Background Of Convergence Of Us Gaap And Ifrs Accounting Essay


The Financial Accounting Standards Board and the International Accounting Standards Boards are attempting to converge US Generally Accepted Accounting Standards (GAAP) and International Financial Reporting Standards (IFRS) in order to create a single set of high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting which is known as 'The Norwalk Agreement'. The convergence efforts have focused on coordinating standard setting and reducing differences in accounting standards. However due to certain reasons the convergence projects was not completed and have been delayed. The FASB and IASB reaffirmed that development of a common set of high quality global standards remains a strategic priority of both FASB and IASB. FASB and IASB later issued a Memorandum of Understanding (MoU) which was based on three principles. In developing MoU, the Board agreed on priorities and established milestones to complete major joint projects and short-term convergence projects as the work plan. However, either the convergence of US GAAP and IFRS successful or not are based on the completion the projects. The purpose of this report is to address what convergence is, the background of the convergence, advantages and disadvantages of convergence, the rule-based versus principle-based arguments, followed by the role of standard setters, the global adoption of IFRS and also joint work projects of the convergence of US GAAP and IFRS, continued with the conclusion of the overall convergence of US GAAP and IFRS.

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In October 2002, FASB and IASB formalized their commitments to the convergence of US GAAP and IFRS by issuing a Memorandum of Understanding called 'The Norwalk Agreement'. The two boards use their efforts to make their existing financial reporting standards fully compatible as soon as is practicable and to coordinate their future work programs to ensure that once achieved, compatibility is maintained. Compatible means two sets of standards do not contain conflicts. Existing standard in US is more detailed than IFRS. Moreover each set of standards is an integrated body with numerous cross-references, links to other bodies, links to auditing and other professional literature. The FASB 's scope of responsibility includes non-profit entities and IASB focusing on business entities.


Investors have demand for international convergence because they want a high-quality and comparable financial information which makes global capital markets easier to make decision. Due to this, Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) started working together in 2002 to unite the two accounting methods to bring Generally Accepted Accounting Principles (GAAP) towards compatibility with International Financial Reporting Standards (IFRS). The agreement was issued at the FASB's headquarters in Norwalk, Connecticut, and was documented in a Memorandum of Understanding titled 'The Norwalk Agreement'. According to the Norwalk Agreement, the FASB and IASB each acknowledge their commitment to the development of the convergence is a single set of high-quality, compatible international accounting standards that can be used by both domestic and cross-border financial reporting through the collaborative efforts by the FASB and IASB to improve US GAAP and IFRS and eliminate the differences between them. In 2006, the FASB and IASB issued a Memorandum of Understanding (MoU) that describes the progress hoped to achieve towards convergence by 2008. In 2007, the Securities and Exchange Commision (SEC) eliminated the requirement to include a reconciliation of IFRS to US GAAP in their financial statements for foreign companies who issue stock in the United States (US). In 2008, the Boards plan to accelerate the convergence of US GAAP and IFRS and SEC proposed a Roadmap that the Boards should aim to achieve a single set of standards. By 2015, this Roadmap planned to have a completed project but due to complications it has been delayed. The complication for the delay was because US GAAP uses rules-based approach for their accounting standards which sets specific rules to be followed to comply with the regulations while the IFRS uses principle-based approach which has a few rules and guidance on how to implement them. An ethical professional requires to represent the principles for the financial statements fairly and accurately. In 2009, FASB and IASB confirmed their commitment to convergence, to complete the major joint projects described in the MoU, and committed to making quarterly progress reports on these major projects presented on their websites. As a further declaration of that commitment, the Boards allotted a joint statement describing their plans and milestone targets for achieving the goal of completing major MoU projects by mid-2011. In 2011, the FASB and IASB issued a first-quarter progress report on their work to develop and achieve convergence of US GAAP and IFRS and decided to modify their joint work plan. The FASB and IASB distributed a quarterly joint progress report that describes the modified work plan and also issued a quarterly progress report on the status of their work to complete the MoU. The progress report defines the Board's affirmation of the significances and also describes how the Board's modified aspects of their strategies for other projects to put them in the best position to complete the priority projects. In 2011, FASB and IASB reported on their progress toward completion of the convergence work program. The Boards were giving priority to three remaining projects on their MoU. The Boards also agreed to extend the timetable for those priority projects beyond june 2011 to permit further work and consultation with stakeholders in a manner consistent with an open and inclusive due process.

