A comparison of THE IASB and FASB Boards

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IASB is responsible for the production of a set of high-quality, easy to understand and implement the global accounting standards, and encourage the convergence of these standards. On the other hand, IASB will refer to the FASB board to create a high-quality and easy to recognize the IFRS. In addition, most of the IFRS's companies from around the world prepare its financial statements. Therefore, FASB is the most significant partner with IASB. On the other hand, U.S. GAAP has developed the FASB or FASB of the listed companies. In 2005, IASB and FASB both announced their commitment to achieve true convergence of their accounting standards.

In 2002, the IASB and FASB both issued a memorandum of understanding known as Norwalk Agreement, a formal commitment to the convergence of US and international accounting standards. At that meeting, both the FASB and IASB promised to use their best efforts to make their existing financial reporting standards completely compatible as soon as is practicable and to coordinate their future work plans to ensure that once achieved, compatibility is maintained.

The IASB and FASB devoted to the development of high quality, compatible accounting standards that possibly will be used for both domestic and cross- border financial reporting meaning to make their existing financial reporting standards completely compatible by undertaking a short-term project aimed at eliminating a variety of individual differences between U.S. GAAP and IFRS. Besides that, it also eliminate other differences between IFRS and U.S. GAAP remaining in 2005, through coordination of its future work programs, namely, through the mutual undertaking of discrete, substantial projects which both Boards would deal with concurrently. After that, continue progress on the combined projects that they are presently undertaking and encourage their respective interpretative bodies to coordinate their activities.

The boards agreed that want to eliminate the difference between standards which need a major improvement. On the contrary, new common standards should be developed. Compatible with that principle, convergence work will maintain to proceed on the following two tracks which will be shown below.

Firstly, the boards will achieve a conclusion about whether major differences in focused areas should be removed during one or more short-term standard-setting projects, consequently, the goal is to complete or substantially absolute work in those areas by 2008.

Secondly, the FASB and the IASB will look for to build continued progress in other areas recognized by both boards where accounting practices under US GAAP and IFRS are regarded as candidates for improvement.

Until recently, international accounting practice of business combination was diverse, mainly in allowing the accounting methods and standards used to determine under what circumstances it is appropriate to use a particular method. In 2001, after extensive due process and political struggle, the FASB issued two new standards which are Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. The most important changes to these standards are to eliminate of pooling of interest method and annual impairment test instead of amortization of goodwill.

Shortly after release of these two new statements by the FASB in 2001, the IASB decided to merge the Business Combination project on its agenda. Basically, The project has two phases. Phase I look for the convergence of existing standards on the definition of business combinations, the appropriate methods of accounting for business combinations, the accounting for goodwill and intangible assets acquired in a business combination, and the preliminary measurement of the identifiable net assets acquired in a business combination. The IASB is currently preparing an Exposure Draft arising from the Phase I of the project is expected to be issued in the fourth quarter of 2002.

On the other hand, FASB and the IASB are currently undertaking a joint project to develop the concept and criteria for revenue recognition based on the concept. The Commission published a discussion paper describing the contract in 2008 based on revenue recognition method uses the client to consider model. This model focuses on asset or liability arising from an enforceable arrangement with the customer. In addition, FASB issued a number of arrangements for the delivery of revenue in 2009. This revised guidance is effective revenue arrangements entered or major changes to the 2010 fiscal year beginning on or after. The new guidelines more closely aligned multi-element arrangement accounting requirements, US GAAP and IFRS requirements, through the elimination of undelivered elements, reliable and objective evidence of fair value, and the delivery elements to treat as a separate accounting unit.

One of the major differences is the concept of method. U.S. GAAP is rule-based, whereas IFRS is principle-based. The intrinsic characteristic of a principles-based framework is the possible of different explanations for similar transactions. This situation means that uncertainty caused by speculation and requires extensive disclosures of financial statements. In a principle-based accounting system, interpretation or discussion can be simplified by the standards-setting board, and provide less of an exceptions than a rules-based system. However, IFRS include locations and guidance that can easily be considered as sets of rules rather than sets of principles. At the time of the IFRS adoption which led English observers to comment that international standards were actually rule-based compared to U.K. GAAP that were principle-based. The difference between these two approaches is on the methodology to evaluate an accounting treatment. Under U.S. GAAP, the research is more focused on the literature whereas according to IFRS, on the fact that a more thorough review of model. However, the professional judgment is not a new concept in the U.S. environment. The SEC is addressing this issue that find the proper balance between the "educated" professional judgment, that is suitable, and the "guessed" professional judgment.

