Exploring the convergence of IFRS and US GAAP



In the beginning of year 2010, SEC (U.S. Securities and Exchange Commision) issued a statement expressing its continued support for the development of a single set of high - quality globally accepted accounting standards and recognized IFRS as being best positioned to serve that role.

The idea of single - globally recognized financial reporting system, has been around for quite some time. The main goals of such idea are the improvement of overall financial reporting knowledge, thus by, reducing country - by - country disparity in financial reporting. This in turn, would facilitate cross - border capital formation while also helping to provide investors with the comparable and material information they need to make informed decisions about investment opportunities. In my personal oppinion it is impossible to have a real global market, with 20 different accounting standards, it is the best example of innefficiency. Clear, accurate, consistent and reliable accounting standards are necessary for investors to have the information necessary to make decisions. The worlds reality is of globalization and the integration of capital markets and emergence of IFRS as a reliable and high quality set of standards. What is most imporatant to recognise in this process of convergence, is that both accounting standards (the US GAAP and IFRS) are taken a considerable part in their integration. Not only one of the accounting standard is going through a change, but from both of them a new standard is emerging, which can give the best answers to the users of financial reporting information.

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The accounting profession is in the midst of a great change in the financial reporting system. US adoption of International Financial Reporting Standards (IFRS) is accelerating at a rapid pace. This has been greatly influenced by the global economic situation in the world. Nowadays, nearly 100 countries around the world require or premit IFRS in varying degrees. Since the year 2007, the SEC allowed foreign companies to file their financial statements in the IFRS. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working working to resolve the differences between the US Generally Accepted Accounting Principles (US GAAP) and the International Financial Reporting Standards (IFRS).

Accounting standards around the world have evolved over centuries of business

and capital market development. In this process, accounting standards historically

were designed to meet the needs of each nation's capital markets. Those standards that were found to work well in the legal, cultural, political and economic

context of each nation became the "generally accepted accounting principles," or

GAAP, for that particular jurisdiction. Naturally, different norms in each nation led

to different GAAPs in each nation.

The growing dynamic of globalization presented a challenge to these "legacy

systems." Global protocols for the internet, electronic payments, software systems and cargo shipping demonstrated the potential value of uniform global

systems. A discussion began among market participants over whether the global

capital markets would similarly benefit by having a single set of high-quality accounting standards that could be applied around the world.

In order to create a uniform global system for financial reporting, the IASB was

formed to serve as the global accounting standard-setting body. In 2001, the IASB initiated the first iteration of IFRS, offering the possibility of a single set of high-quality accounting standards that could be used by all nations. Since 2001, IFRS has become accepted or been adopted for public reporting purposes in over 100 countries, including the 27 member-states of the European Union. Others scheduled to follow in the next few years include Argentina, Brazil, Canada, Chile, India, Korea, Singapore and Mexico. In addition, in June 2009, Japan approved a roadmap for the adoption of IFRS which includes an election for Japanese companies to begin voluntarily using IFRS immediately. As more and more countries adopt IFRS, a robust conversation has begun about whether the United States should take this step or otherwise participate in a process that leads to the acceptance of more uniform global accounting standards for use in the U.S.

The goal is that over time the differences between IFRS and US GAAP could steadily be diminished and eventually the two sets of standards would be essentially, if not completely, identical. While progress has been made to reduce the differences between IFRS and US GAAP, the speed at which that progress has been made has been substantially slower than originally anticipated. In addition, there are some who believe that convergence is unlikely to get to the point where the two sets of standards are truly identical. This view has led some to call for the United States to adopt IFRS outright to replace US GAAP. In that vein, the U.S. Securities and Exchange Commission (SEC) in November 2008 proposed a "Roadmap for the Potential Use of Financial Statements Prepared in Accordance with IFRS by U.S. Issuers" (the Proposed Roadmap).

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This "roadmap" detailed a plan, with associated milestones and action items, by which public companies in the United States could transition from financial reporting based on US GAAP to IFRS beginning in 2014. Under the roadmap, the transition to IFRS would unfold in several stages, with certain large companies being granted the ability to make the transition before 2014. In the coming years, a number of milestones would need to be achieved in terms of preparing businesses, academic institutions, the accounting profession, and legal and regulatory systems for the transition.

