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Celeste Martello

Semester Paper
12/7/15

A Look at the Insurmountable Issues that Surround the


Adoption of IFRS
SYNOPSIS: This paper discusses reasons as to why the United States should not adopt International
Reporting Financial Standards. Three insurmountable issues will be addressed that become the basis of
my argument for the United States to not adopt IFRS. The issues presented in the remainder of this

paper include, but are not limited to, the steep learning curve, irreconcilable differences between
countries, and large costs. Incorporated into this paper to support the argument is research and
studies provided by credible authors.
Introduction to the Potential Adoption of IFRS

The potential adoption of International Financial Reporting Standards (IFRS) by the


United States has been a shared goal between the FASB and IASB for many years. This potential
adoption has sparked much debate and controversy. In 2002, the IASB and FASB agreed upon
the Norwalk Agreement to achieve convergence between United States Generally Accepted
Accounting Principles (GAAP) and IFRS (Pillhofer 2013). Furthermore, in recent years, the
United States Securities and Exchange Commission (SEC) has released announcements and a
roadmap that points to the likeliness of the United States adopting IFRS. The primary goal of the
potential adoption is to increase financial statement comparability across countries and develop a
worldwide standard setter. I contend that this goal is impractical because the benefits of adopting
IFRS do not exceed the costs. The United States financial reporting system should not adopt
IFRS because the goal toward convergence of accounting standards and comparability is still
weighed down by issues that are insurmountable. Those issues include, but are not limited to, the
steep learning curve, irreconcilable differences between countries, and large costs.

Celeste Martello
Semester Paper
12/7/15

Imposed Learning Curves


Learning Curves in the Educational System
Adoption of IFRS would pose learning curves for educational systems and firms. Not
only do these learning curves exist, but the curve is too steep to overcome. In other words, the
benefits that could result from the adoption of IFRS will be overshadowed by an impossible
learning curve. The transformations of the educational system for future professionals in the
accounting field are impractical due to costs and current curriculum. Professors and college
administrators would have to reinvent curriculum to teach students IFRS rather than GAAP.
Barth (2008) argues that IFRS cannot be layered on top of existing curriculum. That means
universities cannot just tweak their curriculum, they must start from the beginning and build it
again. Even further, majority of universities in the country do not have a curriculum in place to
integrate IFRS into the educational system. Seventy-nine percent of respondents
said the key challenge for them is developing curriculum materials, and another 72% said
making room for IFRS in the curriculum is an issue (Nilsen 2008, 83). This would mean that
almost eighty percent of universities would have to equip themselves with new material and
professors in order to educate future professionals on IFRS. It is not far-fetched to expect that
some professors will not be able withstand the transition and curriculum. Professors would very
well have to educate themselves before they can educate the students. To expect for universities
to incur the costs to implement IFRS into curriculum is unrealistic. The reality is that very few
universities are willing or in a position to incorporate IFRS into curriculum, Only 16%. said
their schools would provide funding to attend training sessions and/or acquire study materials
(Nilsen 2008, 83). Although it might be argued by some that students should become familiar

Celeste Martello
Semester Paper
12/7/15

with IFRS in academia, the numbers prove that the learning curve that would occur from
adoption of IFRS is too daunting to overcome.
Learning Curves for Current Professionals in the Industry
Furthermore, accounting firms would have to educate current professionals on IFRS since
GAAP is the predominant body of knowledge. This would mean educating all members within
the accounting field in the United States on a completely new set of standards. One could argue
that this would only be challenging because of our natural tendency to be resistance to change,
but that is far too shallow of an argument. Not only would firms within the United States have to
be re-educated, but many firms outside of the United States would also have to be educated on
IFRS. This is due to the fact that many U.S. based global firms around the world look toward
United States GAAP and prepare financials in accordance with GAAP. Kaya and Pillhofer
(2013) found that majority of cross-listed companies file statements with the SEC in accordance
with GAAP and not IFRS. It is highly probably that these companies do not file in accordance
with IFRS because they recognize that it would require educating and training their current
professionals on a new body of standards. According to Selling (2013, 157), IFRS adoption
would mean that all U.S. accountants would have to learn a new language, and so would many of
the accountants at the foreign subsidiaries. Sellings argument indicates that learning new
financial reporting standards is more intricate than it may appear. It is much like learning a
language because all industry practices revolve around the standard-setting bodys guidelines.
For example, IFRS is principles-based rather than rules-based. Professionals would lose the
guidance that rules-based GAAP provides. This would require professionals to exude discretion
and flexibility to a degree in which they are not familiar with. The trend in our current standardsetting shows that current professionals seek guidance and clarification in standards. The fact

