Natalie Bello

October 27th, 2010

Homework 1 – Part 1

Why are the audit firms, PWC and KPMG supportive of the change from US GAAP to IFRS.
Do you agree with their arguments and their position? Why or why not?

I, personally, believe that the audit firms, PWC and KPMG, are supportive of the change
from US GAAP to IFRS because it provides another avenue in their business structure for
increased business and revenues. They can provide consulting advice and specialized training to
their customers to help them convert and adapt smoothly to the new IFRS system. They can also
explain the changes that come with IFRS and make sure that their accounting procedures and
financial statements comply with IFRS. The audit firms are or will become experts on IFRS and
will use it as a product to be sold by their respective partners.

I also believe that the audit firms are supportive of the change because it is easier for
them to focus on auditing financial statements based on IFRS for their many international clients;
whereas, before, with an international client, they would have to be worrying about the
statements being in compliance with several different standards depending on what countries
their client does business. KPMG and PWC were both very adamant about setting a date for the
mandatory use of IFRS and speeding up the process toward completion of the 2011 decision so
that U.S. issuers will make the investment required to adopt IFRS under the early adoption
provision in the Proposed Roadmap. Hiring an audit firm such as KPMG or PWC to furnish the
services they provide is part of that investment that is required in order for U.S. issuers to make
the related changes necessary in their systems, accounting, other operational processes, internal
controls, and contracts to comply with IFRS. KPMG also mentioned how they “believe that
when consistently applied, the use of a single set of high-quality, globally–accepted accounting
standards would increase comparability of financial information among companies, and could
foster more effective and efficient allocation of capital on a global basis.”
 While I do believe that a single set of high-quality, globally-accepted accounting
standards would increase comparability, I am strongly against speeding up the process of
adaptation for U.S. issuers to IFRS. IFRS is a fairly new system and no one truly knows how it
will affect U.S. companies or how it will be able to adapt to different industries and different
economies throughout the world. US GAAP is a rules based system that is able to adapt to the
needs of different industries and the needs of the US economy. IFRS is a principles based system
that may not be able to adapt the way US GAAP is able to. Although I am very skeptical about
the new IFRS system, it is a change that is going to happen in the years to come.

I believe that the process that the US government should use in converting to IFRS is one
of convergence and not of mandatory change. KPMG feels that the projects necessary for
“mandatory” completion are: financial instruments, fair value measurements, revenue
recognition, and financial statement presentation. While these projects are necessary, there are
many others such as leases, liability and equity distinctions, consolidations, etc. that need to be
considered before a mandatory convergence is decided. The IASB and FASB need some more
time to converge and wait until they can come up with a standard that will provide equivalent
financial statements with comparable information. There are still many changes between IFRS
and US GAAP that need to be addressed before there can be any mandatory convergence. The
need to adopt IFRS is a large long term cost for many companies and is something that needs to
be completely thought out, analyzed, and reviewed, before setting it as the one and only
standard.
Natalie Bello
October 27th, 2010
Homework 1 – Part 2
A. What is the academic opinion based on research conducted about the convergence of
IFRS and US GAAP.
The academic opinion based on the research conducted about the convergence of IFRS
and US GAAP is that the International Accounting Standards Board (IASB) and the Financial
Accounting Standards Board (FASB) should continue to work together to move to an
international set of financial reporting standards. This would be done through continued
convergence of U.S. GAAP with IFRS. The academic opinion suggests that the two boards
continue this method of convergence the standards so that the SEC can review and reevaluate the
adoption of IFRS. The main goal is to come up with an international set of financial reporting
standards that provide equivalent financial statements with comparable information.

B. What does academic research tell us about the quality of IFRS?

The results of the academic studies performed suggest that IFRS does reflect a high
quality set of standards, but, it is not clear if mandatory adoption of IFRS alone leads to
information environment benefits. It is also not clear whether improved liquidity and accounting
quality will be beneficial to the U.S.’s adoption of IFRS. Most of the studies examine IFRS
adoption relative to non-U.S. domestic standards; so it is very difficult to conclude if the U.S.’s
mandatory or voluntary adoption of IFRS will yield the same results.

Research shows that IFRS reflects a higher quality than non-U.S. accounting standards
and that it is similar or of lower quality when compared to U.S. GAAP. The results also suggest
that the stock market effects of mandatory adoption of even a higher quality set of standards
might be minimal. In general, research finds that accounting quality improves when IFRS is
adopted; however, enforcement levels vary across countries and this may affect the impact of
IFRS on accounting quality. The improvements are greatest for companies that have incentives
to provide higher quality earnings, voluntarily switch to IFRS, and in countries where earnings
quality had been poor. Given the high quality nature of U.S. GAAP, the question of whether the
documented capital market benefits of adopting IFRS will extend to the U.S. is left an open
question. It is not clear that IFRS reflects a set of accounting standards that are equivalent or
greater quality to U.S. GAAP in the U.S. markets.

C. What does academic research tell us about the state of convergence of IFRS and US
GAAP?

The evidence suggests that U.S. companies may benefit from convergence of U.S. GAAP
with IFRS given that IFRS has been adopted by over 100 countries and may be the familiar
standards for an increasing number of investors. Therefore, convergence of accounting standards
with IFRS may increase foreign investment in U.S. companies.

Beneish, Miller and Yohn (2009) find that there is an increase in foreign investment in the
countries that adopted IFRS and an increase of foreign participation in those countries’ debt
markets. In addition, the authors find that there is an increase in foreign investment and
participation in the debt markets for countries with weak enforcement and investor rights before
their IFRS adoption. These results suggest that there are little to no benefits to equity markets
and that improved financial reporting is the main benefit that appears to drive the increased
foreign attraction to debt markets after IFRS adoption. These results suggest that IFRS adoption
may provide negligible benefits to the U.S. in terms of attracting foreign investment.

Until greater convergence is achieved, adopting IFRS is likely to create important obstacles
for preparers and users of financial statements. Educators and accounting professionals might not
be well prepared for a near term adoption of IFRS. If the FASB and IASB continue with
convergence activities, then universities, companies and financial statement users will have the
necessary time to prepare for such a transition.

Although, maintaining two boards until convergence is achieved might be a good strategy,
academics have provided some insights into potential costs of convergence to IFRS rather than
adoption of IFRS. The need for each Board to maintain its existing literature, different political
pressures faced by each board, different priorities, and different levels of detailed guidance can
create differences in standards even when convergence is the goal. This suggests that even when
a single set of standards is a goal, convergence rather than adoption creates some obstacles.

D. What is the overall conclusion of the AAA committee about adoption of IFRS based on
their review of academic literature.

The overall conclusion of the AAA committee about adoption of IFRS is that convergence of
IFRS and U.S. GAAP is in the best interest of U.S. companies in the long run as long as it
provides greater comparability, yields equal or high quality standards, and attracts investment
from a wider population of investors. Both sets of standards represent a high quality set of
accounting standards in terms of mitigating information asymmetry and providing information
important for valuation. However, U.S. colleges and universities are not ready to teach their
students about IFRS at the level that it is needed. There have been a lot of downturns in the U.S.
economy recently that have inundated companies with costly accounting regulation. Near term
adoption of IFRS could exacerbate this volatility and costliness. While material differences
between IFRS and U.S. GAAP exist, convergence of the two sets of standards is currently
occurring via the joint standard-setting activities of the FASB and the IASB.