What are the opportunities of having a global financial reporting system? A single set of high-quality global accounting standards would increase the ability of companies to raise capital in multiple jurisdictions around the world while at the same time allowing investors to more efficiently compare global investment opportunities. Already, as previously stated, more than 100 nations have adopted or accepted IFRS, including most of the world's developed economies. At this point, it is fair to say that IFRS is becoming the global norm. If the United States were to adopt IFRS, it would be joining much of the rest of the world, which would provide a powerful push toward worldwide acceptance of a single set of global accounting standards. Cross-border investment and the integration of capital markets may be easier among those nations that adopt IFRS. By choosing not to adopt IFRS, the United States may run the risk of seeing investors and businesses shift to financial centers in those nations that use IFRS, rather than accept the burden of having to operate in both IFRS and US GAAP

Literature Review

IASB - The IASB is based in London and is overseen by the International Accounting Standards Committee (IASC) Foundation, which is a private, not-for-profit corporation. The IASC Foundation is governed by 22 trustees from geographically diverse backgrounds. The IASB is comprised of 15 members from different nations around the world. The current board consists of members from five EU member-states, China, Japan, Australia, South Africa, Brazil and five Americans. The IASB is funded through national levies as well as voluntary contributions from around the world, including large international companies, regulators, standard setters and international accounting firms.

FASB - The FASB is the independent standard-setting body in the United States. The FASB was established in 1973 with the goal of ensuring greater objectivity and independence in the standard-setting process. The FASB is organized as a non-profit, private sector organization. The FASB is overseen by the Financial Accounting Foundation (FAF), which selects the members of the FASB and funds its operations through assessments on public companies. The FASB is comprised of five board members who all serve on a full-time basis and are required to sever ties to other private sector firms in order to preserve independence. Current board members include representatives from academia, the accounting profession and the investor community.

IFRS - IFRS is a more "principles-based" set of accounting standards than US GAAP. As such, it may allow companies and auditors to focus less on strict adherence to detailed requirements and "bright lines," and instead concentrate on providing a clear statement of an entity's assessment of the economic realities of its business activities. Some studies have suggested that this principles-based approach allows for, and in fact, incentivizes companies to provide financial reports that offer a more transparent picture of the firm's economic condition.

US GAAP - a set of accounting standards, that is used in the United States of America. It is quite more strict set of rules than the IFRS. A simple example would be the one in the case of Microsoft. Microsoft has policy of giving their workers a number of shares, after some period of time. There is a reward of 100 Microsoft shres, for each employee in the main offices of Microsoft, which he will be entitled to after having worked for at least 5 years in the company. According to US GAAP, this expense is disposed over those 5 years in equal amount. So if the NPV of the stock is $20, then the whole expense would be $2000 dollars for each employee. The annual expense according to GAAP, is exactly 1/5th of the total expense, and in this case it will be $400. On the other hand IFRS, treats this expense, in my opinion, in a more realistic manner. It shows a more accurate meaning of the date when this expense has occurred, which makes more sense to the users of this financial information. According to IFRS rules (IFRS - 2), the expense is depreciated over the 5 years, in such manner that the first year will carry most of the expense, over 40% in this exact case. The final year, or the 5th year for us, will show less than 5% of the whole expense, which makes this type of financial reporting more focused on the historical occurrence of event.

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The data I intend to use in this dissertation, will be mostly secondary data, which means I will use sources such as books (published by verified authors), interviews from the experts in this field, as well as any other means of publications that I can reach.

The nature of this topic doesnt allow me to receive data from people outside this business, even people closely working in the field, as not likely have an indepth - knowledge as to what is exactly going on in financial reporting systems outside their own country or field.

