The IASB and US GAAP have been working together on convergence project for 10 years. Undoubtedly, it is extremely difficult to get an agreement that give these two standards a mutual satisfaction.
Moreover, US announced that it will not adopt IFRS for at least five years.
According to this situation, some people argue that maybe we should be aiming for a Global accounting and financial reporting standards GAAP which can be suitable and accepted for all over the world. Also come up with two following questions.
â- is Global GAAP desirable
â- is Global GAAP feasible
This report discuss these two questions and also by using historic examples and practical matters to explain the issues.
Global GAAP is desirable
US crisis affect it to require IASB (IFRS)
The US regulators' sudden receptivity to IFRS because the impact of the financial reporting crisis in 2001-2001 in US. This financial collapses had fuelled US to allow or require principle-based approach of the IASB as a basis to play. After the accounting crisis and letting the principal rule, the FASB believes that it is necessary to focus more on the principles clearly in order to improve the quality and transparency of US financial accounting and reporting. (IFRS). (''Principles-Based Approach to Standard Setting", FASB Report, November 27, 2002)
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However the US will not adopt IFRS which is principle-based approach instead of their own rule-based approach unthinkingly and rapidly. The US just had an unintended consequence to adopt IFRS to help US dealing with crisis of 2001-2002, but it can clear be seen that for harmonization between IFRS and US GAAP, a Global GAAP is extremely important and useful.
Impact for adopting Global GAAP
According to the important of the globalization, it reflects the increased integration of economies giving rise to greater levels of trading activities, increased capital flows, enhanced cross-border investments and more extensive and complex financial transactions (Masson, 2001).The globalization of business encompasses very many dimensions including greater interaction between enterprises over large geographical distance (Robertson, 1992),expanded economic growth and innovation through interdependencies across many industry sectors(Moshirian, 2008; Prasad et al., 2003) and generally wider movement of financial assets and levels of financial globalization (Obstfeld and Taylor, 2004; Prasad et al., 2006) .A large
and expanding body of scholarly research suggests that the reform of national institutions which address corporate governance and financial transparency issues not only enhance economic growth enabled by globalization but also that global regulation itself sponsors the emergence and growth of international institutions and standards which further enhance global integration (Drori et al., 2006).
The process is very complex for countries adapt from their own national GAAP to IFRS. All differences needed to be identified and quantified, new accounting manuals prepared and reporting processed adapted. The complexity of accounting and reporting processed has increased significantly since the changes brought about by each region by IFRS in financial instruments, pensions, impairment testing and share-based payments (Ernst&Young, 2006).
Companies on the verge of having to implement already adopted IFRS of what the real costs are of IFRS with regard to increased audit, tax, and other auditor charged fees. Auditor charged fees could rise because of the move to IFRS. Because auditors provide the assurance necessary for any reliance on numbers within annual reports, they provide valuable service to the public. However, as companies those are publicly traded must utilize auditors, their committees sometimes deserve to question the fees charged. Although auditors can be changed, the markets tend to react negatively to that decision. Also, with the market for the most respected audit firms lessened, an oligopoly has developed that could potentially result in identical fees with any other audit firms (Diehl, 2010)
â-Easily lead to confuse
The area related to expenses that seems inconsistent and may lead to confusion from financial statement users is the transition provision for the residual margin. The use of deposit and non-deposit accounting in the single statement of comprehensive income may be confusing to analysts and investors. Automated analysis of change models, combined with bridging analysis between the different bases, will be needed to calculate, understand and explain the results to users. (Ernst&Young, 2010)
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Errors are omissions from, and misstatements in, an entity's financial statements for one or more prior periods arising from failure to use or misuse of reliable information was available when the financial statements for that period were issued. It may because of mathematical mistakes, mistakes in applying accounting policies, oversights and misinterpretation of facts and fraud. (BDO International Limited, 2012)
Although there are plenty of disadvantages and risks lead countries to doubt that whether adopt and set a global GAAP is good strategy or not. It is still true that in the long term Global GAAP will produce more benefits than undesirable impact. And also Global economy urges the accounting standards to be unified around the world.
Global GAAP is feasible.
The first thought in Europe
In 1999, in Europe the Financial Services Action Plan was agreed by the European Commission and one of the objectives in the Financial Services Action Plan is to create a single large capital market within the EU. In 2000 all listed companies were proposed by the European Commission that they should use one set of accounting standards for financial reporting purposes. (Alexander, 2011, p. P42). It is the first thought about establish a single standards although at that time it just applied in European countries.( EU Directives
General situations at the present stage
As we all know, there are two main accounting standards used widely in the world which are International Financial Reporting Standards, or IFRS, and US Generally Accepted Accounting Principles or US GAAP.
IFRS is a formal financial reporting set forth by IASB or the international Accounting Standards Board. U.S.GAAP is published by FASB or the Financial Accounting Standards Board. The former is principle-based accounting and the latter uses rule-based accounting. IASB is a private sector which is based in London, it has been developed very quickly in recent years and it is the most recognized standard by the world. Especially after Enron's collapse and Lehman Brother's debacle US GAAP got unprecedented doubt. Thus IFRS becomes more attractive and reliable accounting standard and worldwide use of IFRS is increasing.
