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The Financial Accounting Standards Board is founded by Financial Accounting Standard in the United States. According to Fogarty et al the Securities and Exchange Commission (SEC) was empowered, this private sector organization trough a delegation of its authority where created under the amended Securities Act of 1934. The main purpose of FASB is to improve and establish the standards of financial accounting and reporting that stimulated financial reporting by the private sector and also provides useful information to stakeholders and public to make good decisions in term of financial background, FASB (2013).
Besides that, the International Accounting Standard Board (IASB) also played important roles in the convergence of Unites States General Accounting Principles (GAAP) with FASB. The IASB is the replacement of International Accounting Standards Committee (IASC). In additional, the IASB operates under the supervision of International Financial Reporting Standards (IFRSs). Byatt et al (2013) stated to fulfill the standard duties setting of the IFRS, the IASB follows a thorough, open and transparent due process of which the publication of consultative documents, such as discussion papers and exposure drafts, for public comment is an important component. The IASB engages closely with stakeholders around the world, including investors, analysts, regulators, business leaders, accounting standard-setters and the accountancy profession.
FASB and IASB work together to achieved the standard- setting in the accounting and reporting. In order, to achieved it FASB and IASB created a Memorandum of Understanding which known as the " Norwalk Agreement". Yallapragada (2012) stated FASB and IASB are actively works together for reducing the differences between US GAAP and IFRS. Hence, to achieve the compatibility of the Boards agreement, they undertake a short term project and aiming to remove the various different between US GAAP and IFRS and set a national standard setter.
2.1 International Convergence of Accounting Standards
According to Epstein and Jermakowics (2010) suggested that, virtual by all the distinctions between US GAAP and IFRS will be eliminated, even if US GAAP remains an independent set of financial reporting rules, notwithstanding that there remain challenging issues to be resolved before full convergence can occur. International convergence of accounting standards is not a new idea. The concept of convergence first arose around 1950s when post World War II economic integration and related increases in cross-border capital flows.
Furthermore, the initial efforts focused onÂ harmonization where reducing differences among the accounting principles used in major capital markets around the world. In 1990s, the notion of harmonization was changes to the concept ofÂ convergence which is the development of a single set of high-quality, international accounting standards that would be used in at least all major capital markets.The Securities and Exchange Commission (SEC) issued a statement in support of convergence and global accounting standards that also direct the SEC staff to develop and execute a work plan of specific areas and factors the SEC will consider in deciding whether and how to incorporate IFRSs into the U.S. financial reporting system in February 2010.
The Norwalk Agreement: The FASB and IASB Agree to Collaborate
In September 2002, the FASB and the IASB met jointly and agreed to work together to improve and converge U.S. GAAP and IFRS. That partnership is described in "The Norwalk Agreement," issued after that joint meeting. The Norwalk Agreement set out the shared goal of developing compatible, high-quality accounting standards that could be used for both domestic and cross-border financial reporting.
It also established broad tactics to achieve their goal: develop standards jointly, eliminate narrow differences whenever possible, and once converged, stay converged Norwalk Agreement. Nikolai et al (2010) said, to achieve this compatibility the FASB and IASB agreed to work together for achieve short- term convergence on number of individual differences between U S and international accounting standards. In additional, both signed to coordinate their future agendas on substantial long period. Furthermore, in next discussion it will explain more about the progress report on IASB- FASB convergence works.
2.2 Progress report on IASB-FASB convergence work
Weygandt et al (2010) stated in the United States, the FASB is faced with a litigious society and therefore it is often encouraged to write detailed standard and also there are often in stitutional and legal barriers to changes.
In a joint Statement issued in November 2009, the International Accounting Standards Board (IASB) and the US-based Financial Accounting Standards Board (FASB), reaffirmed our commitment to improving International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP) and achieving their convergence. They planed to complete the major projects in our Memorandum of Understanding (MoU) which issued in 2006 (updated in 2008) and committed to provide transparency and accountability by reporting periodically on their progress towards achieving those goals.
Moreover, their last progress report, given on 29 November 2010 where affirmed the changes that they made to their work plan in June 2010 to allow for broad-based and effective stakeholder outreach, which is critical to the quality of our standards. That plan gave priority to the major MoU projects for which they believe the need improvement for IFRSs and US GAAP. Those priority projects include joint projects on financial instruments, leasing, revenue recognition, insurance contracts, fair value measurement, and the presentation of other comprehensive income and the consolidation of investment companies.