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Use of one common global reporting standards. Allow for comparability over all financial markets, regardless of the country of origin will have better information for decision making. Applying accounting principles will be more flexibility for companies. IFRS uses principles-based and GAAP uses rules-based whereas transactions required to be reported using substance over form criteria. To lead to a better disclosure, more professional judgment will be exercised. A large, multinational company that prepares different sets of financial statements in many different forms has potential for reduced financial reporting complexity. All levels of management will be more involved in financial reporting and aware of transactions and the companies should be more efficient and have the advantage of cost-savings.


IFRS can be adopted by small companies that have no dealings outside of US unless mandated. Companies claim to convert IFRS may arise incompatibility but in reality only selected portions can best fit their needs. There is no incentive for early adoption due to the fact that it could be a waste of time and resources. If IFRS is not adopted, companies will be required to have two sets of records, which is GAAP and also IFRS. During financial crisis, conversion of magnitude is too much to ask of executives and management. Two sets of books, both GAAP and IFRS need to be maintained a minimum of two years of financial information to meet requirement of financial statements to obtain three years of financial data. All the above will come to fruition in a single set of high quality standards that would decrease cost, increase efficiency and provide better information for investors.


There are arguments that both US GAAP and IFRS are principles based and US GAAP are based on set of principles that is recognized from FASB's conceptual framework. US accounting standards typically are written to operationalize the FASB's underlying conceptual framework are based on principles. US GAAP utilizes an 'incremental perspective' which rules are added to a standard increase the standards precision and its complexity. Rules-based are defined as specific criteria, examples, scope restrictions, exceptions, subsequent precedents, implementation guidance and etc. While both regimes may be principles-based, US GAAP typically incorporates many rules.

Arguments over rules-based versus principles-based standards is potentially moot unless it shows the regimes result in different reporting/disclosure outcomes. IFRS adoption in US revolves around lack of specificity associated with principles-based standards been criticism, and there are also arguments that less guidance and greater judgment will likely result in more diverse interpretations, treatments, and practices. Financial reports are more useful and more comparable across firms, industries and countries to help generate a high-quality standards based on principles instead of rules. General principle and calls for judgment in application is concise which necessarily vary across individuals and situations, giving rise to greater variability in application than a more detailed rule-presumably calling for less judgment will generate. Lack of specificity can raise volatility in reported accounting numbers. Consistency and comparability problems with principles-only standards and rule-based standards was acknowledges and discussed in the study on the adoption of principles-based acoounting standards.

Principles-only standards may present enforcement difficulties and rules-based standards often provide a vehicle for circumventing the intention of the standard. The SEC expressed that either too much guidance or little guidance can reduce the usefulness of financial statements to users. SEC also express that rules-based standards lead to poor reporting quality which tend to emphasize form over substance. Whereas principles-only standards as interpretations of the principles vary across time and companies hurt comparability and consistency. It is believed that use of regulatory context is not appropriate for principles-based standards that lack of specificity and they are of limited enforceability by design.

Arguments suggested that different accounting regimes will lead to different accounting outcomes. Former chairman of the International Accounting Standards Board (IASB), Sir David Tweedie asserted that world does not want a volume of guidance, where US GAAP is over 25000 pages and IFRS are just over 2500 yet the results are not far away. Different approaches to standard setting (i.e. principles-based versus rules-based) yield outcomes are essentially similar across reporting regimes which is made without appropriate support from specific empirical evidence. Research to explore whether principles-based standards lead to qualitatively and quantitatively different accounting outcomes when compared to rules-based standards has recently began.

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International Accounting Standards Board (IASB) is an independent private-sector body that develops and approves International Financial Reporting Standards (IFRS). The IASB operates under the oversight of the IFRS foundation. IASB formed in 2001 to replace the International Accounting Standards Committee (IASC).

IASB has responsibility for all technical matters of the IFRS under IFRS Foundation Constitution including: (a) Bound by certain consultation requirements with the Trustees and the public, full caution in developing and pursuing its technical agenda, (b) Preparation and issuing of IFRS's (other than interpretations) and exposure drafts, following the due process stipulated in the constitution, (c) Issuing and approval of interpretations developed by the IFRS interpretations committee.


FASB is an independent, self-regulatory board that establishes and interprets generally accepted accounting principles (GAAP) operates under the principle that the economy and the financial services industry work smoothly when credible, concise, and clear financial information is available. FASB periodically revises its rules to make sure corporations are following its principles. The corporations are supposed to fully account for different kinds of income, avoid shifting income from one period to another and properly categorize their income.


The adoption of International Financial Reporting Standards (IFRS) has grown in response to the need to move toward global accounting standards. IFRS is used in over 100 countries as the primary accounting standard in the preparation of external financial reporting. Standard setters have three options in developing convergence of standards. The first option is opt for a FASB standard, second would be use an IFRS standard and the third option if both are inadequate; they may develop a completely new rule. In one case, they decided to converge on IFRS standard to a US GAAP (Discontinued operations) standard. After reviewing FASB, the standard setters decided that FASB was the preferable standard. As a result, IASB issued IAS which generally converged with FASB. In another case, a US GAAP standard converged to an IFRS standard and the standard setters decided that IFRS was superior to past US GAAP. In the third case, to develop a new standard and approach, standard setters are jointly working.

For example FASB and IFRS standard setters were unable to converge on the handling of extraordinary items. Movements towards IFRS resolution to be converged are more likely to adopt a simpler or principled based solution. Therefore, many areas of accounting standards remains to be comprised and converged. Measurement of interpretations including IFRS standards as compared to US GAAP, most of it are more broad and principle based US standards has strong regulatory and legal requirements and also underlying principles. A more prescriptive approach to financial reporting required in the US as a result of the existing standards environment and enforcement and differences in implementation will make financial statements appear more uniform than they actually are in various countries.




Borrowing costs

IASB reissued IAS 23 Borrowing Costs in 2008

Discontinued operations (IASB only)

The IASB issued IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations in March 2004

Fair value option for financial instruments (FASB only)


Government grants

Work on this project has been deferred


Work on this project has been deferred

Income taxes

This project is currently on hold

Investment properties

The FASB is actively working on this project

Joint arrangements

IASB issued IFRS 11 Joint Arrangements in 2011

Research and development (FASB only)


Segment reporting

IASB issued IFRS 8 Operating Segments in 2008

Subsequent events (FASB only)

Major joint projects



Business combinations

Converged standards issued in 2008

Conceptual Framework

This project has been partially completed. Work on further phases is currently on hold


Converged standards issued in 2011


This project is ongoing

Fair value measurement

Converged standards issued in 2011

Financial instruments

This is a high-priority project of both boards and work is currently under way This project compromises a number of projects, some completed and some under way

Financial statement presentation

The comprehensive project is currently on hold. Some amendments to existing requirements have been made in relation to the presentation of the statement of comprehensive income

Insurance contracts

This is a high-priority project of both boards and work is currently under way

Intangible assets

The IASB and FASB decided in 2007 not to add this project to their joint agenda


This is a high-priority project of both boards and work is currently under way

Liabilities and equity

This project is currently on hold

Post-employment benefits

Work on the comprehensive project has been deferred

Revenue recognition

This is a high-priority project of both boards and work is currently under way


The world of accounting is changing rapidly. Many multinational companies have reached a level where foreign sales revenues exceed domestic revenues earned. Many comment letters sent to the SEC indicates that there are still have many differences between IFRS and US GAAP need to be resolved. Accounting standards are frequently updated so that they can continuously improve. The overall conclusion is that it is both timely and necessary to converge and harmonize IFRS and US GAAP into a single set of Global Accounting Standards which lead to a more stabilized and prosperous world economy and it will help to resolve many of the worlds financial reporting problems.