Worldwide countries adopt IFRS
According to the IASB chairman Hans Hoogervorst mentioned. By now there are more than 100 countries using IFRS. In 2002 EU decided to switch to IFRS from 2005 and the members of EU countries adopted IFRS from their own national accounting standards. After that, Australian and New Zealand listed groups were subject to comply with IFRS on a mandatory basis as the EU did before. Since 2005 Australian listed groups were subject to mandatory compliance with IFRS as well. For the list companies in New Zealand they have to prepare their group accounts to IFRS from 2007. Moreover in Asia and Americas the IFRS adoption also increases. In Brazil banks had to comply with IFRS from 2009 onwards and listed companies from 2010 onwards. Canada is working towards a deadline of 2011 to implement IFRS. Russia and Mexico are required from 2012. (Alexander, 2011, p. P48) International Accounting standards
Furthermore, a number of countries have decided to move to IFRS for their listed groups.
U.S. tries to move towards IFRS (Convergence project).
Since 2002, the IASB and the FASB created the Norwalk Agreement and agreed to work together in order to minimize some of the differences between international standard IFRS and US GAAP. The aiming is to achieve convergence of IFRS and US GAAP and have a common set of global standard which is suitable and acceptable for both IFRS and US GAAP. (ifrs.org)
Revenue recognition, lease and financial instrument are three main projects in the convergence project.
In reality, a number of convergence projects are still outstanding in the short term. Like intangibles, valuation of investment properties and income taxes which need time to solve. For the projects with a longer timeframe, the current practices will be studied in order to find out how the current standards can be improved. (Alexander, 2011, p. P49)the process of acceptance of IAS/IFRS in the USA
It is sure that the convergence project is a very difficult and challenge work. Fortunately, during last 10 years the progress of convergence project lots of standards became much closer and also it is better for the US to decide whether and how they adopt the IFRS.
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In November 2007, the SEC approved that for "foreign private issuers", financial statements prepared in accordance with IFRS would be accepted on American stock exchanges without reconciliation to US GAAP. This is a very significant step towards global harmonization of accounting (Alexander, 2011, p. P48).inter a s
In US GAAP was brought in line with IFRS though the numbers of standards for induction of a fair value option and the convergence was done for the new standards on segment reporting and borrowing costs (Alexander, 2011, p. P49)the process
Furthermore, in 2009 IASB and FASB joint statement stated that due to the wake of the financial crisis they aimed to provide a high degree of accountability through appropriate due process, including wide engagement conducted in the public interest such as stakeholders and oversight (Alexander, 2011, p. P54)The IASB's due process of standard setting
However, the situation of the convergence project these days seems more difficult. After a joint meeting between IASB and FASB in July 2012, AICPA chairman Gregory Anton announced that "US will not adopt IFRS for at least five years" and IASB chairman Hans Hoogervorst said the failure of the agreement was "deeply embarrassing". (Crump, 2012) It can clear be seen that it is difficult to get the common answer between this two standards.
Recently, in November the two boards stated that they will no longer work together and it means they split over the convergence project and they have now reached the end of the convergence. (Crump, 2012)
Although the convergence is dead US investors expect the country will eventually adopt IFRS, but this needs to take time and put effort into staff training. (Crump, 2012).From the speech of the chairman of the IASB, he mentioned that the US had to make up their minds and also advised the US can adopt the IFRS in the end.
Accordingly, in the short term the global GAAP or worldwide use of IFRS cannot be achieved only if the SEC accepts international accounting standards for listing purposes. (Alexander, 2011, p. P48)inter acc s
Development of the IFRS itself
IFRS is developed through an international consultation process-due process, which involves interested individuals and organizations from around the world. This due process contains six stages, with the Trustees having the opportunity to ensure compliance at various points throughout (ifrs.org):
Setting the agenda
Planning the project
Developing and publishing the discussion paper
Developing and publishing the exposure draft
Developing and publishing the standard
After the standard is issued
This report will not expand details for the due process, since it clearly shows that IFRS has a strict plan to improve and develop itself in order to be satisfied around the world
Also the IASB was undertaken with the FASB to remove the need for IFRS users registered with the Securities and Exchange Commission (SEC) to reconcile their accounts to US GAAP. (Grant, 2005)
Recently, in November 2012, the IASB has opened its first international office in Tokyo. The aiming is the development, adoption and consistent for the Asia/Oceania region. Some of the biggest and growth capital markets are in the Asia/Oceania. It is necessary and very momentous improvement for the global standard IFRS. (Crump, 2005)
Two main important processes for establishing global GAAP
In technical term it is a word that tends to be associated with the supranational legislation promulgated in the EU. In recent years, it focuses on global harmonization more than regional harmonization. (Alexander, 2011, p. P41). EU d In order to reach a globally accepted standard needs countries to stop developing their own national GAAP and accept the international standards and substitute their national GAAP with international standard. (Alexander, 2011, p. P48). And nowadays what is more important is for global international standard IFRS, it should absorb other countries' useful ideas to provide a more comprehensive global standard.
As we all know in the modern communication, information, transportation and other technology means, Global GAAP is an urgent need for particular economic globalization. The aim of IASB is to develop a high-quality, compatible accounting standards that could be used for domestic, cross-border and globally accepted financial reporting standards. It is more difficult and complicated to set an international standard than a national's. Without doubt, the IFRS received globally now. The IFRS continues developing and become more popular and global than before at this stage.
On the whole, truly it is the time for countries to harmonize between domestic GAAP and international standards. As the improvement of Global GAAP it tends to be adopted over a long period of time.
This report has discussed the desirable and feasible of Global GAAP and there is no doubt that global GAAP tends to be achieved in the long term. For short term, we must allow countries to have time to adapt the IFRS. Also the improvement and development of IFRS can lead to countries to adopt and believe this international accounting standard and then achieve a global accounting standard will be more convenient and quicker. Therefore, the global GAAP will eventually be established to satisfy all over the world