In addition, the IASB also assigned priority to improved disclosures about derecognized assets and other off balance sheet risks aligning with recently issued US GAAP requirements and consolidations particularly in relation to structured entities. Following their joint meeting in London on 11-14 April 2011, the boards are providing this report on the progress of their joint convergence work. Since their report last November, the IASB and the FASB have taken the following actions:
Completed five projects: The boards have reached important decisions on a number of projects, reducing the number of remaining priority MoU projects to three which are revenue recognition, leasing and financial instruments for continued work. Reflecting the completion of MoU projects, publication of standards that are converged or substantially converged on fair value measurement, consolidated financial statements including disclosure of interests in other entities, joint arrangements, other comprehensive income and post-employment benefits is expected in the coming weeks.
Priority given to the remaining MoU areas and insurance accounting, example in November 2010 the boards decided to give priority to their joint work on three MoU projects which are financial instruments, revenue recognition and leases and accounting for insurance contracts in order to permit timely completion.
Extended the completion target beyond June 2011, where the boards extended the timetable for the remaining priority MoU convergence projects and insurance beyond June 2011 to permit further work and consultation with stakeholders. The boards have revised their work plan to focus on completing the three remaining priority convergence projects in the second half of 2011, in a manner consistent with an open and inclusive due process. For insurance contracts, the IASB plans to complete its project in the second half of 2011 while the FASB plans to issue an exposure draft in a similar timeframe. This work plan is described in more detail below.
Agreed that the decisions that will be made on effective dates will give entities sufficient time to implement changes: The boards have emphasised that they will set Page 2 effective dates that will allow those who use IFRSs and US GAAP adequate time to prepare for implementation of the standards.
The author will explain more detail in the completion of Memorandum of Outstanding ( MoU) Work, therefore it will have clear understanding of the convergence.
2.3 Completion of Memorandum of Outstanding (MoU) Work
With the progress made since the last report, the boards are nearing the completion of their MoU programme, which began in 2002:
The short-term projects identified for action in their 2006 MoU and updated 2008 MoU have been completed or are close to completion.
Of the longer-term projects, only three of the priority convergence projects remain for which the boards have yet to finalise the technical decisions which is financial instruments, revenue recognition and leasing.
For a summary of work completed from the original publication of the MoU in 2006, please see Appendix A.
2.4 Priority and timing of the remaining convergence work
Three years ago the boards set, with support from the international community, the target date of 30 June 2011 to finalise the MoU projects. Setting that target date has been instrumental in getting the boards to this point, the near final stages of completing new standards that they expect will bring significant improvements to financial reporting.
At their meeting in April, the boards agreed that they will spend additional time beyond June 2011 to complete this joint work. The objective is consistent with the recommendations of G20 leaders made at the Toronto summit. The boards will use the additional time to consult those affected by the proposed changes and work through concerns and issues being raised by stakeholders. Before each standard is issued, the boards will consider:
whether re-exposure is necessary
whether they have undertaken sufficient outreach on the proposed standard to assure the boards that the proposed standard is operational and will bring improvements to financial reporting.
In October last year the boards published documents seeking views on ways to reduce the costs of applying new requirements, focusing on the potential effective dates and transition and whether early adoption should be permitted. The objective of both boards is to ensure that stakeholders have sufficient time to prepare for any new requirements.
To provide additional assurance, the Trustees of the IFRS Foundation are undertaking an enhanced oversight process between its Due Process Oversight Committee and the IASB to ensure that the IASB is meeting its due process requirements.
The FASB's due process is also subject to oversight by its Board of Trustees as well as its Standard-setting Process Oversight Committee.
Specific details regarding the proposed work plan for each of the remaining projects are explained in Appendix B.
Next, the author will explain why the convergence has advantages and disadvantages in applying as the global standards in the reporting.
Advantages of Convergence
G. Schroeder et al (2011) expounded that, the main objective of convergence of accounting standard is to have companies in different countries use the same accounting procedures to measure and report their financial positions and results of operations.
Besides that, there are many different viewpoints were discussed in these comment letters that were submitted to the SEC from Congress pointing to the vastness of the impact of one set of global standards, institutional investors, major corporations from multiple industries, multinational corporations, international organizations, accounting organizations, trade associations, and academia had varying interpretations of the impact.
