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Why Ifrs? The Benefits And Drawbacks Of Conversion From Gaap To Ifrs

International Financial Reporting Standards, IFRS, are used by public companies in over 100 countries, so it is easy to see why the U.S. is following suit. The United States is currently using what is known as Generally Accepted Accounting Principles when filing their financial statements and records. Currently, the SEC is debating how to impose the change in the U.S. The choice is between making IFRS a gradual adaption and establishing a definite date that companies must be converted by. If there was a gradual adaptation, companies would be given the choice of switching to IFRS from GAAP. This is mostly dependent on the size of the companies. On the other side, companies may continue to use GAAP until a certain date which then will force them to file their financial statements according to IFRS standards. The quick change to IFRS would be beneficial to companies because it would allow them to adapt the new standards quickly and efficiently.

It is estimated that the United States should be converted to using IFRS by the year 2014. This is possible because there are many advantages to adopting the procedures and companies will be eager to take part in them. A quick and speedy change would be ideal for the conversion to IFRS from GAAP, however it is unlikely that the change will be smooth or quick because of the complexity and work behind switching systems. Smaller companies will most likely be the ones to suffer in changing their systems because of financial strains and lack of employees. Larger companies have a larger base and therefore would benefit more from switching. They are also more likely the companies that are being publically traded. Using IFRS will be extremely beneficial to them because they have the most to gain and they will have the easiest transition. Although they have possibly more companies, offices, and detailed financials, they are more likely to have the staff or means to hire staff to assist them in a smooth change. Regardless, both large and small companies can benefit from IFRS and with proper planning and motivation.

Conversion to IFRS offers many benefits to companies. The most obvious and beneficial aspect of adopting IFRS is consistency. As stated before, public companies in over 100 countries are using IFRS and Canada is on track to adopting the new system and it seems only logical that the United States do the same. Additionally, if a company has foreign operations, adapting IFRS would give them internally consistency as well. They would be able to make their reporting uniform which can reduce costs because all reporting will be done the same way. This will allow them to streamline their operations, reporting standards, auditing, training, development and company standards. Whether domestic or global, their offices could adapt similar standards and reporting techniques, giving them precise and consistent company records and reporting. If IFRS adaptation is ruled to be optional before a set date, a company can gain a large advantage if they were to adopt the reporting standards early because they would be giving themselves a head start on using and becoming familiar with the system. Also, they would be receiving all the before-mentioned benefits that IFRS has to offer. For first-time converters, there are many choices on how to run their initial application.

It goes without saying that along with benefits come drawbacks. Changing to IFRS from GAAP is not simply a change in accounting procedure. It needs to be a transformation by companies. They need to focus on developing an action plan as well as a clearly defined plan for their future as IFRS users. Since the benefits of using IFRS will allow them easier and better foreign management, there should be a plan involving using these circumstances to their full benefit. There needs to be a strategy for conversion that will allow it to go as smoothly as possible so they can keep interruptions to their daily performance at a minimum. Additionally, because IFRS is different from GAAP, it would be beneficial to companies to hire financial advisors and staff that are knowledgeable in IFRS that will be able to help guide the company through its conversion. Hiring this new staff will increase costs and also makes layoffs and staff cutbacks very possible. Companies will most likely also have to upgrade their technology and computer programs for the change from GAAP. All reports, financial documents, contracts and agreements will have to be revised since they were originally drawn up under GAAP standards. Finally, companies will incur additional costs from the previously mentioned activities as well as costs for the auditors and advisors needed for the initial conversion. These would most likely only be one-time expenses however. These expenses would be good for tax purposes however and could turn out to be helpful by reducing net income and therefore cutting down on taxes paid by the companies.

The eventual conversion from IFRS from GAAP is unavoidable. For companies to be sufficiently prepared for the change, they should plan ahead. It is a good idea for companies to begin their conversion with a plan and a timeline. It has been estimated that total conversion time will be about two years. As previously stated, it was projected that the US should be converted by 2014. That leaves approximately 4 years left for companies to be changed to IFRS. It is crucial that companies begin planning and changing their standards. Time is running out and the rest of the world does not have to file their records with any adaptation to GAAP. It is in their interest to start the change over so that they can be up to date and receiving the benefits that conversion has to offer as soon as possible. If companies start planning and acting now, it is entirely possible for the United States to have successfully converted itself to IFRS and be able to join the rest of the world in their accounting procedures.

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