International Financial Reporting Standards (IFRS) aim to replace each country’s national Generally Accepted Accounting Principles (GAAP) for consistency in financial reporting, but drawbacks include lack of detail, adoption costs, and perception of being a lesser standard. Some countries, like the US, have reservations due to the sacrifice of detail and the high cost of implementation.
International Financial Reporting Standards (IFRS) are an accounting methodology for preparing financial statements. This set of standards is designed to replace each country’s national Generally Accepted Accounting Principles (GAAP) so that the financial statements of any corporation around the world can be evaluated based on the same set of accounting principles. Although global standardization of accounting standards has many benefits for international business, it also has some drawbacks, particularly for countries with well-established GAAP. Disadvantages of IFRS include a lack of detail, significant adoption costs, and the perception that IFRS is a lesser standard than already exists in some countries.
Investors, regulators, employees and the general public rely on the financial reporting system that requires corporations to disclose details of their financial position each year. This information should be presented in a uniform manner that allows reviewers to compare the information against industry standards. To ensure standardization of financial reporting, each county’s accounting industry adopts GAAP which governs the proper manner for accountants to present financial information on behalf of businesses.
When a corporation operates only within its own borders, National GAAP is an appropriate guide for financial reporting. With the globalization of markets and the rise of the multinational corporation, many companies have found it difficult to provide standard GAAP-conforming information in one country without violating GAAP in another. The International Accounting Standards Board (IASB) has promoted the adoption of IFAS that would apply worldwide and allow for consistency in financial reporting, regardless of where the corporation is located.
Although many countries have adopted IFRS, there are significant reservations. For some countries, some of the disadvantages of IFRS outweigh the current benefits. The most significant example of a country where the drawbacks of IFRS have impacted and delayed the transition to global accounting standards is the United States.
Arguments about the disadvantages of IFRS in the United States point to the fact that IFRS is less detailed than US GAAP. In an effort to achieve global standards that are acceptable to all, the IASB has had to sacrifice a level of detail that national standards currently enjoy as a result of the process of refining the standards over time. Additionally, US GAAP is considered the gold standard of financial reporting. There is little incentive in the US and in countries like Canada to adopt what some consider a lesser standard for the sake of global consistency.
Other significant disadvantages of IFRS refer to the cost of implementation. The accounting profession in each country adopting the new standards would have to bear the cost of re-education and training. Corporations would also have to invest time and resources in the reeducation process. Another problem is the cost for corporations that only operate nationally. The cost to these corporations of switching to IFRS far outweighs any benefit.
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