Adoption of IFRS into US GAAP: Factors and Perceived Benefits

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ACC305
Accounting Theory

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Introduction
The present essay is developed for examining the key issues highlighted in the article
compiled by KPMG, one of the big accounting firms, in relation to the adoption of IFRS into the
U.S. GAAP for promoting the development of high quality set of global accounting standard.
The essay in this context has addressed the issues such as factors influencing the adoption of
IFRS into the US and perceived benefits of such an adoption to the country. In addition to this,
the essay has examined the approaches that are, free-market and regulation, in context of the
issues of standardization of accounting standards. This has been for examining the importance of
developing global accounting standards in depth.
Part 1:
Factors that influences or discourage the full implementation of IFRS in United States
Globalization of accounting standards is one of the major issues that have led to the
discussion of adoption of IFRS by United States. The convergence of IFRS and US GAAP have
started a decade before but it seem not to end as many of SEC (Securities and Exchange
Commission) regulators does not find appropriate to fully adopt the IFRS. The convergence of
IFRS with US GAAP has been a matter of serious discussion but it does not seem to be end.
However, FASB (Accounting standard board of United Nations) and SEC support the full
adoption of IFRS through the method of convergence.
IFRS, typically known as International Financial Reporting Standards has been issued by
IASB with the support of many accounting bodies including many experts from FASB. IFRS is
currently being used nearly in every country either in form of convergence with IFRS or direct
adoption of IFRS. It can be said that IFRS is type of guidelines for preparing the financial report
that has the main purpose to allow the comparability of the financial reports and other statements
worldwide. To the contrary there are few countries that has not adopted or fully adopted the
IFRS as their local GAAP (General Accounting Accepted Principles). In this context, United
Nations is one of the countries that resists in accepting the IFRS as their local accounting
standards. Due to this problem there arises a major problem of comparability of financial reports
of companies in United States and companies that uses IFRS as the basis of their preparation of
financial report (Hail et al., 2009). There have many attempts made to make convergence of

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IFRS and US GAAP successful but there are many factors that restricts its convergence. The
SEC has many times expresses their opinion on need of a single authoritative standard globally
but their confidence in IFRS seems to be fuzzy. In the report of KPMG “Defining Issues” states
that SEC has very little support in adopting IFRS completely as the single set of standards but
they supports the adoption of bits and pieces of IFRS (KPMG, 2015). The Wes Bricker, a chief
accountant at SEC has mentioned many times in his statement that there is very string
requirement to make the convergence of US GAAP with the IFRS in order to promote the
globalization in accounting standards. But at his retirement time he purposely mention that fight
to adopt the IFRS as the single piece of standards seems not to be working and he did not see the
implementation of IFRS by US companies in near future. This section will highlight the factors
that underpin the full adoption of IFRS in US (Nelson, 2003).
The extreme differences between US GAAP and IFRS, is one of the reason that lead to
non-implementation of IFRS in US. The primary difference between both is that IFRS is
principle based while US GAAP is complete rule based standards. This difference can be
understood as rules based standards are less flexible while principle based standard provides
prepares more discretion power while making report to the investors. The purpose of rules based
standards is to reduce the imprecision and to promote the high quality financial reporting. It is
also true that rules based standards leads to the high level of complexities and purposeful of
structuring of certain companies that cannot avoid the certain threshold laid through implication
of rule based standards. As this difference is most distinguishable difference between US GAAP
and IFRS but it cannot said that it is only the difference that has stopped or slows down the
progress of convergence. In relation to the individual standards or objectives of financial
reporting there are many areas where it seems that FASB and IASB has not reach on conclusion
that has lead to major factors that discourages that full implementation of adopting the IFRS. For
example, both FASB and IASB claims or aims to provide the high quality accounting standards
but there has major difference between the definitions of what exactly they entails and planning
persists by both of these boards. At various point of time IASB admits that IFRS fails to provide
detailed rules as compared to US GAAP and also it fails to provide the guidelines for specific
type of transaction in certain industries ((IFRS, 2014).

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Both IASB and FASB seek to develop such standards that provide high quality financial
statements that have certain characteristics such as reliability and relevancy. Relevance in
context of financial information means that information must be such that it helps in decision
making process. On the other hand reliability states that information must be independently
verified and should be materially accurate. It is also important provide all the information at the
time of preparation of financial statement. This arises one of major issues between IFRS and US
GAAP that IFRS has laid down its emphasis on the relevance while US GAAP focuses mainly
on the reliability (Shamrock, 2012).
As the convergence will be made the US will loss the power in making the accounting
standards as IASB will get in power to set standards in US. It can also be one of factors that
hinder the adoption of IFRS in US. The companies in UN will lost their power to put influence
on the accounting legislature as IASB will work for the best interest of investors and companies
but FASB has to think only for the companies in US. US government has equally interest and
takes part in setting the accounting standard that provides the lobbyists in US to have more
power than any other country. It has been that major lobbying cases are being reported in United
States. As there are only 4 members of FASB from 16 members in the IASB board committee,
FASB seems that there is no enough representation for the US in IASB (Economist, 2008).
There are many arguments between FASB and IASB on the quality of accounting
standards. As US GAAP is of higher quality FASB require use US standards to frame or develop
the global set of standards. Cost in switching from the US GAAP to IFRS will have drastic
impact on the income statement of American companies and at last this impact will pass on to
the investors at any given point of time. There is no exact calculation on how much US
companies will have to spend while switching from US GAAP to IFRS. There requires extensive
training and education to make complete the process of switching from existing US GAAP to
IFRS (Massoud, 2009). To move from the US GAAP to IFRS, there requires retraining the
accountants, auditors, and other parties that are involved in developing the preparation of
financial statements. It will be required because there are significant differences between US
GAAP and IFRS (Rezaee, Smith & Szendi, 2010).
Part 2: