This paper examines the ongoing convergence of International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP), arguing that global economic integration makes a single worldwide accounting standard increasingly necessary. The paper addresses the SEC's role in facilitating convergence, the EU's influence as a major trading bloc, the shareholder benefits of a unified reporting system, the institutional challenges of transitioning to IFRS, and the practical costs of long-term convergence strategies. Drawing on principles-based versus rules-based accounting distinctions, the paper concludes that full IFRS adoption is more practical and cost-effective than a gradual convergence approach.
As Benjamin (2012) observes, "economic globalization over the past twenty years sparked demand for a single, worldwide set of high-quality accounting standards." The SEC's allowance for American companies with international holdings to use International Financial Reporting Standards (IFRS) supports convergence to some extent by providing an incentive for filers to adopt IFRS. Companies that use IFRS can be compliant with both U.S. and international filing requirements without having to maintain duplicate records. All firms with an international scope are now likely to consider using IFRS because of its compatibility with U.S. and worldwide standards.
Given the globalization of the economy, even small and mid-sized U.S. organizations may begin using IFRS, which will make firms that continue to use GAAP more isolated. Convergence will be facilitated, with a likely bias in the new universal standards toward IFRS with minor — or no — modifications.
The EU is one of the most powerful trading blocs in the world. The wholesale adoption of a single accounting standard closely resembling IFRS will be incentivized by the EU's economic integration, given that more companies will likely be doing business with Europe and therefore interacting with companies that already use IFRS.
For ordinary shareholders, having a single financial reporting system makes it far easier to compare the financial performance of different companies. There are substantial differences between GAAP and IFRS that can make direct comparisons between companies using different systems difficult — even for an accountant, let alone an ordinary shareholder. As Benjamin (2012) notes, "GAAP contains more detailed, specific requirements than IFRS [because] IFRS contains broad principles to account for transactions across industries, with limited specific guidance and stated exceptions to the general guidance."
This is a frequently cited reason for the benefits of using IFRS: it is easier to understand, less technical, and many argue more ethical. There is less potential for adhering to the "letter" of the rules while still engaging in conduct that violates the "spirit" of accounting ethics — a criticism frequently leveled against GAAP.
As Schneider (2012) explains, "principles-based systems offer broader guidelines in accounting treatment, within which accountants exercise their best judgment; rules-based systems are more prescriptive and specific." However, international adoption of IFRS — or convergence based upon a system emphasizing principles-based standards — requires some common agreement as to what those principles are and by which all companies should abide.
"Frameworks needed to resolve IFRS ambiguities"
"Single-step IFRS adoption beats gradual convergence"
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