Why convert to IFRS?
For many years there has been a debate in the accounting world about whether or not the United States should move 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 preparing to convert. Businesses today work in a global economy and having different reporting standards can be inefficient and costly. In an environment where more companies do business globally and compete globally, the US will be at a distinct disadvantage if we don’t convert to IFRS. I think there are more advantages than disadvantages in converting to IFRS. IFRS will make companies more efficient, provide higher quality and consistent financial information to compare companies globally, and raise capital more quickly.
Many people believe that because there is no agency that consistently enforces IFRS regulations, there is an increased risk of fraud. Unlike GAAP, which is overseen by the Securities and Exchange Commissions (SEC), IFRS is not. They believe that no global agency will closely monitor fraudulent financial statements that will lead to general uncertainty regarding financial statements. This argument, however, is not very effective since the Internal Accounting Standards Board (IASB) oversees IFRS, although not as closely as the SEC oversees GAAP. To raise capital, companies must be transparent in their financial statements, and they must be reliable. Investors and the general public understand that the company’s best interest is that its financial statements are reliable and free of errors. For these financial statements to be reliable and free from fraud, they must be monitored. In order to monitor such a large number of companies, there needs to be organizations that consistently monitor them, hence the rise of the IFRS regulatory body. Due to the need for precision, once IFRS is implemented, a monitoring system will definitely be put in place because it is essential to validate the information that is provided. Right now we don’t have an organization that closely monitors IFRS, but once IFRS becomes common accounting practice, it will exist and therefore this argument will be moot.
Another argument against conversion to IFRS is the amount of time and resources required to perform the actual conversion. Although the initial cost of the conversion is high, in the long run it will benefit the company by creating more opportunities by making it more profitable in the long run. It will also take a substantial amount of time to fully convert to IFRS, depending on the size of the company. This initial investment of time will pay off in the future because most accountants believe that the field of accounting needs to catch up with the global economy and go global as well. So it’s almost certain that eventually some kind of international accounting standards will be established, it’s just a matter of time.
Despite the objections, most people are in favor of converting to IFRS. One of the most frequently cited reasons for converting to IFRS is that having a company-wide reporting standard will be more efficient. Many multinational companies with subsidiaries in other countries already use IFRS and for them this change will help them to be more competitive. Although the change will cost the company a large amount initially, it will save the company money in the long run. For example, companies will no longer need to spend time or resources learning different standards or staying current on 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 competent use of company resources. Businesses will also save money on preparation and audit costs.
Another reason why conversion to IFRS is advantageous is that financial statement comparison will be easier for companies, investors and the public. In today’s global economy, the consistency of a 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 global accounting language will help people better understand financial statements. This ease of comparison will help companies obtain financing from investors more quickly.
The reliability of financial statements, the ease of comparison and competition will make companies more attractive to investors. Because investors will be using only accounting language, they will be able to gain a better understanding of financial statements. IFRS will simplify the process for both companies and investors, and companies will also be able to obtain loans from various institutions more easily. Investors will also be able to provide funds to companies at a lower cost to the investor. In general, converting to IFRS has more advantages than disadvantages. The economies of the world are becoming more integrated and having an accounting system will make life a little less complicated for both companies and investors.