According to Tyson's study, a large part of responders, many of whom were directly involved in international accounting or auditing discussed the advantages of having one set of standards worldwide. These advantages mentioned in their comment letters included the following results: increased competitiveness of U.S. issuers in capital markets; a lower cost of capital- especially for preparers and investors; process and cost efficiencies for multinational U.S. issuers and auditors; and improved ability for investors to assess investment options (Tyson, 2011, p. 26). The respondents who were in favor of the implementation of IFRS also stated that principles-based IFRS standards, as opposed to the more rules-based United States GAAP which, were designed to incorporate the better use of professional judgment and overall resulted in better clarity and transparency.
Ernst and Young (2012) suggested, the convergence can improved in term of education and training, so before making a final decision to move towards IFRS, the SEC can consider the state of preparedness of US issuers, auditors and users including the extent and availability of IFRS education and training.
Disadvantage of Convergence
Yoon (2007) argued that these approaches are good at comparing cross- country accounting differences in depth, but they only show how accounting practices are different and it is hard to summarize these differences into one convergence measure and to asses whether or not the differences are reduced over time.
Besides that, Walton (2011) stated the biggest disadvantage is the cost of making the transition because all the accounting managers in a group will need training and there may be significant system changes as well. In additional, moving to different standards may also affect the monthly management reports in the company. Industry professionals who were opposed of IFRS argued that the advantages of a one single set of international standards did not outweigh the costs of the implementation and transition of the standards.
Tyson (2011) recognized those arguing against conversion or adoption of IFRS identified a large number of disadvantages. These included: loss of control in the United States over standard setting, large transition costs to implement IFRS, including employee training and Internet technology systems, especially during a period of severe budget shortfalls and economic crisis (Tyson, 2011, p. 26). Moreover, other potential concerns involved the lack of any evidence supporting that the IFRS were in fact superior standards to the United States Generally Accepted Accounting Principles and another concern was the omission of clarity on the FASB roles and SEC roles after the convergence.
Furthermore, author discuss how the convergence with IFRS which provides a lot of benefits to the country, industry, accounting professional and investors.
5.0 Benefits of achieving convergence with IFRS.
As the markets expands globally the need for convergence increase. The convergence benefits the economy by increasing the growth of its international business. It encourages international investing and thereby leads to more foreign capital flows to the country. Chand and Patel (2011) suggested the convergence experience may be useful to those countries with rigorous accounting standards and strong regulatory enforcement mechanisms.
R.Robinsons (2008) stated the convergence helps to identities the elements of financial statement such as assets, liabilities, equity, income, expenses and capital maintenance adjustment. This detail can be used to develop the industry and gain more profits. The industry is able to raise capital from foreign markets at lower cost if it can increase confidence in the minds of the foreign investors that their financial statements comply with globally accepted accounting standards. With the diversity in accounting standards from country to country, enterprises which operate in different countries face multitude of accounting requirements prevailing in the countries. The burden of financial reporting is lessened with the convergence of accounting standards because it simplifies the process of preparing the individual and group financial statements and thereby reduces the costs of preparing the financial statements using different set of accounting standards
The Accounting Professional
Convergence with IFRS's also benefits the accounting professionals in a way that they are able to sell their services as experts in different parts of the world. The thrust of the movement towards convergence has come mainly from accountants in public practice.
It offers them more opportunities in any part of the world if the same accounting practices prevail throughout the world. It also, for accounting professionals in the Industry as we as in practice, their mobility to work in different parts of the world increase.
Hanif and Mukherjee (2009) expounded that investors could be stated as the party most benefited by the convergence and they are the people to invest money into different companies or markets. So they are in need of relevant, reliable and comparable financial reports available at right time. Convergence with IFRSs will help them in acquiring relevant and timely information regarding business across the world. They also reduce the cost of interpretation of different accounting standards for different countries.
According to Fischer et al (2011) the SEC continue to believe that IFRS will serve as the best source of high quality international accounting standards. The approach of convergence created a standard of accounting and financial reporting in favors of trust and integrity around the world. The ultimate move to IFRS in the United States will be extremely complex and will take several years to fully implement. Changes must be made to the United States financial reporting system, auditing standards, licensing requirements, and the current education of accountants. The SEC was tasked to make a decision in 2011 on whether and how to incorporate the IFRS in the United States but this immeasurable decision was delayed. The arguments made in this paper point toward an advantage to United States businesses as well as multinational businesses in adopting unified financial international standards. The FASB has a lot of work to accomplish with the IASB in making this project successful. Researchers in multinational companies have to work on understanding tax laws in many companies and the impacts that they will have on the financial statements. Harmonization remains the goal of the convergence of GAAP across all organizations worldwide. Accounting professionals from the United States will be instrumental for the initial implementation of the IFRSs once adopted.