Celeste Martello
Semester Paper
12/7/15

that U.S. GAAP experienced professionals rely so much on guidance does not bode well for the
industry if the United States adopts IFRS. Adopting IFRS would require current accounting
professionals to reform their entire basis of education and experience.
How to Educate Firms and Current Professionals
Another matter to think about is how firms will educate professionals on IFRS. What
does this look like? It is argued that the educational transition will not be as formidable as it
seems because firms have already begun to incorporate IFRS into their professional
development. Large firms have begun to put forth effort in training existing professionals, At
the PwC University for faculty in early July, the firm rolled out a suite of interactive tools, such
as IFRS financial statements, and videos and software. (Nilsen 2008, 85). This may be
manageable for large firms, but it is impracticable to assume that all firms can incur the costs
associated with training staff on IFRS. Firms will more than likely have to invest in software and
online training tools, such as the ones PwC University has employed, for their faculty to utilize.
Not only would firms more than likely have to invest in self-study tools, but they may have to
host workshops and hire IFRS professionals to educate existing professionals. This not only costs
money on the firms part, but it requires a great deal of time on the professionals end. Nilsen
(2008) argues that many firms have already started to weave in IFRS and educate their
employees on IFRS. That may be the case for a few large firms, but that only accounts for a
slight percentage. Majority of existing professionals still need education on IFRS. Educating an
already proficient staff of accountants would take time and money; therefore, it is not a
resistance to change, but a situation in where the benefits do not exceed the costs.

Celeste Martello
Semester Paper
12/7/15

Political and Legal Obstacles


Regulation and Enforcement Variance
Even if IFRS was adopted by the United States, variance in standards would still exits
due to differences in political and legal factors. The goal of a worldwide standard-setter is to
increase comparability; however, implementation obstacles are insurmountable due to
irreconcilable differences between countries. It is worthless for the United States to take on
extraordinary burdens to adopt IFRS when the goal of a worldwide standard-setter is
unattainable. An incredible implementation obstacle that would be near impossible to overcome
is the varying regulations and enforcement from one country to the next. It can even be argued
that there is a lack of security regulations and enforcement presence in some countries. U.S.
GAAP is successful in enforcing and regulating standards because the power of the SEC. Not
every country who files in accordance with IFRS wants an authoritative body such as the SEC to
enforce and regulate standards because they view it as oppressive (Zeff 2007). A country with
less regulation from a body of enforcement will be more apt to depart from IFRS, rather than a
country such as the United States who has the SEC to strictly enforce standards (Zeff 2007). To
demonstrate the difference of regulatory bodies across countries, the United States and United
Kingdom serve as a prime example. The U.K. is in favor of a private-sector body possessing
statutory authority over standards (Zeff 2007). In contrast, the United States has delineated
enforcement power of accounting standards to the SEC, a governmental agency. Ball et al. (2008,
18) asserts, There is no UK regulatory body comparable to the SEC in the US, financial markets
(the City of London) historically have been viewed as primarily self-regulating, and the UK
parliament seldom has intervened in accounting matters. The United Kingdoms implementation

Celeste Martello
Semester Paper
12/7/15

of standards under IFRS would undoubtedly be more lax than standards implemented in the
United States under IFRS.
Political Power Struggles
The degree of enforcement of IFRS will ultimately stem from the political structure of the
country. According to Kothari et al. (2010, 272), The effectiveness of regulation depends on the
effects of regulators political ideologies and the impact of special-interest lobbying on
regulation. Of course, not all countries share similar political ideologies or political structures.
If the United States were to adopt IFRS, it would pose problems for our policy making bodies.
The United States cannot expect to retain the SEC as the primary regulatory agency over
standard-setting if IFRS is adopted. The IFRS has their own body to govern standards, IFRS
are set by the IASB, which acts as an independent supranational standard-setting body appointed
and overseen by the Trustees of the IASC Foundation and the Monitoring Board (Hail et al.
2010, 572). It is unlikely that the IASB will be able to cooperate with national standard setters
because each national body will be reluctant to relinquish power. Hail et al. (2010, 573) supports
this claim, Legislative bodies like the U.S. Congress have an innate resistance to give up power
to a foreign authority or standard-setting body. One of the major concerns from a U.S.
perspective is that foreign governments and interest groups exercise an undue influence on the
IASB and, consequently, the formulation of IFRS. It is apparent that countries, including the
United States, would struggle with the idea of transferring power to a foreign body. This is due to
the fact that every country will have different objectives in standard-setting to push their own
political and economic agenda. A worldwide standard setter is not enough in itself to achieve
comparability because of differences in politics around the globe. The varying political and legal

