There is an ongoing discussion in the accounting and financial statement industry on which standard—US GAAP or IFRS—is superior and whether the US and other major countries should adopt IFRS, to fuel a need for global comparison. I want to address this subject specifically to the US rather than simply considering which is better. Many people in the accounting field claim that IFRS is better because of its principle-based nature as opposed to the rule-based US GAAP. I argue that US GAAP is the more preferable standard for the US and there should be no adoption because it is a different nation that requires rigid standards to meet the needs of its investors and adhere to the regulations and systems of the country.

The US’s Political and Legal System Differs from Other Countries

Different nations have different markets, levels of governmental influence, and political systems which affect the firms within that nation. Because of this, firms differ across the world in their policies, strategies, industry, technology, etc; this leads countries to enter into transactions that differ substantially from each other(Ball, 2006, para. 16). Accounting standards should work with local institutions and legal systems. Since legal systems differ across countries, contracts will also differ; maybe the accounting standards should differ as well (Byard, 2023). This illustrates that the country should prioritize itself and follow a standard that best fits its needs.

US Investors Should Have Their Needs Prioritized

Financial statements are necessary for them to see which company they should invest in since it provides information about the companies cash flow and other financial information. The US is not very willing to change from US GAAP to IFRS because it is more important to protect US investors’ interests which is a reasonable justification. The SEC (U.S. Securities and Exchange Commission) claims that the IFRS lacks consistent application, allows too much leeway with judgment, and is underdeveloped in many areas. When you compare the IFRS to the US GAAP, the latter has more detailed and accepted guidelines and an established practice as evidenced by their most recent guidance on the presentation of costs related to the revolving lines of credit, and this in turn is beneficial for the US investors(Bogopolsky, 2020, para. 10). The adoption of IFRS will most likely effect investors’ interest negatively and we should preserve US GAAP to prevent that from happening.

Adopting IFRS from US GAAP Will Have a Drastic Impact in the US

Transitioning from one standard to the other will incur many costs and is also very risky because it is unclear whether it will actually improve the quality of the financial statements. To implement IFRS you would need to teach the new standard which is a problem because U.S. colleges and universities are not equipped to teach IFRS if adoption takes place. The picture to the right shows some of the differences between the two accounting standards. In addition to the pricey accounting regulations, companies have been overwhelmed by the changing and difficult economy. The U.S. capital market is extremely volatile, and the adoption of IFRS would have a negative impact on the market by making it even more unpredictable and costly(Bradshaw, et al., 2010, para. 54). This adoption of IFRS will affect the U.S. economy negatively. It would cost a lot for little or no gain (Byard, 2023). If we consider how IFRS will impact a country, as opposed to just a business, then switching to IFRS is not a good idea.

US GAAP Has Been Working Well in the US for a Long Time

It has been made to work with the laws and policies that are in the US. But with IFRS. we are not sure if it will work in the US, and if it does work, will it perform effectively(Selling, 2008, para. 30)? Studies have also shown that when the UK, France, and Australia transitioned to IFRS, the earning management increased in France while staying stable in the UK and Australia. Together the results demonstrated that the switch to IFRS was not a major reason for improvement when it comes to earning quality (Jeanjean & Stolowy, 2008, para 8). Adopting IFRS seems like it might even cause a negative impact because of the possibility of heightening earning management, like what happened in France. Since US GAAP is already a high-quality accounting standard, there doesn’t appear to be many advantages in implementing IFRS in the US.

Rule-Based US GAAP vs Principle-Based IFRS (other’s thoughts)

Some might say that IFRS is the better standard because it is principle-based as opposed to the rigidness of the rule-based US GAAP. The video below shows how a principle-based standard effects financial statements.

IFRS is a principle-based standard that allows space for individual thoughts and interpretations since it’s based on principles, not rules (Mirza, & Nandakumar, 2013, p.4). In contrast, the US GAAP is rule-based where there is no room for change, and is very strict when creating financial statements. The opinions and interpretations can’t stray from the reporting standard of US GAAP (Zarb, 2006, p. 32)(DeGennaro, 2017, p.2).

 Some companies may believe that IFRS is better and should be implemented in the US because, as Carmona and Trombetta (2008) argued, IFRS’s principles-based structure and its concepts of openness and flexibility were key factors in its global acceptance. Globally, many countries have accepted IFRS as their primary accounting standard because of its adaptability and its higher likelihood of catching fraud. IFRS can be believed to have a standard that is flexible enough to adjust to unforeseen economic transactions, yet detailed enough to prevent misrepresentation of economic events (Shamrock, 2012, p.ix). IFRS’s flexibility to handle problems seems to be one of the reasons that it is better and why the adoption should take place.

My Counter Argument

I disagree with their argument that the IFRS is a better standard that should be adopted by the US because its flexibility can cause many different viewpoints and opinions when a problem arises. According to one study, a principle-based standard imprecise rules like IFRS may encourage structured management because of the expectation of compliance uncertainty and error costs. This study highlights the potentially detrimental effects of transitioning to IFRS because of the increased level of earning management(Liu, et al., 2014, para. 64). When managers start getting any form of leeway, there is a higher chance of earnings management. Adopting IFRS raises uncertainty because it allows managers to practice their own judgment when deciding what to report in their financial statements(Albrecht) (Felder-Strauss, 2014, para. 4). This will have a negative impact on the quality of financial statements because of the higher chances of fraud. There is no assurance that IFRS will function in our specific setting even if it has been already adopted by more than 100 countries(Selling, 2008, para. 25). A stricter rule-based standard will be better for the US because it will decrease the chances of fraud or earning management done from managers having too much flexibility. 

Conclusion

The US GAAP is better for the US so the adoption of IFRS shouldn’t take place. An important thing to consider is that the US has different political and legal systems, so the accounting standard that they employ should be compatible with them. Since the US GAAP is working just fine in the US, we shouldn’t change the accounting standard to something that we don’t know the consequences of. We should focus on what would be best for the US instead of trying to adhere to the wants of international companies.