Pros and Cons of IFRS

Last Updated Aug 28, 2008 12:49 PM EDT

sec.gifThe U.S. Securities & Exchange Commission voted Aug. 27 for a proposed "roadmap" that could led to U.S. firms switching from the U.S. Generally Accepted Accounting Principles (GAAP) to the International Financial Reporting Standard (IFRS).
The U.S. is one of the last GAAP holdouts but that could change by 2014. The SEC will make a final decision about IFRS in 2011 about universal use of IFRS but some 100 or so large companies with international operations could use the system sooner.

Executives have told me personally that they prefer IFRS because it is easier to use and more intuitive.

Here are some pros:

  • IFRS will save money. As more companies go global, they won't have to spend money doing two sets of books.
  • Being principles-based, IFRS allows more leeway in how companies can portray their financial performance.
  • IFRS will make cross-border investments easier.
And cons:
  • Not many U.S. business schools teach IFRS.
  • Inconsistencies in IFRS such as how research costs are explained and its tendency to allow higher earnings statements need to be worked out.
  • Small and middle-sized firms may beunfairly hit with extra costs just as they were with the Sarbanes-Oxley Act.
The overriding point is that corporate America is being dragged further into the global economy whether it wants to or not.