’ position with regard to transition from GAAP to IFRS.

However, the SEC commissioner is of the view that further delays in the adoption of the IFRS will cost the United States a lot; therefore, the only viable option available to the country is the incorporation of IFRS for issuers in the United States. In light of this, public sensitization of the significance of IFRS adoption is critical. As the commissioner observed, “in light of the global nature of capital markets, investors, public accountants and other market participants already need to know both U.S. GAAP and IFRS" (Casey, 2011).

Meanwhile, the transition towards IFRS generated several ideas on the best approach to their adoption in the United States. First, there are those who believe that conversion is the optimal approach, where the current applicable GAAP methods are abandoned for IFRS without the need of converging them. Secondly, there are those opting for convergence, where the transition to IFRS is aligned closely with the current accounting standards. Thirdly, there is a suggestion that amended or new IFRS should be endorsed formally before they can be legally applicable and binding. While these methods have their individual merits, integration of these methods is critical in formulating a comprehensive approach to adoption with which all the interested parties will be adequately satisfied.

In light of this, on 6th December 2010, Paul Beswick, the SEC Deputy Chief Accountant, developed a fourth alternative, to which he referred as “Condorsement”. This approach integrates convergence and endorsement in order to arrive at the optimal solution (IASeminars, 2012).

Critical Assessment

Practitioners in the US have varied feelings about the adoption of IFRS. As per historical data, the United States accounting sector believed that the upcoming transition towards International Financial Reporting Standards was inevitable, as early as 2008. According to a 2008 survey conducted by AICPA, a significant percentage of CPAs appreciated the significance of preparing for the transition (AICPA, 2008). A year later, a similar survey indicated that 47% of CPAs who were interviewed strongly favored delaying the proposed criteria of adopting IFRSs (AICPA, 2009). Meanwhile, in 2010, 42 % of CPAs interviewed in the survey supported mandatory requirements for the United States public companies to adopt IFRS; essentially after the significant convergence of IFRS with GAAP (AICPA, 2010). 18 % of surveyed CPAs advocated for accelerated transition to IFRS, while 6% were of the opinion that IFRS should not be allowed or mandated for implementation by United States issuers (AICPA, 2010).

Robert Herz, the former FASB chairperson, implied cautiously that there was a wide advocacy for the uniform qualitative international standards. However, various arguments were put forward with regard to the readiness levels and the various system wide infrastructural concerns that require attention in order to ensure an uneventful transition (WebCpa, 2008). The incoming Chair of AICPA, Ernest Almonte, appeared significantly optimistic indicating that accounting sector was ready to shift towards IFRS (WebCpa, 2008). An approximated period of 3 years is required to acquire all the research materials, update examinations, and train respective users (WebCpa, 2008).

Meanwhile, Ken Bishop a member of the National Association of State Boards of Accountancy (NASBA), observed that different viewpoints have been presented regarding the acceptance and implementation of IFRS as the basis on which financial statements will be reported in the United States (WebCpa, 2008). He observed that, though arguments have been presented advocating for the preservation of currently applied GAAP, it is evident that a uniform global financial reporting standard is essential for comparative measurement of performance in varied industries worldwide (WebCpa, 2008). However, it is critical to note that auditors and financial statement preparers will be faced by significant challenges when moving to the final stage of adoption of the International Financial Reporting Standards. Such challenges entail minimal IFRS guidance and concerns relating to the possibility of implementing rules from “other standard-setting bodies” such as United States GAAP (Jones, 2010).

The possible benefits of IFRS should not be discounted; however, it is essential to investigate all the aspects of GAAP conversion to IFRS (Jones, 2010). Caution is advocated against potential drawbacks of adopting IFRS in the United States, including significant variations in financial regulations, business customs, tax laws, conversion costs, and political factors (Iwata, 2009). Contrary to the skeptical perception of the unsuitability of IFRS for economic atmosphere in the United States; consequently, the decision to adopt IFRS entails a tradeoff between recurrent comparable benefits to investors, future cost savings significantly accruing to multinational entities, and one-time cost borne by the U.S. economy and its financial institutions (Hail, Leuz, & Wysocki, 2009).

