April 13, 2009
Cunningham on GAAP-IFRS Debate
Treatment Differences and Political Realities in the GAAP-IFRS Debate, by Lawrence A. Cunningham, George Washington University Law School, was recently posted on SSRN. Here is the abstract:
The Securities Exchange Commission has introduced a "Roadmap" that describes a process leading to mandatory use of IFRS by domestic issuers by 2014. The SEC justifies this initiative on the grounds that global standardization yields cost savings and an ultimate gain in comparability, facilitating the search for global opportunities by U.S. investors and making U.S. capital markets more attractive to foreign issuers.
This paper enters an objection, noting that the stakes include more than the choice of the framework for standard setting. The accounting treatments themselves are at issue, treatments that for the most part concern domestic reporting firms and domestic users of financial statements.
We present a treatment by treatment comparison of GAAP and IFRS and go on to discuss the differences' implications. FASB maintained its independence during its 35 year history in the teeth of opposition from corporate management, which experienced a steady diminution of its zone of financial reporting discretion.
A switch to IFRS would allow management to reclaim some of the lost territory. Meanwhile, the interest group alignment that protected FASB, comprised of auditing firms, actors in the financial markets, and the SEC, has disintegrated as U.S. capital market power has waned in the face of international competition. Management is the shift's incidental beneficiary, with possible negative effects for reporting quality in domestic markets.
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