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In Laymen's terms convergence can be explained as the convergence of national accounting systems for the purpose of forming one set of global standards for publicly held companies. Convergence has been in the making since September 18, 2002, when a meeting was held between the FASB and the IASB, in which they acknowledged their commitment to the development of high quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting (fasb.org). The commitment by the FASB and the IASB is known as the Norwalk agreement. To achieve compatibility, the FASB and IASB (together, the "Boards") agree, as a matter of high priority, to:
a) Undertake a short-term project aimed at removing a variety of individual differences between U.S. GAAP and International Financial Reporting Standards (IFRSs, which include International Accounting Standards, IASs);
b) Remove other differences between IFRSs and U.S. GAAP that will remain at January 1, 2005, through coordination of their future work programs; that is, through the mutual undertaking of discrete, substantial projects which both Boards would address concurrently;
c) Continue progress on the joint projects that they are currently undertaking; and,
d) Encourage their respective interpretative bodies to coordinate their activities (fasb.org).
One major reason convergence is so important, is that companies operating outside the United States, prepare their financial statements using a different set of standards than U.S. GAAP. This can cause a lot of frustration for international companies such as Starbucks, Wal-Mart, Microsoft, and many more because they have to prepare financial information in different ways. Beyond the additional cost these companies incur because of this, users of the financial statements often must understand at least two sets of GAAP (wileyifrs.com). The Global world would run just a little bit easier if there were only one set of high-quality international standards. There is no question that convergence is a must for the international market, but more so the question is when. Originally 2011 was the year in which IFRS would be required by U.S. public companies, but the SEC is now saying that it may be 2015 before IFRS is required.
Currently in the accounting world, there are two sets of standards that are accepted for international companies. U.S. GAAP and IFRS are the two that are currently accepted and both have many similarities. U.S. companies that list overseas are still permitted to use U.S. GAAP, and foreign companies listed on U.S. exchanges are permitted to use IFRS (wileyifrs.com). The United States seems to be the last ones to do everything, for example we have still yet to convert to meters and kilometers vs. feet and miles, along with other things that other countries use that we still don't. At this point in time, over 115 countries currently use IFRS as their reporting standards. If the U.S. doesn't get on board we will be left behind the rest of the world.
For the U.S. to transition to IFRS there will be numerous effects on people and corporations at different levels. One significant difference between GAAP and IFRS rest in the amount of detail each go into in explaining various principles. GAAP has three volumes totaling about eight inches of reading, as opposed to IFRS which uses about two. Restrictions and rules are more open to interpretation, making them more unclear. Those which have little to no experience with international companies will have to spend significant amounts of time and money on adopting these new principles Also, their clients will have to be taught at least the basics of the new system in order to understand how the money that they own is being spent (articlesbase.com). Businesses will have to spend a lot of time and money training their employees when the transition takes place. Not only will companies have to make many changes, but also Colleges and institutions will have to make changes to the material covered in higher level accounting courses. Therefore many professors will have to be re-educated on using IFRS, and not to mention the students in school right now who will have outdated information in the next few years and have to learn a whole new way of doing things.
In November, FASB and the IASB reaffirmed their commitment to a 2006 Memorandum of Understanding that outlines major convergence projects scheduled for completion by June 2011 (Journal of Accountancy). There are 11 projects that were outlined in the 2006 MoU, and as of now only one of those, being Business Combinations has been completed. One has been removed from the agenda, and another that is still on the agenda has been removed from the list of priority. Three of the convergence projects-Financial Instruments, Consolidation and Derecognition-have taken on greater significance and are thus subject to more scrutiny because of the financial crisis that began in 2008; as a result, the standard setters have been pressed to deal with them on an accelerated schedule. The remaining projects deal with important fundamental accounting issues such as Revenue Recognition, Financial Statement Presentation, and Leases (Journal of Accountancy). Although it seems a little difficult to complete these joint projects in the next 14 months, the Group of 20 (G-20) affirmed that the June 2011 deadline was still foreseen.
Although there are many similarities between IFRS and GAAP, there are also many differences. Yet, with the continued projects between the IASB and FASB the differences continue to shrink. Some of the significant differences that still exist are: IFRS does not permit Last In First Out (LIFO). IFRS uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP, making write-downs more likely. IFRS has a different probability threshold and measurement objective for contingencies, and also IFRS does not permit curing debt covenant violations after year-end (ifrs.com).