Differences in terms of accounting standards

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Convergence between IFRS and the US GAAP began from September 2002 in which the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) signed a mutual agreement "Norwalk Agreement" which shows the commitment by both parties to a set of high quality global accounting standards. The convergence is still in process, although it has taken more or less ten years. There are several reasons which will be explained below in details.

First, there are many differences in terms of accounting standards between the IFRS and US GAAP. For instance, the accounting treatments for financial instruments, revenue recognition and so on in both standards are not compatible. There are 14 joint projects in total for the convergence [1]. Therefore, it is hard for both boards to make a consensus on all these projects within a decade. Also, at the beginning of the process, there is no an obvious and right direction for both parties about the convergence process and hence the process is not finished yet and has been undertaken about a decade.

Second, the difference in methodology and terminology is also one of the reasons why the convergence has taken a long period. It is well known that U.S. GAAP is rule-based and IFRS is principle-based. U.S. accountants are used to the rules provided by the GAAP when preparing their financial statements, but IFRS focuses on the principles provided by IASB and professional judgments, which is hard for U.S. accountants to get used to it. It is hard for two boards to make consensus on something which have different methodology and even interpretation in only several years.

Third, in order to achieve the goal "to move to a single set of high quality global accounting standards", there are different views which are adoption supporters and convergence supporters [2]. They have disagreement on how to achieve the goal and hence there is no a consensus between them about which road FASB should be toward. Regarding the adoption supporters, they believe that if there is only convergence between these two standards, there will be a lot of problems like race to the bottom problem. Besides, they believe that IFRS is a set of high quality accounting standards since there are more than 100 countries which adopt the IFRS for their domestic companies and hence they claim that the adoption will increase the comparability of the financial statements of companies in same industry but in different countries more than what convergence does. However, convergence supporters claim that US is the greatest capital market globally, so it should not lose its significant control of the standard setting process, and the costs related to changes in accounting standards are too high. These different views make the process of convergence unfinished since they will put pressure on FASB and SEC based on their own view.

Finally, the reason why the convergence has taken a long time is related to political matters. Although FASB is a private setter for accounting standards in U.S., to a large extent, it has to follow the decisions made by Securities and Exchange Commission (SEC). Therefore, if a part of convergence does not match the willingness of SEC or the needs of U.S., there may be a call from SEC for the stop of such projects in the convergence process.

Although the process is still going on and remains unfinished, there are many breakthroughs between two boards such as the cancellation of the reconciliation of financial statement and release of roadmap by SEC.

Whether the U.S. GAAP should converge with IFRS depends on the analysis on both benefits and costs.

Regarding the benefits, it is obvious that investors will be more able to make comparisons between companies in US and in other countries adopting IFRS since all companies' accounting treatments will be more or less the same after the convergence except any exception case. This benefit matches the objective of both financial reporting of US GAAP and IFRS.

Also, one of the objectives of convergence is to improve both standards, which can enhance some of the fundamental characteristic of both standards. For example, the convergence can let investor not need to have understanding on both two different accounting standards when making their investment decision. This can enhance investors' ability to make an accurate analysis on companies and can reduce much confusion.

In addition, cross-listing is one of the common tools for large companies to obtain their equity financing nowadays and more non-American companies try to get access to the great capital market in U.S. If there is no such convergence between U.S. GAAP and IFRS, the costs created by preparing reconciliation by non-American companies, which adopt IFRS, will be significant and hence may affect performance of the companies. Therefore, the convergence can reduce such unnecessary transformation costs.

Moreover, globalization boosts the international trading among countries including capital market. If there is such convergence, it can make foreign companies more possible to get access to the capital market of U.S. It can let the capital market of U.S. expand and also can provide foreign companies with more opportunities of raising capital for their expansion.

Concerning the costs, as mentioned above, US GAAP is rule-based but IFRS is principle-based, so if there is such convergence, it will force American companies to adopt a new set of accounting standards and practices and hence it will may the operation of the companies and will increase the costs of the companies significantly. For instance, the training costs for accountants and the costs for re-scheduling business strategies will be significant.

In addition, different countries have their own needs on financial reporting due to the cultural differences and hence they have different accounting practices. If the convergence takes place, the new standard may not totally match the local needs of U.S. In U.S., its original accounting standards are partly for the tax purpose, but, in UK, IFRS is for the accounting purpose.

Also, many critics in U.S. claim that the convergence may make FASB lose the control over the accounting setting since it has no longer power to set accounting standards for U.S. own needs and has to deal with IASB.

After concerning all the benefits and costs, the benefits overweigh the costs, although the costs involve some political issues, and hence the U.S. GAAP should converge with IFRS.

From my point of view, IFRS and the U.S. GAAP will eventually converge due to globalization and pressure from other countries.

Regarding the globalization, a rapid development of technology makes people and countries closer, which means, from investors' view, there are more investment opportunities and, from companies view, there are more ways for raising capital. In order to maintain its status of the capital market in globe, U.S. will be more willing to provide investors with a more comparable accounting standards for their comparison on different companies and willing to provide foreign companies with a more cost-effective method to raising capital in U.S. As we know, there are more countries having strong economy such as China and India. Most of these countries' companies have to raise capital overseas, so U.S. has to change its own accounting system in order to increase its attractiveness as a suitable capital market for these companies.

Regarding the pressure from other countries, in the G20 Summit in Pittsburgh in 2009, there was a "call on our international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011." Although it seems to be impossible for FASB and IASB to finalize the work on convergence, the work will eventually finish since the pressure from other countries is greater progressively. After the financial tsunami in 2008, the economy of U.S. is still not fully recovered and more developing countries like China and India got voice in international matters. It is expected that these developing countries will put more pressure on U.S. in order to make their domestic companies easily get access to the capital market of U.S.

Although it is believed that the process will finish eventually, it is expected that the process will remain unfinished for more several years, even a decade. The reason is that there are still different views on the way to convergence, as mentioned above. Eliminating the different views is a must in order to achieve the convergence. In addition, it is believed that SEC will not be willing to lose the control over the accounting standard setting and hence there are still many obstacles in the road to the convergence between IFRS and U.S. GAAP. As a result, the convergence will not finish in a short run but in a long run.