So in this analysis, the identified group for whom the incremental analysis is performed is most definitely U.S. investors. It is likely that if another group were identified, such as corporate executives or partners of large auditing firms, then the incremental analysis would lead to different results. Never-the-less, the Securities and Exchange Commission was created to bring order to U.S. securities markets and to protect investors. Therefore, investors is the group that matters today.
The two key characteristics of the current system of financial markets related to companies following U.S. GAAP, pertain to the corporate cost of capital and investor return. First, companies seeking capital in the U.S. incur the lowest cost of capital in the world. Second, U.S. investors reap the highest expected returns on their investment when compared to any other world financial markets.
Many believe that having good accounting rules is a fundamental reason for why it works so well. That we have good rules (better than any other set ever created) results from a process that has evolved over the years. Essentially, many U.S. executives that run corporations will bend/break/disregard any rule that gets in the way of reporting numbers the executives want reported. U.S. auditors have had little success over the years in getting companies to report good faith, honest numbers. There have been cycles of prosecutors taking company execs to court, courts requiring more specific rules for convictions, and then rule makers tightening the rules. It is frequently said that American accounting rules now have many “bright lines” that companies must absolutely follow when they prepare financial statements. The entire system of compliance and jurisprudence has resulted in the U.S. making very expensive investments in creating the accounting rules.
IFRS rules, while a step up for many (or even most) of the countries that have adopted them, actually represent a step backwards for the U.S., at least in the bright line department. Supporters of IFRS say the bright lines are not needed because company execs are supposed to do what is right. Sure. What universe do they live in? Certainly not mine. Certainly not the good ole U.S. of A. There are exceptions, such as the reporting for contingencies, but for the most part it is U.S. GAAP that has bright lines and IFRS that doesn’t. Consequently, companies that use IFRS get to massage their numbers, and reported earnings are at least 10-15% higher on average under IFRS than GAAP. All of this is indisputable scientific fact.
To make a long story very short, if the U.S. switches from GAAP to IFRS, the market values for stocks and bonds are going to go down. The amount of decline is one of the additional costs to put into the benefit/cost frame work. How much? I tried to build a contraption or model, but it contained so many assumptions it was indefensible. But we need a numbers, so I’ll say approximately $3 trillion USD, could be more or a lot more.
CAclubindia