Celeste Martello
Semester Paper
12/7/15

factors would result in dissimilar standards and financials. Thus, the goal of a worldwide
standard setter is discredited and seems to be more of a utopia than an attainable reality.
Cost Implications
Substantial One-Time Costs
One of the largest arguments in favor of adoption of IFRS, besides comparability across
countries, is cost savings. The common belief related to cost savings from IFRS is that the most
amount of cost will occur during the transition period, but fewer costs will be incurred on an ongoing basis (Hail et al. 2010). In other words, it is argued that the adoption of IFRS will result in
a one-time cost, but in the long-run it would result in cost savings. Multinational firms could
potentially save on reporting costs if a worldwide standard-setter was adopted because the firms
would not have to produce duplicate statements that comply with both IFRS and US GAAP (Hail
et al. 2010). Even if arguments were correct and the adoption ensued in only one-time costs for
firms, those one-time costs would be substantial. One-time transition costs can weigh heavily on
smaller firms (Hail et al. 2010). Based on evidence from the European Unions (EU) transition to
IFRS, Hail et al. (2010) estimates average one-time costs to small firms to be $420,000 and
$3.24 million to large firms. Large firms are in a better position to incur substantial costs, but the
costs that small firms will incur will not exceed the benefit. Selling (2013) points out that small
firms financial statements do not even stack up against large firms statements. Large firms are
more often than small firms preparing financial statements for global companies. Small firms are
less likely to even have the need to report under IFRS; therefore, small firms would incur the
costs associated with the adoption of IFRS but not reap any benefits.

Celeste Martello
Semester Paper
12/7/15

Costs of IFRS Exceed Benefits


Also, I contend that the prospective benefits associated with the adoption of IFRS will
not come to fruition. The benefits of adopting IFRS do not exceed the costs for both large and
small firms. Morris et al. (2014) executed a survey based study from the perspective of
Australian preparers of financial statements after full implementation of IFRS. The results of the
study yield negative responses. It is important to note that the survey respondents were chosen
from a large sample of Australian Companies. Thus, the survey results are representative of large
companies as well as small. Overall, data from the survey responses show that perceived benefits
of adopting IFRS have not actually outweighed the cost. One response reads, Much ado about
nothing. Cost has certainly not justified the benefits. A waste of time and effort (Morris et al.
2014, 160). Additionally, results from the study display that costs are not only one-time, but
exponential. Seventy-six percent of preparers from the study expect for ongoing costs to increase
(Morris et al. 2014). Larger firms expect even more significant increases in cost (Morris et al.
2014). Responses associated attribute exponential costs to increasing audit fees and on-going
staff training (Morris et al. 2014). The United States transition after the adoption of IFRS may
not be the same as Australias, but the study is important because it includes perceptions of actual
preparers of financial statements after adoption.
Conclusion
Despite the research that surrounds this debated topic, there are still unknowns about the
adoption of IFRS and how it would affect the United States economy, legal system, and political
structure. We can look towards nations such as the EU as guinea pigs who have successfully
adopted IFRS, but it does not mean the U.S. will respond the same way. Selling (2013) simply
said it the best, the adoption of IFRS is not a one size fits all. The uncertainties of adopting IFRS,

Celeste Martello
Semester Paper
12/7/15

plus the conceivable negative effects from the adoption, are too great to replace the current
standard-setting system. Academic studies have shown that U.S. GAAP produces high quality
standards. Much like the idiom, if its not broke, why fix it? It is wise to be forward thinking in
terms of global comparability, but there are still things in this world that are insurmountable. The
adoption of IFRS in the United States is one of those.

Celeste Martello
Semester Paper
12/7/15
Reference Section
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accounting earnings. Journal of Accounting & Economics, 29, 151.
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Hail, L., C. Leuz, P. Wysocki. (2010). Global accounting convergence and the potential adoption of IFRS
by the U.S. (Part I): Conceptual underpinnings and economic analysis. Accounting Horizons,
24(3), 355-394.
Hail, L., C. Leuz, P. Wysocki. (2010). Global accounting convergence and the potential adoption of IFRS
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research in accounting. Journal of Accounting and Economics 50 (2-3): 246286.
Morris, R., S. Gray, J. Pickering, and S. Aisbitt. (2014). Preparers perceptions of the costs and benefits of
IFRS: Evidence from Australias implementation experience. Accounting Horizons, 28(1), 143173.
Nilsen, K. (2008). On the verge of an academic revolution. Journal of Accountancy, 206(6), 82-85.
Selling, T. (2013). Bumps in the road to IFRS adoption: Is a U-Turn possible? Accounting Horizons,
27(1), 155-167.
Zeff, S. (2007). Some obstacles to global financial reporting comparability and convergence at a high
level of quality. The British Accounting Review, 39(4), 290-302.

Celeste Martello
Semester Paper
12/7/15