Should the US adopt IFRS? The question isn't whether global accounting standards are better than U.S. GAAP or vice versa, but whether U.S. investors and domestic companies should be forced to drive on the other side of the road from the rest of the world.

• Author: Anderson, Aaron
• Position: International Accounting - International Financial Reporting Standards

As the U.S. Securities and Exchange Commission prepares to decide this year about whether and how to incorporate International Financial Reporting Standards into the United States financial reporting system, constituents continue to discuss what option would be best suited for the U.S. Some argue that U.S. generally accepted accounting principles provides high-quality, decision-useful information to users of financial statements in making various economic decisions, and doesn't need to change a system that is not broken.

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Others argue that U.S. GAAP is simply better than IFRS, as it provides higher-quality information and gives the U.S. capital markets an informational advantage. Still others believe the implementation costs to convert from U.S. GAAP to IFRS would be prohibitive particularly now, as the U.S. has hit snags in its economic recovery.

These and other arguments usually focus on whether U.S. GAAP is better than IFRS or vice versa--as if deciding whether driving on the right or left side of the road is better. While there are various opinions on this IFRS debate, they are usually narrowly focused and do not consider the bigger picture, which is looking beyond merely comparing the two systems, and instead examining IFRS in the context of the global economic environment.

The Global Economic Environment

The global economy has gone through different phases of evolution, with one phase setting the stage to propel the next. Notable phases include the Industrial Revolution, the period after World War II and the current Information Age. The Industrial Revolution started in Britain in the 18th century and later spread across the rest of Europe and to America.

Its economic growth was unprecedented, fueled largely by technological advancement in production, transportation and communication. The technological advancement in this era set the stage for the growth and expansion of trade among countries for decades.

Economic growth came to an abrupt halt after World War I, due to protectionist and retaliatory economic policies. The Great Depression exacerbated economic issues as international trade plummeted and capital flow was halted. The declines seen during the Great Depression reversed in the post-World War II era, due largely to the financial reforms that favored trade liberalization as a catalyst, to global economic expansion.

Subsequently, several of the world's economies saw significant growth and expansion in the next three decades. The technological advances late in the 20th century through present day--the Internet, mobile communication technology and advanced transportation networks--have further fueled economic growth through rapid integration of the world's markets.

The Globalization of Capital Markets Domestic Market Capitalization Source: World Federation of Exchanges End 2001 End 2009 United States 14(25%) 15(31%) Americas (Excluding the U.S.) 1(4%) 4(8%) Europe, Africa and Middle East 8(30%) 14(29%) China 1(1%) 6(12%) Asia Pacific (Excluding China) 3(13%) 10(20%) Note: Table made from pie chart Today, even though political boundaries that...