Although IFRS is a burning issue in the United States, there are no conclusive empirical research reports on the adoption of IFRS. IFRS is perceived as an international reporting standard which is under consideration or is adopted in over 120 countries across the world. There are considerable benefits of adopting IFRS for international business transacted by the US companies. It is essential to note that behavior is affected significantly by the attitude; therefore, the attitude of the United States accounting professionals will significantly impact the decision to accept or reject the adoption of IFRS. The implications of adopting International Financial Reporting Standards have been a contentious issue, especially when the SEC agreed to allow the use of IFRS by foreign issuers without the need to reconcile such reporting to the established United States GAAP (Halyer, 2010).

IFRS Adoption

Subsequently, the inevitability of IFRS adoption in the United States has been recognized. Nevertheless, there are varying attitudes toward IFRS, which range from the broad acceptance to the absolute opposition; as a result, there is no consensus regarding the IFRS adoption. Nevertheless, a number of entities may wish to adopt IFRS at earlier to gain a potential competitive advantage. As a result, industry pressure will have an impact on the purpose of adopting IFRS. Additionally, as Certified Public Accountants and the accounting fraternity in the United States are becoming progressively aware of IFRS’ global implications, they foresee a need to gain expert or advanced knowledge of it. The adoption of IFRS requires significant investment; hence, environmental constraints, such as human resources, information systems, and money, impact the behavioral intention of adopting IFRS.

Thus, the decision to adopt IFRS integrates the company integration functions such as cash management, technology and auditing functions (Iwata, 2009). Furthermore, the potential conversion costs are very high for individual companies. While the large companies such as multinational corporations are capable of covering the adoption costs, there is a high likelihood that the midsize and small enterprises may not have the capacity to bear such costs, especially during the periods of the economic instability (SEC, 2011).

Whether the U.S. accounting fraternity and companies agree or disagree, the adoption of international standards worldwide is inevitable (Iwata, 2009). The persistent question being asked is when the United States is going to adopt IFRS. Meanwhile, as suggested by the available data, there is an increasing acknowledgement in the United States accounting profession concerning the necessity of acquisition of the knowhow in the use and application of IFRS as the SEC creates a roadmap to IFRS adoption (AICPA, 2009).

Benefits of adopting IFRS

The differences between IFRS and U.S.GAAP impact various aspects of business.

There is a perceived future loss in the vent that the United States leans towards conversion. The benefits United Sates hopes to realize are comparability; therefore, greater liquidity in the market and low cost of capital. Cost savings are foreseeable for r multinational companies who apply several accounting standards

A significant benefit of conversion is comparability. Switching to IFRS would allow users to gauge companies from different parts of world on the same level. As trade activities increases, capital markets integration and cross-border investment are easier with low cost of capital and significant market liquidity (SEC, 2012). Due to the resulting comparability of financial reports, investor bases would significantly increase. Hence, in the presence of adequate information, companies will allocate their capital effectively.

Secondly the conversion to IFRS is cost saving, significantly for multinational entities. However, considerable transition costs will be incurred before companies can realize cost savings. These include certification, preparation, opportunity costs and dissemination of reports.  However practitioners who have not integrated the use of IFRS in their businesses will not realize these benefits in the short term but in the long run there will be significant cost savings.

Drawbacks of adopting IFRS

A significant drawback to the united states switching to IFRS is monopolizing the IASB This switching may indicate the United States’ willingness to cooperate internationally as a result the United States would be ceding power to IASB which would subsequently lead to several problems. For instance, IASB would be closer to being a potential monopolist in a free market. As a result, when IFRS slip, there would be no competing party to correct this or pick up the slack

Meanwhile, the United States accounting power would be significantly diminished. Currently, the FASB is the authority setting accounting standards in the united states; however, this power rests not only with FASB, but with the Securities and Exchange Commission (SEC) , united states congress and the court precedents. Therefore, ceding control to IASB would diminish the control of FASB and that of other authoritative agencies. Even though United States has positions on IASB, there are significant concerns of underrepresentation.

