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Convergence Between GAAP In the United States and IFRS

Background

Financial Accounting Standard Board (FASB) was established in 1973. The main role of the board is to develop standards. The operations of the board are independent of businesses or other organizations in the business environment. The standards set up by the board guide in the preparation of the financial reports for the nongovernmental companies. The board develops and maintains GAAP. Further, the board maintains the Accounting Standards Codification. The Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants (AICPA) grant the standards prepared by the board authority (Financial Accounting Standards Board 1).

On the other hand, the International Accounting Standards Board is charged with the responsibility of setting accounting standards. The board comes up with and publishes the IFRS. It also develops IFRS for SMEs and approves the interpretations that are developed by the IFRS interpretation committee. The board uses a participatory approach in developing the standards. It engages various stakeholders globally when coming up with the standards. It follows an open and clear approach in setting the standards. Besides, it publishes all the documentation that relates to the process followed in setting up the standards. IASB belongs to the IFRS Foundation. The board was set up in 2001 (Financial Accounting Standards Board 1). It is worth noting that the operations of the IASB are funded by the IFRS Foundation.

The aim behind issuing global standards

The main goal of issuing global standards is to improve reporting of the financial information of companies across the world. It ensures that the financial reports of various companies across the world are prepared in a similar manner. Further, the global standards enhance domestic and cross-border reporting for companies. Therefore, global standards benefit the various users of the accounting standards. Besides, global standards enhance the comparability of financial reports prepared by companies across the world. This arises from the fact that all companies across the world follow the same procedure when preparing financial standards. Therefore, it results in a reduction of cost to the users of the financial statements. It also reduces costs that relate to the preparation of the financial statements. The ability to compare the financial reports of various companies across the world enhances international investment because it allows potential investors to interpret the results easily. Further, the global standards improve efficiency in the global market because it results in a reduction of cost and time used for comparing the financial performance of various companies.

Ruled-based and principles-based accounting standards

In the case of rule-based accounting, there is a set of comprehensive procedures and guidelines that institutions must use when reporting the financial results for a given period. Most accountants always prefer to use the rule-based accounting standards because it gives them clear guidelines on how to prepare and interpret financial statements. This minimizes the possibility of litigation and fines. Further, rule-based accounting standards enhance the level of precision in reporting. This minimizes uncertainty in the preparation of the financial statements of the company. On the other hand, the intricate nature of rules makes them not suitable for use. This may be a challenge to the users of the financial statements.

On the other hand, accountants use principle-based accounting as a theoretical basis when preparing the financial statements of the company. In this case, objectives (not rules) are provided to facilitate good reporting. The principles-based accounting is provided to supplement the rules because the rules-based accounting standards cannot be applied at all times. One advantage of principle-based accounting is that it creates flexibility when preparing and reporting financial statements. Therefore, it can be applied in a range of situations. On the other hand, the principle-based accounting standards generate accounting reports that are difficult to compare. This occurs when the management of an organization applies different interpretations of the standards when preparing the financial statements. This may result in unpredictable and varying information (Financial Accounting Standards Research Initiative 1).

The IFRS is principles-based while the US GAAP is rule-based. The difference between the two models can be supported by some examples. For instance, “when carrying out consolidation, IFRS favors a control model while GAAP prefers the risks-reward model” (Forgeas 1). Secondly, “when presenting the statement of income, IFRS outlines that the extraordinary items should not be segregated in the income statement while under GAAP; the extraordinary items are presented below net income” (Forgeas 1). Finally, “in the valuation of inventory, LIFO is used under IFRS while LIFO and FIFO are used under GAAP” (Forgeas 1).

Convergence between US GAAP and IFRS

The process of convergence between the US GAAP and IFRS began in 2002. The IASB and FASB have been working together to ensure that the differences between IFRS and GAAP are removed or reduced (Warren 283).

