The world is rapidly shrinking by means of expanding globalization. There is a noticeable worldwide move towards globalization that is naturally involving capital markets. This is just the beginning of this beneficial business trend and immediately a major setback raises concern. Financial statements worldwide are prepared using different rules and standards varying from country to country. This fundamental issue has made very apparent the necessity to establish a universally used method of reporting that will allow for easy comparison and understanding of financial statements in all countries. The solution has already begun brewing. A common set of standards, called International Financial Reporting Standards (IFRS), has been developed and is currently being used in other countries. The implementation of International Financial Reporting Standards will have a positive effect on United States companies by increasing investor’s interest and generating new opportunities for private companies. However, IFRS will negatively impact these companies if they are not attentive and responsive to the changes taking place.
An informed investor has the ability to make an informed assessment of an investment. Very few, if any, investors would willingly dive blindly into an investment. With the differentiation that currently exists in global financial statements, a small number of potential investors would have knowledge substantial enough to comprehend the diverse and dissimilar statements provided. This factor is inhibiting investments that would otherwise take place; therefore decreasing the capital a company would receive, and inevitably restricting its full potential. U.S. businesses are at a disadvantage due to the opportunities that are missed by the incapacity to draw the attention of foreign investors and prospective mergers and acquisitions. The time consuming and difficult conversion of financial statements required for mergers and acquisitions are very unattractive with current standards placing a constraint on moving forward quickly in such instances. A decrease in cost will result for companies looking for investors in foreign countries because they will not have to use their resources on converting their financial statements.
It is essential for companies to begin preparing for IFRS now. Perhaps a full understanding of the new concepts and rules is unnecessary at the moment, but basic knowledge of the fundamental aspects of IFRS is a benefit that most companies do not have. Educating employees now will give companies a competitive advantage among other U.S. companies. Early introduction will appropriately prepare them for the global competition that will have a large lead on best ways to use and put together these statements. Although the date that the switch from U.S. GAAP to IFRS continuously gets pushed back, there are still good reasons to become acclimated with IFRS. U.S. is lagging behind many countries in the change, which naturally develops the need for informed accountants and employees when conducting business internationally. The unavoidable financial burden that will occur during the switch will be less significant if education begins sooner because the cost will be able to be spread out over a longer period of time. IFRS also allows for a separate filing for private companies, called IFRS for Small and Medium-sized Entities. IFRS for SMEs decreases the amount of money these companies will have to spend on preparing their financial statements because it does not involve as many specifics as the regular IFRS does. The less time needed to prepare financial statements, the less money needs to be spent on having them prepared.
The longer private and public companies take to learn about IFRS, the more opportunities will be missed. Investors will turn to other companies in the U.S. or other countries that are willing to or already use IFRS. International business will continue to have barriers even for opening subsidiary companies abroad and for purchasing supplies from companies in other countries. The U.S. will be at a huge disadvantage when operating internationally. Over 100 countries already require IFRS when reporting financial statements. As the U.S. continues to postpone the change from U.S. GAAP to IFRS they are putting all U.S. companies at an extreme disadvantage. It is allowing smaller countries, that were previously nonthreatening, to have a lead in the inevitable completely global market. It is left up to the companies to take it upon themselves to remain abreast with the changes that they will be presented with and to stay current with the attempt to universalize financial reporting standards and simplify globalization. Despite their own government crippling opportunities and restricting their ability to be competitive internationally, U.S. companies need to acknowledge the affects IFRS has on the U.S. as well as global businesses. The change is undeniably going to occur at some time. The question is when. If the government will not position its corporate industry to succeed, it is left up to the firms to act in order to do so, or not to act and be outdated and unprepared.
Morgan Quinn
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