The geographical boundaries have been losing their significance due to globalization and increase in international trade and some countries such as those in Euro Zone even have taken steps to integrate their respective economies with each other more closely. Such measures have been inspired by the simple realization that cross-border trades and expansions are usually win-win scenarios for all the parties involved. But globalization participants also realize there are still several hurdles to take care of before the full benefits of international business could be realized. One of these hurdles are different accounting systems such as GAAP and IFRS and while IFRS is followed in most countries, companies incorporated in the U.S. are required to comply with GAAP. There have been calls for the U.S. accounting system to move to IFRS and the recommendation should be followed because it will result in numerous economic benefits to the U.S. companies and investors involved in international business.
One of the benefits of IFRS to the U.S. will be an increase in international investment activities by U.S. investors as well as foreign direct investment (FDI) in the U.S. by international investors. Convergence to IFRS means U.S. investors will have to educate themselves on IFRS principles which are followed in most countries. As a result, they will increase their investment activities in international markets due to more informed decisions as a result of better understanding of financial reports of international companies. Not surprisingly, 62 percent of the respondents to CAQ claimed that a uniform set of global accounting standards will give them greater confidence as investors . Similarly, international investors will also be able to better understand financial reports of American companies and may be encouraged to bring capital into the country. An increase in international investments in both the U.S. and abroad should lead to more efficient markets as well as better allocation of investment funds. Even research supports the fact that convergence to IFRS increases the investment appeal of a country. Beneish, Miller, and Yon found foreign investment increased in countries that adopted IFRS .
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Convergence to IFRS may also improve U.S. companies’ access to funds in international markets. Lenders usually assess organizational borrowers’ financial health through financial reports and financial reports completed in accord with IFRS principles may give more confidence to international lenders. As a result, U.S. companies may be able to borrow at more favorable terms.
Convergence to IFRS will also help U.S. companies simplify accounting systems as well as save on preparation and compliance costs. U.S. GAAP standards cover almost 25,000 pages while IFRS standards take about 2,500 pages . Convergence to IFRS also means accounting functions could be centralized to improve efficiency. At the moment, a significant proportion of U.S. companies with international operations may have to comply with both U.S. GAAP and IFRS but a convergence to IFRS may eliminate the need to keep up with two different standards.
It is clear that U.S. will greatly benefit from IFRS. A uniform global accounting standard will help both U.S. and international companies to improve their operations as well as allocation of their scarce resources.
- AICPA. (2008, October). Accounting Profession Reacts to IFRS Plan. Retrieved September 17, 2013, from http://www.ifrs.com/
- Gornik-Tomaszewski, S., & Showerman, S. (2010, Spring). IFRS in the United States: Challenges and Opportunities. Review of Business, pp. 59-71.
- Iwata, E. (n.d.). Will going global extend to accounting? Retrieved September 17, 2013, from http://www.usatoday.com/
