Advantages and Disadvantages of Switching from U.S.Gaap to Ifrs

3343 Words Jun 14th, 2011 14 Pages
Advantages and Disadvantages of switching from U.S.GAAP to IFRS
Nara Yoon
Charles Center Summer 2009

2 Advantages and Disadvantages of switching from U.S.GAAP to IFRS

In today’s business, markets are demanding increasing conformity. Many countries have converted to and implemented the International Accounting Standards Board (IASB)’s accounting standards. The United States, however, still maintains its own Financial Accounting Standards Board (FASB). Both IASB and FASB have created International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (U.S.GAAP) respectively. These accounting standards are rules of measurements for financial statements that companies issuing stock to the public must provide
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In addition to more discretion, the differences also affect the numbers the companies choose to represent themselves. “The area of financial liabilities and equity gives rise to differences that could affect how a firm chooses to raise capital” (Hail,54). Reclassification of certain instruments as equity and debt will affect reported net assets and debt to equity ratios (De Jong, 2006).These changes will affect “firms’ borrowing activities, debt covenants, ratings, and other contracts” (Hail,54). In the area of consolidation, one of the specific differences is the order of the inventory. U.S.GAAP uses the Last-In-First-Out (LIFO) method, which “assumes that goods purchased most recently are sold first and that the remaining items have been purchased at earlier periods” (Libby, 2007). Using the LIFO method results in lower gross profit, which allows a company to be taxed less. Under IFRS, however, the LIFO method is prohibited. Implementing IFRS would “trigger a big tax hike for U.S. companies” (Bogoslaw). This would probably diminish a company’s position because of a higher tax burden. Thus, the differences between the standards in the various areas affect a firm holistically. The switch of numbers effect more than just the financial report but also the company’s financial standing and its bargaining power. The second benefit of the conversion is cost savings, primarily for multinational companies. Before companies can