Funding to the IASB raises concern since the IASB has no stable funding source. Its finances a realized form contributions from various corporations, businesses and organizations form varying countries (SEC, 2012). This aspect is perceived as compromising independence of IASB. Additionally, in view of studied economic and political implications to the transition, there are unforeseeable risks that cannot be predicted. The adoption of IFRS has been received with mixed evidence worldwide. The fact that the united states has unparalleled and superior public enforcement of financial reporting and the observable similarities between IFRS and US GAAP, limits the benefits that would accrue to the united states as a result of IFRS convergence. Therefore, the transition costs would be significantly higher compared to the realizable benefits of convergence.

Rationale for IFRS Adoption

Significantly, the United States accounting fraternity’s attitude is influenced by the prevalent differences between the US GAAP and IFRS (SEC, 2011). Hence, global and US standards differ in principle initial financial statement preparations, from the period when revenue is recorded to the application of a fair value accounting in recording investments and long term assets (Iwata, 2009). Therefore, accountants will require the insight and assistance of their colleagues in the implementation of IFRS. International Financial Reporting Standards provide financial statements preparers with numerous options in electing policies that reflect the business optimally. Significantly the stakeholders in a company should be involved in making a decision that would revolutionize the company’s operations and business structures. This ensures the optimal decision is made benefiting all stakeholders (Dulitz, 2009).

Furthermore, accounting practices in the world are significantly characterized by the “differences in business customs, financial regulations, tax laws, politics, and other factors. There are observable indications that IFRS has boosted income, investment returns, and other financial measures for Europe-based companies” (Iwata, 2009). Additionally, a persistent debate as to whether IFRS accounting standards are better than the US GAAP has significantly influenced the attitudes of accountants in the United States. This has impacted accountants in their contemplation of moving to a standard which is substantially less prescriptive.

Therefore, it is critical for preparers to comprehend the auditor’s interpretation of IFRS through reading significant publication in a fact finding mission on the suitability of the convergence before making significant policy changes (Dulitz, 2009). Niemeier, a passionate critic of the IFRS and a former chief accountant at the SEC, observes that international standards are subject to “multiple interpretations and a lack of uniform enforcement” (Iwata, 2009). Similarly, Ray Ball, a business professor, points out that it is not realistic to assume that all countries in the world that have adopted IFRS will implement and apply the rules in a similar manner (Iwata, 2009). Meanwhile, Dulits argues that the fundamental challenges in the United States lie in the practitioners’ capability to affect a transition (Dulits, 2009). However, it is evident that shifting to a new framework implies that preparers should motivate themselves to view issues on a wider scale and not only through United States GAAP perspective. The preparers should appreciate the transaction’s substance to leverage IFRS and reach the most representative accounting conclusion.

Similar to GAAP, once an entity has implemented its accounting policies under IFRS, it is required to indicate preference when making changes to the accounting policies later (Dulitz, 2009). Additionally, IFRS proponents has come to the conclusion that this system “is more streamlined and less complex” through a comparison of 25000 pages of GAAP and 2500 pages of IFRS (Iwata, 2009). Increasing globalization has challenged US companies to acquaint themselves with IFRS. Thus, accountants employed by foreign companies’ perceived the need to recognize the significance of learning principles of international accounting (AICPA, 2009).

In addition to challenges from growing globalization of business practices, the “Security and Exchange Commission’s proposed roadmap calling for U.S. adoption of international standards by 2014 is clearly getting people’s attention” (AICPA, 2008). According to AICPA senior Vice President for member competency and development, AICPA data shows that the United States accounting fraternity members “are increasingly aware that international standards are coming and are starting to feel a real need to get training and gain expertise in this new area” (AICPA, 2008). Mary Schapiro, SEC Chairwoman, reiterated during her Senate confirmation hearing that it was her intention to revisit the SEC’s consideration of adopting IFRS put forward by her predecessor (AICPA, 2009). Meanwhile, 47 % of CPAs are of the view that the IFRS adoption timeline should be changed or delayed (AICPA, 2009).