Pros and cons of convergence between US GAAP and IFRS

There are several advantages and disadvantages of the convergence between US GAAP and IFRS. First, the management will gain from the simple rules that can be applied across the world and it will lower the cost of doing business. Besides, it will enhance capital creation. However, it will be quite costly for the company to implement the new rules. Secondly, investors will gain the ability to understand the simple rules that are applicable across the world. This will improve their ability to relate the results of a number of entities across the world. It will further enhance the flow of capital across various countries. However, the investors will have to learn the new standards (Financial Accounting Standards Board 1). Thirdly, there will be a reduction in the cost of trading in the stock markets because similar procedures and rules will be used across the world. On the other hand, the stock markets will incur a lot of costs in changing over. Further, the convergence will benefit accountants across the world. The accountants will need to learn the new standards and they will be able to apply the new standards consistently across the world. Finally, the convergence of the new standards will be quite costly and time-consuming for the parties involved in setting the standards. However, after developing the standards, the subsequent process of creating and executing new standards will be much easier (IFRS 1).

Joint projects

In the past several years, “the FASB and IASB have worked on joint projects to create common standards” (Financial Accounting Standards Board 1). These projects focus on areas where the two accounting standards differ. The two boards have worked on several projects. The first project is revenue recognition. The guidance provided by GAAP and IFRS on revenue recognition differs. Therefore, “the project aims at coming up with a single and principle-based standards for revenue recognition” (Financial Accounting Standards Board 1). The second project is on leases. The project seeks to improve clearness and comparability among companies. The project suggests that assets and liabilities that arise from lease transactions should be recorded on the balance sheet of the lessee (Financial Accounting Standards Board 1).

Roadmap issued by the SEC

The SEC has advocated for convergence because it will develop new standards that can be used across the world. The policy statement SEC issued in 2003, it stated that the international convergence of the standards is appropriate in the public interest and protection of investors. The SEC stated that common standards will improve financial reporting internationally and improve comparability. The institution came up with a road map to IFRS reporting by the US issuers. The roadmap outlines the milestones that need to be achieved to lead to the use of IFRS, milestones are, “improvement in accounting standards, accountability and funding of the IASC foundation, improvement in the ability to use interactive data, education and training, limited early use of IFRS, anticipated timing of future rule making by the commission, and implementation of the mandatory use of IFRS” (Securities and Exchange Commission 21). The commission finished the implementation of the limited early use of IFRS in the year. The commission is working on a comprehensive review of all the new rules relating to financial reporting. Thereafter, recommendations will be made on the amendments that will lead to the full implementations of IFRS in 2014 (Securities and Exchange Commission 21).

Opinion

The idea presented by the commission that requires US firms to follow IFRS when preparing the financial statements is noble because it is in the best interest of the public and other parties.

Works Cited

Financial Accounting Standards Board 2013, International Convergence of Accounting Standards – Overview. Web.

Financial Accounting Standards Research Initiative 2013, Principles-Based Versus Rules-Based Accounting Standards. Web.

Forgeas, Remi 2008, Is IFRS that Different From U.S. GAAP? Web.

IFRS 2013, Convergence between IFRSs and US GAAP. Web.

Securities and Exchange Commission 2008, Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers. Web.

Warren, Carl. Financial & Managerial Accounting, USA: Cengage Learning, 2007. Print.

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OctoStudy. (2022, March 23). Convergence Between GAAP In the United States and IFRS. Retrieved from https://octostudy.com/convergence-between-gaap-in-the-united-states-and-ifrs/

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OctoStudy. (2022, March 23). Convergence Between GAAP In the United States and IFRS. https://octostudy.com/convergence-between-gaap-in-the-united-states-and-ifrs/

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"Convergence Between GAAP In the United States and IFRS." OctoStudy, 23 Mar. 2022, octostudy.com/convergence-between-gaap-in-the-united-states-and-ifrs/.

1. OctoStudy. "Convergence Between GAAP In the United States and IFRS." March 23, 2022. https://octostudy.com/convergence-between-gaap-in-the-united-states-and-ifrs/.


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OctoStudy. "Convergence Between GAAP In the United States and IFRS." March 23, 2022. https://octostudy.com/convergence-between-gaap-in-the-united-states-and-ifrs/.

References

OctoStudy. 2022. "Convergence Between GAAP In the United States and IFRS." March 23, 2022. https://octostudy.com/convergence-between-gaap-in-the-united-states-and-ifrs/.

References

OctoStudy. (2022) 'Convergence Between GAAP In the United States and IFRS'. 23 March.

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