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Ready or Not United States, Here Comes IFRS
As business transactions and investing become more and more globalized each year, it has become critical to find a way to ensure global transactions are comparable by the simplest means possible. This idea of simplification has progressed into actualization. These guidelines are known as the International Financial Reporting Standards (IFRS), and have been adopted by about twelve-thousand companies in more than one-hundred countries. The United States is not included as one of the many countries that have already adopted IFRS. Although they are working towards IFRS, they seem to be falling further behind implementation and stubbornly sticking to their original reporting standards. As the need for higher quality financial information continues to progress, it has become a necessity to not only move towards global standards, but also to maintain worldwide consistency. With the United States lack of determination, they are forfeiting the opportunities that IFRS has to offer.
The acceptance of IFRS is a process that everyone must adapt to. Because most countries have their own reporting standards, like the United States has Generally Accepted Accounting Principles (GAAP), the steps that need to be taken in order to move towards IFRS might very well cause some short-term chaos and confusion. However, it will generate long-term benefits such as reducing the costs of raising capital and minimizing the risks of a financial crisis. The main focus behind IFRS is not convergence on the basis of identical standards; in contrast, it concentrates on having similar general principles. The underlying conception of IFRS based on principles, not rules used by U.S. GAAP. Principle-based standards offer more disclosure and transparency which provides the capability for investors to compare financials easier, leading to more knowledgeable and confident international investments. IFRS does not provide a specific framework for accountants, but instead encourages them to use their personal judgment, to stand back, think and focus on what really matters. As far as the European Union is concerned, who converged to IFRS is 2005; believes the principle based approach is the right approach. Interestingly enough, foreign companies that previously listed in New York, often list in London instead. Why? The adaptation to IFRS has set a foundation of stronger and open dialogue in the investment community, which is a key factor in the development of globalization.
The real question then becomes, if IFRS is expected to deliver so many future benefits, why has the United States delayed perseverance to rid GAAP and carry out global standards? Currently, the United States uses a rules-based standard that produces a very litigious environment. Rules written in excessive detail have the tendency to condone avoidance and give incentive to find ways around them. Principles condone agreement and motivate forward-thinking. The deficiency of transparent financial information has facilitated scandals such as Enron and WorldCom. With the fear of losing public confidence, these scandals generated the importance of strengthening the reporting system. Instead of moving towards more transparent regulation, regulators simply strengthened internal controls. As investors trust diminishes, people tend to confide in countries where companies are reliable and comply with proper standards.
The United States has obtained major financial dominance for so long that fear of losing that is a major reason of resistance to change. What the United States refuses to see are the benefits that IFRS can introduce. Some of the benefits include streamlining opportunities, standardization and making company reporting more manageable. Although there are other countries that have converged to IFRS that also have accounting standards that differ from International Standards, they are enduring the obstacles and working together to successfully transform global finance. The real focus of the United States should not be to preserve dominance, but instead should try and reinstate a sense of responsibility and perseverance that will recover the relationship between business and society.
Although a global implementation will take time, it is definitely necessary for countries to put it into practice. With the continual growth of globalization, just the idea of copious worldwide accounting standards complicates comparisons. There are others besides the United States who still question IFRS, but the question now should not be whether a country should adopt, rather, countries should be questioning the best ways to deal with adoption. International Financial Reporting Standards are coming whether we like it or not. In the end, the ones who choose to fall behind convergence will be the ones who are hurt the most. If the United States continually fears change, other regions will grow much more quickly because of a wider range of investment options. So instead of leading by example and adjusting to the rise of the rest of the world, the United States fear will soon become a reality as more and more countries progress towards uniformity.
About the Author
Tricia Cannizzo
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