Why Convert to IFRS?

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For many years now there has been a debate going on in the accounting world of whether or not the United States should convert from generally accepted accounting principles (GAAP) to international financial reporting standards (IFRS). Hundreds of countries around the world are already using IFRS and more are getting ready to convert. Companies today are working in a global economy and having different reporting standards can be both inefficient and expensive. In an environment where more companies are doing business globally and competing globally, US will be at a distinct disadvantage if we do not convert to IFRS. I believe that there are more advantages than disadvantages in converting to IFRS. IFRS will make companies more efficient, provide consistency and higher quality of financial information for comparing companies globally, and raise capital more quickly.

Many people believe that because there is no agency that will enforce the IFRS regulations consistently there is a higher risk for fraud. Unlike GAAP, which is monitored by the Security and Exchange Commissions (SEC), IFRS is not. They believe that no global agency will closely monitor for fraudulent financial statements which will lead to overall uncertainty regarding financial statements. This argument, however, is not very effective since Internal Accounting Standards Board (IASB) does supervise IFRS, albeit, not as closely as the SEC supervises GAAP. In order to get capital, companies need to be transparent in their financial statements and these statements must be trustworthy. Investors and the general public understand that it is in the company’s best interest that financial statements are reliable and error free. In order to make these financial statements reliable and free of fraud they must be monitored. In order to monitor such large number of companies there need to be organizations which oversee them in a consistent manner, thus the emergence of IFRS regulatory institution. Due to the need for accuracy, once IFRS is in place, a supervisory system will most definitely be put in place because it is essential to validate the information being provided. At this time we do not have an organization overseeing the IFRS very closely but once IFRS becomes the common accounting practice they will come into existence and therefore this argument will be moot.

Another argument against conversion to IFRS is the amount of time and resources it will take to do the actual conversion. Although the initial cost of converting is large, in the long run, it will benefit the company by creating more opportunities by making it more cost effective in the long run. It will also take a substantial amount of time to convert to IFRS completely, depending on the size of the company. This initial investment of time will pay off in the future because most accountants believe that the accounting field needs to catch up to the global economy and become global also. Therefore, it is almost certain that some sort of international accounting standards will eventually be put in place, it is only a matter of time.

Despite the objections, most people are in favor of converting to IFRS. One of the most often cited reasons to convert to IFRS is that having one reporting standard throughout the company will be more efficient. Many multinational companies with subsidiaries in other countries already use IFRS and for them this switch will help to make them more competitive. Although the switch will cost the company a large amount initially, the company will save money in the long run. For example, companies will no longer need to waste time or resources to learn different standards or keep current in them.

Educating and training employees will also become more focused which in turn will make the quality of their work much higher. Higher quality of work means less chance of errors, therefore, more proficient use of company’s resources. Companies will also save money in preparing and auditing costs.

Another reason that converting to IFRS is advantageous is that comparing financial statements will be easier for companies, investors and the public. In today’s global economy the consistency of one reporting standard will make it more efficient for investors to research and compare financial statements globally and more effectively. Consistency is essential to making informed and educated business decisions. Using one accounting language globally will help people to understand the financial statements better. This ease of comparison will help companies to obtain funding from investors more quickly.

Reliability of the financial statements, the ease of comparability and proficiency will make the companies more attractive to investors. Because investors will be using only one accounting language they will be able to get a better understanding of the financial statements. IFRS will make the process simpler for both the companies and the investors and the companies will also be able to obtain loans from various institutions more easily. Investors will also be able to provide funds to businesses at a lower cost to the investor. Overall, there are more advantages to converting to IFRS than there are disadvantages. The world’s economies are becoming more integrated and having one accounting system will make life a little less complicated for both the companies and the investors.

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