IFRS vs GAAP: Advantages, Disadvantages & Global Adoption

Introduction to IFRS and Accounting Harmonization

International Financial Reporting Standards (IFRS) refer to a set of accounting standards created and introduced by the International Accounting Standards Board (IASB) (Centroid 2013). Their objective is to establish a single global standard for producing financial statements for all public enterprises.

The harmonization of international accounting is envisioned to enhance business decisions and to assert influence over the economic environment (Beke 2010). When it proves workable and effective, harmonization will produce new types of analysis and data, and integrate indicators that characterize how businesses in certain countries are managed. As it stands, subsidiaries of multinational companies utilize national accounting rules when converting and consolidating frameworks into unified financial statements for reporting purposes. The application of a precise and suitable international accounting system will be helpful to such multinational businesses in conducting their managerial functions globally (Beke).

Interpreting and adopting financial information through diverse accounting methods has been found to be expensive for those who use this information (Beke 2010). A genuine and harmonized international accounting system can establish a common business language through which the comparison of accounting information among different countries becomes possible. This is a sensible solution given that differences among accounting systems incur economic costs arising from variations in national laws and regulations across countries. Even expert financial analysts engaged in collecting, measuring, and transmitting business information encounter and attest to this burden. It will be the critical responsibility of managers and researchers to evaluate and analyze the effects of harmonizing accounting systems across different countries. Their responsibility includes determining the contribution of information-system harmonization to globalization. Business experience attests to the reduction of information disruption between business owners and their managers (Beke).

Rationale, Advantages, and Disadvantages of IFRS

The adoption of an international system of accounting information is in keeping with the accelerating and integrating character of economic globalization (Beke 2010). In comparison to Generally Accepted Accounting Principles (GAAP), the advantages of IFRS include its focus on investors, elimination of recognition timeliness issues, comparability, standardization of accounting and financial reporting, improved consistency and transparency of reporting, greater access to investments and foreign capital markets, greater comparability of financial information with global competitors, and overall relevance (Jordan 2013).

On the other hand, comparative disadvantages include the costs involved in applying IFRS to multinational corporations, the difficulty of regulating the reporting system in all countries where IASB or IASC control is not enforceable, the fact that extraordinary loss or gain is not allowed under IFRS, the risk of making the IASB a monopolist in standard-setting, the sizable transition costs incurred by companies switching to IFRS, the time lag before benefits from IFRS materialize, the overall complexity and cost of IFRS, and the large number of listed companies that still prefer their own reporting standards (Jordan).