The topic I think is quite an interesting one, is why did the United States of America, accept converging their GAAP to IFRS, and overall why did they accept IFRS as the standard that will be used by the US companies, in not that distant future? The reasons are numerous factors, and throughout my studies, I have seen that the US have been fighting for the supremacy of GAAP in the global financial reporting systems, but that simply said did not happen, as nowadays over 100 countires in the world have or intend to accept IFRS as their system of financial reporting. The reasons for this may be in the growing power of nations such as China, Brazil, etc. which have decided to converge to the IFRS. Those examples have obviously been followed by their surrounding countries, and it had extended that much, that it is clear nowadays that IFRS is here to stay. So why did that many countries decided to follow and adopt or converge their system of financial reporting to IFRS? The reaason is foreign capital. Countries want to receive lots of foreign capital, and the best way to do that is to have the investors informed in the way which they can understand. It will be inevitable to have clear financial stantements in the future, clear in a manner that they can be read and analyzed across the whole world, without any second guesses what they could mean. A country that can follow world trends, and the one that adapts to the investing countries, will have a bigger chance of attracting foreign capital, than the one that uses a financial reporting system which can only be applied or read in a few number of countries. United States of America have recognized this problem, and have made the decision to converge their own set of financial reporting standards, the GAAP, to the IFRS. Most of the US companies, which file their own financial reporting statements according to US GAAP, in country (USA), file according to the rules and pratices of IFRS, in the countries where they have their subsidiaries. When consolidations are made, or even any other kind of sharing the data between the main company and its subsidiariez, immense work is needed to be done, in order to translate the financial statements from IFRS to GAAP, or vice versa. This creates a whole lot of work, that can be eliminated by having a clear and global set of financial reporting standards. However that alone, will need substantial amounts of investements, because systems that have been using GAAP, which are quite complex to say at least, will need to be modified or completely changed with the ones using the IFRS. For many companies this transition will be quite shocking and expensive, but in the long run it is quite clear that it is the right thing to do, in todays world of global markets.

Preliminary Conclusions

The decisions about the future of accounting standards in the United States involve complex and challenging questions. While there are significant benefits for investors, businesses, and the entire economy of having all nations

move to a single, uniform set of high-quality accounting standards, there are a

number of considerations that need to be evaluated in making such a transition. In order for the United States to successfully transition to IFRS, it will require a significant effort and investment from virtually all market participants in the capital markets system. Transition to IFRS would increase the need for training and education for investors, accountants, auditors and others involved in the preparation and use of financial statements. Businesses would need to integrate new software platforms and adjust their reporting processes to reflect the requirements of IFRS - this includes changes to internal control requirements and data gathering systems that currently are designed to meet US GAAP standards. Investors (both individuals and institutions) and lenders would need to become familiar with financial reports prepared in accordance with IFRS. For example, lending agreements would need to be modified to allow for and consider reporting under IFRS.

Another aspect I would like to cover with this dissertation are the cultural differences between the United States of America and the Europe. As we all know the most popular sport currently in Europe (as well as the rest of the world) is Football. It is quite an initeresting topic as to why Football, as it is, is not one of the most popular sports in USA. It is not even in the top 3 most popular sports there. I have found a logical explanation, through my own experiences there, as well as through talks with people living there. The fact that the game of Football, is that much voulnerable to referees mistakes, simply shocks the average citizen of the USA. They are very vulnerable to injustice, and most of them do not see the point of playing a game, if it has such a high probability that the referee might make a mistake, which could totally alter the outcome of the game. As we know in the american football, almost after every action, and when a referee needs to intervene, the game is stopped and reviewed. After closely having reviewed the play, referee than announces his decision over a loudspeaker so that every spectator can hear what has happened, and what is the referees verdict on that case. That is basically the biggest difference in the two most popular sports in the USA and the rest of the World. Which can be correlated to US GAAP and IFRS. US GAAP, as it is, is a more strict set of rules. In my opinion the convergence, when it happens in the US, will not be that shocking to most companies as to understanding the new rules, because of the nature of GAAP which is already more strict than the IFRS, and those changes will have already been somewhere in GAAP.

The process of convergence of US GAAP and IFRS, is inevitable and it is happeneing even as I write these pages. The Securities and Exchange Commision (SEC) has posted the plan of convergence in the USA. By this plan, year 2015 is regarded as the starting year, in which companies could be mandated to report financial results using the IFRS. Currently we are in the transition years, and year 2013, as stated by SEC, is regarded as the year which will mark the beginning of the first comparative IFRS year.