Session 11 - IFRS (Essay)

Question 1

IFRS - Differences

Answer 1

• Another key difference is the lack of industry-specific rules under IFRS (banks, insurance firms, oil & gas etc.)
• IFRS is principles-based whereas GAAP is rules-based

Question 2

Reporting Incentives (LEC MOCO)

Answer 2

Shaped By:
Legal institutions (common law vs. code law)
Enforcement regime (SEC, auditing etc.)
Capital market forces (investor vs. bank financing)
Market competition
Compensation policies
Ownership and governance structure
Other factors

Question 3

Move to IFRS

Answer 3

• Moving to IFRS is not enough to produce comparability of reporting and disclosure practices, even if these standards are strictly implemented and enforced.
• The reporting incentives that were at play in the U.S. before the adoption of IFRS will still be at play after switch.

Question 4

Benefits

Answer 4

• greater market liquidity, a lower cost of capital, and better allocation of capital
• MNCs: avoiding costly dual reporting under US GAAP and IFRS
• Large firms served by Big 4 auditors: possibly lower audit fees due to less complexity and effort needed

Question 5

Costs

Answer 5

• the short-term costs of transitioning to a new system
• Delayed or non-adoption of IFRS can have recurring costs for firms and investors as well

*net effect for a given company or the U.S. economy is not obvious.

Question 6

Politics

Answer 6

• The adoption of IFRS is not just an economic but also a political issue.

Question 7

Potential Consequences

Answer 7

• Implications for lack of competition among standard setters
• Political ramifications of IFRS adoption in U.S.