Question

Do you think U.S. companies will embrace IFRS for financial reporting purposes? Why or Why not? Present original arguments (supported by authoritative reference sources) in support of your position. Include in your response, a list of 2-3 U.S. MNCs who are already using IFRS for financial reporting purposes.

Answer 1

Greater Comparability

Companies that use the same standards to prepare their financial statements can be compared to each other more accurately. This is especially important when comparing companies located in different countries, as they might otherwise be using different rules and methodologies to prepare their statements. This increase in comparability has helped investors better determine where their investment dollars should go.

Not Globally Accepted

The United States has not yet adopted International Financial Reporting Standards and other countries continue to hold out as well. This makes accounting by foreign-based companies that do business in America difficult as they often have to prepare financial statements using IFRS and another set using American Generally Accepted Accounting Principles.

More Flexibility

IFRS uses a principles-based, rather than rules-based, philosophy. A principles-based philosophy means that the goal of each standard is to arrive at a reasonable valuation and that there are many ways to get there. This gives companies the freedom to adapt IFRS to their particular situation, which leads to more easily read and useful statements.

Manipulation

There is a downside to the flexibility that IFRS allows: companies can utilize only the methods they wish to, allowing the financial statements to show only desired results. This can lead to revenue or profit manipulation, can be used to hide financial problems in the company and can even encourage fraud. For example, changing the method of inventory valuation can bring more income into the current year's profit and loss statement, making the company appear more profitable than it really is. While IFRS requires that changes to the application of the rules must be justifiable, it is often possible for companies to "invent" reasons for making the changes. Stricter rules would ensure that all companies are valuing their statements the same way.

Cost

A small company would be impacted by a country's adoption of IFRS in the same way a larger one would. However, small businesses do not have as many resources at their disposal to implement the changes and train staff. This results in smaller companies bringing in accountants or other outside consultants to help make the changeover. These smaller companies will bear more of a financial burden than larger ones in this area.

One notable exception to the global adoption of IFRS is the United States. Given that the US represents the world’s major capital market, the non-involvement of the US represents a significant limitation in the global acceptance of IFRS. In the late 20thcentury, the US appeared very strong in its resolve not to adopt IFRS believing that its ‘rules-based’ standards were superior to the more ‘principles-based’ standards of the IASB. However this resolve to retain their own standards (and to reject IFRS) appeared to diminish around 2001/2002 with various ‘accounting scandals’ involving organisations such as Enron. An argument was made that the “rules-based” GAAP made it easy for Enron to “get around the rules”. If, on the other hand, Enron had been subject to “principles-based” standards such as IFRS, it would have been far more difficult to keep debt and underperforming assets off the consolidated balance sheet. There was a Convergence Project between the IASB and the FASB to align as far as possible IFRS and US GAAP (this started with the Norwalk Agreement in 2002 and was subsequently reinforced by various Memoranda of Understanding). In the decade from 2002 significant work was conducted on this process of convergence, much of it heavily influenced by the US (FASB).From late 2007 the SEC adopted rules that permitted foreign private issuers (but not US domestic companies) to lodge their IFRS compliant financial statements with the SEC, without the need to provide reconciliation to US GAAP. In terms of some of the factors that might discourage the US from adopting IFRS, one obvious factor is that the FASB (Financial Accounting Standards Board), FAF (Financial Accounting Foundation – oversight body similar to our FRC) and SEC must be satisfied that the convergence project has led to accounting standards that are appropriate to the US context. In 2007 the FAF also raised concerns about the perceived independence of the IASB and they argued that before the US adopts IFRS certain changes need to be made to the governance policies of the IASB. The FAF was also concerned that in many jurisdictions there are amendments being made to IFRS at a local level before the standards are used in that particular country. This will also need to be addressed. Many of these concerns over governance were addressed by a constitutional review mid-decade dealing with representation, and the establishment of the IASB Monitoring Board that was mainly comprised of representatives from the capital markets.