As a result, monetary constraints and costs involved in the conversion to IFRS are a significant impediment in the United States. 73% of CPAs have no inclination to adopt the new standards due to burden of transition costs; the SEC’s estimates that the transition cost would be 0.125 % of revenue for United States issuers (AICPA, 2009). Other monetary costs relate to the practical application and learning of IFRS rules. 65.2 % of CPAs indicate that they have tangible IFRS knowledge but still require learning more (AICPA, 2008). The AICPA aided CPAs become knowledgeable and informed about IFRS through the provision of training alternatives for CPAs.

There is a fear of the unknown influences, the perceived behavior as a result of fundamental shifts in reasoning, interpretation of IFRS’s guidance, and behavior and application consistency within the client (Dulits, 2009). Characteristically, IFRS has fewer rules in contrast to the US GAAP; therefore, significant judgment will be on the part of auditors and preparers. Judgment provides the preparer with the initiative to improve financial statement’s transparency, but there is a potential risk of application inconsistency (Dulits, 2009). Moreover, these practices could potentially “unleash a legal and regulatory nightmare” and “add rampant corruption, poor financial practices and weak securities enforcement in many countries and it gets worse” (Iwata, 2009). However, these possible events can be averted if the United States rapidly adopts IFRS.

United States’ position

The extent of readiness for transition in the United States varies significantly, in some entities the personnel have been made aware of the application and use of IFRS and require minimal supplementation to prepare them fully for the transition. However, in other companies employees have no idea how IFRS are applied or used in financial reporting and continued to use GAAP in their financial reporting. As a result the time required for the United States to transition will significantly depend on the endorsed method of incorporation. These will also depend on the extent of similarities and differences observed between IFRS and U.S. GAAP.  The transition cost factors will also influence the transition timing and contingency measures in case of rollback to GAAP. The United States is yet to determine the optimal approach in which to transition its financial reporting to IFRS. This is estimated to be realized before 2014 (SEC, 2012). As a result, the United States runs the risk of being isolated in financial reporting as other countries have already adopted or are adopting IFRS. Therefore, transactions with other countries will be significantly difficult leading to extensive economic and political problems. It is critical that the United States operate at par with other countries; hence the adoption of IFRS is critical as indicated by the Securities and Exchange Commission

Conclusion

The US accounting professionals are of the view that International Financial Reporting Standards will be ultimately adopted in the United States; therefore, initiatives are being taken in preparation for the impeding changes in financial reporting. These professionals observe that the United States cannot afford to segregate itself while the rest of the world has adopted or is in the process of adopting IFRS. The benefits of converging and harmonizing the United States accounting standards with IFRS are monumental. As Beswick observes, the United States cannot afford to seclude itself from the global convergence since the growth of the world economies is inherent in their ability to evolve and adapt to changes as they occur.

Meanwhile, investments can be subjected to comparative measurement to determine their performance worldwide. In the United States, the adoption of IFRS is subjected to behavioral control and social pressure; as a result, individual attitudes have an impact on this decision. The implications of refusing to adopt IFRS in the United States are significantly appreciated by the accounting professionals; meanwhile, the SEC has initiated structures aimed at ensuring that the convergence is implemented in the nearest future. As a result, the Condorsement concept has been coined as a step towards the adoption of IFRS in the United States.

Although a defined and ready adoption criterion is yet to be determined, it is evident that the United States is keen on adopting the IFRS, as indicated by a significant percentage of the United States CPAs. The roadmap to the adoption of IFRS has been prioritized by the SEC; however, the recurrent economic downturn underscored the significance of the uniform global financial reporting standards.

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