The SEC is considering proposals regarding the accounting principles companies may use for their financial statement filings. The SEC could require that U.S. companies use only U.S. GAAP in their financial statement filings. Alternatively, the SEC could allow, or even require, U.S. companies to use IFRS in their financial statement filings. Many issues and complexities surround the use of IFRS. The SEC must consider these and many other issues as it deliberates whether it should continue to require the use of U.S. GAAP or whether it should require the use of IFRS.
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Required:
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Identify and discuss three of the potential problems to be considered by the SEC in deliberating these proposals.
What will be an ideal response?
Note: Six issues are discussed below. Three should be selected and discussed.??
| 1. | Many U.S. companies (particularly smaller ones) filing with the SEC do not operate globally, so they would not see any advantage when using IFRS. If IFRS were required, it would likely be very costly for them to switch from U.S. GAAP to IFRS, thereby affecting profitability during the conversion period. |
| 2. | If IFRS were allowed rather than required and some regulated companies did not switch to IFRS, there would be differences between the financial statements of regulated companies that used U.S. GAAP and those that used IFRS. These differences potentially affect the ability of investors and creditors in comparing companies. |
| 3. | Most U.S. corporations are small companies and do not issue publicly traded securities; therefore, they are not regulated by the SEC. These corporations would likely continue to use U.S. GAAP in preparing their financial statements. A switch to IFRS for regulated U.S. companies would create a "dual-GAAP" system in the United States. |
| 4. | Accountants, auditors, and financial statement users would have to be trained to understand the impact of IFRS on the preparation of financial statements for companies using these standards. |
| 5. | If U.S. companies have subsidiaries operating in foreign countries, they may be required to prepare their subsidiaries' financial statements according to IFRS for local filings and still have to prepare their financial statements using U.S. GAAP when filing with the SEC; this would create costly inefficiencies. |
| 6. | Many companies have entered into contracts based on U. S. GAAP. (For example, companies may have borrowed money with "debt covenants" based on U.S. GAAP that restrict their financing activities.) A shift to IFRS may require renegotiating these contracts. |
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