The second different is the impairment. If the investor has objective evidence of one of the indicators of impairment specify in IAS 39.59. For instance, the major financial difficulty impairment test is tested as arranged under Impairment of Assets, IAS 36. The completely carrying amount of the investment is tested by comparing its recoverable amount with its carrying amount. In the evaluation of future cash flows for value in use, the investor might use either its share of future net cash flows expected to be generated by the investment together with the proceeds on ultimate disposal of the investment or the cash flows expected to arise from dividends to be received together with the associate company final disposal of the investment funds.

Conversely, the impairment test under US GAAP is different from IFRS. Equity investments are considered to be damage if the depreciation is considered other than temporary. Therefore, it is probable for the fair value of the equity method investment to less than its carrying amount, as long as this decline is temporary. If the determination of other- than- temporary impairment exists, the investment should be written down to fair value.

Finally, although this is not a comprehensive list of existing differences, but these examples provide the impacts on the financial statements and corporate behavior.

The first one is Consolidation which IFRS prefer a control model whereas U.S. GAAP prefers a risks-and-rewards model. Some entities consolidated in agreement with FIN 46(R) might have to be shown apart under IFRS. Secondly, the income statement of under IFRS, non-recurring items are not separate in the income statement whereas under US GAAP are shown below the net income. Besides that, the stock of IFRS cannot approach the historical method of recording the value of inventory, a firm records the last units purchased as the first units sold while according to U.S. GAAP, companies can choice between LIFO and FIFO which is a common method of recording the value of stock. Moreover, the earning-per-share calculation does not average the individual short-term period calculations in IFRS, whereas according to U.S. GAAP the calculation averages the individual short-term period incremental shares. The last one is the development costs. These costs can be capitalized under IFRS if certain conditions are met whereas it is considered as "expenses" under U.S. GAAP.

(Available at: http://www.ifrs.com/overview/General/differences.html)

The idea of converging or changing all of these standards has raised many issues. Many people feel that to merge them would only complicate things further and make problems worse, especially since certain rules are at odds between the two. This also leads to the problem of which types of businesses should be considered and who should be allowed to handle the merger. Other people feel that one or the other should just be dropped entirely; this view is considered to be too drastic and too altering. Regardless of what decision is made, it appears that there is a lot of change on the horizon for U.S. and world accounting.

The first problem faced in the convergence of IFRS and US GAAP which a major problem to changing to IFRS is giving "monopoly status to IASB". This switching may "signal willingness by US to cooperate internationally". On the other hand, U.S. would be ceding power to IASB which would cause some problems. Firstly, IASB would be close to a potentially dangerous monopolist. As the monopolist does not face competition, IASB standards may fall and it would not be corrected. In fact, some member of FASB said that many analysts in the U.S. and overseas found the differences between GAAP and foreign standards very useful. They agree that competition between different sets of standards might lead to better information.

Secondly, U.S.'s accounting power would be undermined. At present, the authorities in the development of accounting standards not only in the FASB, but also with the Congress, SEC and the court precedents. Ceding power to IASB would not only diminish the control of FASB but also that of other authoritative bodies. Even though U.S. has seats on IASB, there are concerns of underrepresentation. Some firms want to have "influence in accordance to America's equity markets, which account for almost half of global market capitalization". Overall, U.S.'s company worry that U.S.'s interests will not be served in addition to they were below FASB.

In addition to studied political and economic implications to the transition, there are some risks even experts can not predict. Agreeing to IFRS has had diverse evidence around the world. Since it has been recognized that U.S. already has higher quality and incomparable public enforcement and that there are many similarities between U.S.GAAP and IFRS, benefits themselves may be limited, where case the costs of transitioning would outweigh the benefits. In a country like U.S. which has one of the largest economies in the world, it is quite difficult to know what the transition will do. IFRS has not been tested in such an environment but U.S.GAAP has been proved through time. U.S.GAAP has been customized, evolving with the changes in the U.S.'s institutional framework. U.S. GAAP has become more "rules-based" according to the demands of the changes. It has been tested during various incidents. Consequently, switching to a new standard from an accepted dependable standard may be worried and making unknown complications.

(Available at: http://www.differencebetween.net/business/difference-between-gaap-and-ifrs/)

In conclusion, the IAS in cross-border investment and capital flows have increased in many parts of the world, In addition, IASB asked FASB board to become an active participant in this process, high-quality global accounting standards. Hope the new leadership, the FASB has been committed to providing substantial resources. IASB has now begun to affect the agenda of the FASB, including international accounting in addition to priority issues. In a growing number of cases, an increase of FASB, a project which will enhance the convergence of their agenda. The current U.S. financial crisis report, the need for better accounting standards acceptable internationally, the new EC regulations require listed companies to comply with IFRS in 2005, it will create a unique opportunity, gathered in a single set of high-quality global accounting standards. These standards will greatly improve the efficiency of global capital markets; lower funding costs improve comparability and enhance corporate governance.