The Convergence Of The Gaap And The Ifrs Accounting Essay


Convergence is driven by several factors, including the belief that having a single set of accounting requirements would increase the comparability of different entities' accounting numbers, which will contribute to the flow of international investment and benefit a variety of stakeholders.[1][4] Criticisms of convergence include its cost and pace,[5] and the idea that the link between convergence and comparability may not be strong.[6]

The FASB and the IASB have announced plans to finalize their priority joint projects relating to revenue recognition, leasing, and financial instruments. Once these projects are complete, we believe that the "era" of convergence will be at an end. Nevertheless, the benefits for investors of eventually getting to consistently applied, high-quality, globally accepted accounting standards are worth the price of some form of continued collaboration between the Boards. Despite the difficulty, as the Boards finalize their agendas for future projects, we believe that they should identify areas to continue working together, and that they should do so in a manner that contributes to the highest quality standards with the least amount of differences.

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Benefits of the convergence of the GAAP and the IFRS

There are many benefits of achieving convergence with IFRS. First of all is for the welfare of the economy as the markets expands globally the need for convergence increase. The convergence benefits the economy by increasing the growth of its international business. It also facilitates the maintenance of orderly and efficient Capital Markets and also helps to increase the Capital Formation and thereby economic growth. It encourages international investing and thereby leads to more foreign capital flows to the country. Furthermore investors plays another role for reason that give rise to the advantage of the convergence. A strong case for convergence can be made from the view point of the investors who wish to invest outside their own country. Investors want the information that is more relevant, reliable, timely and comparable across the jurisdictions. The financial statements prepared using a common set of accounting standards helps the investors to better understand investment opportunities as opposed to financial statements prepared using a different set of national accounting principles. For better understanding of financial statements, investors have to incur more costs in terms of time and effort to convert the financial statements so that they can confidently compare opportunities. The investors’ confidence would also be string if accounting standards used are globally accepted. Convergence with IFRs contributes to investors understanding and confidence in high quality financial statements. Other than that industry is another major reason for the convergence A major force in the movement towards convergence has been the interest of the industry. 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

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. They are able to quote IFRS to clients to give them backing for recommending certain ways of reporting. Also, for accounting professionals in the Industry as we as in practice, their mobility to work in different parts of the world increases.

Arguments against accounting standards convergence are renewed clarity, possible simplification, transparency and comparability between different countries on accounting and financial reporting. This will result in an increase of capital flow and international investments, which will further reduce interest rates and lead to economic growth for a specific nation and the firms with which the country conducts business. Timeliness and the availability of uniform information to all concerned stakeholders will also conceptually make for a smoother and more time-efficient process. Additionally, new safeguards will be in place to prevent another national or international economic and financial meltdown. Other than that, unwillingness of the different nations involved in the process to collaborate based on different cultures, ethics, standards, beliefs, types of economies, political systems, and preconceived notions for specific countries, systems and religions and the time it will take to implement a new system of accounting rules and standards across the board. Furthermore, error correction is another major problem. According to IFRS rule IAS 8, it's not always necessary to retrospectively restate financial results when a company corrects errors, especially if the adjustment is impractical or too costly. U.S. GAAP, on the other hand, requires restatements in many error-correction cases.

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Another problem is Death of LIFO. Last-in, first-out inventory accounting is prohibited under IAS 2, so any American company using the method will have to abandon it (and the tax benefits) and move to another methodology. Although LIFO is permitted under U.S. GAAP, the repeal of LIFO for tax purposes is an ongoing debate. Impact on Accounting Standards Setters also give rise to the problem on convergence. The development of standards involves a number of boards and entities that make the process longer, more time consuming and frustrating for all parties involved. PP&E valuation is another major against convergence. IAS 16 allows for the revaluation of property, plant, and equipment, but the entire asset class must be revalued. That means a company can choose to use the revaluation model if its fair value can be measured reliably. But it must choose to use one model or the other; both cannot be used at the same time. U.S. GAAP does not allow revaluation. Component depreciation is another problem as well. Also under IAS 16, companies must recognize and depreciate equipment components separately if the components can be physically separated from the asset and have different useful life spans. In practical terms, that means controllers will have to rely on the operations side of the business to help assess equipment components. U.S. GAAP allows component depreciation, but it is not required. Other than that are the development costs. Based on IAS 38, companies are permitted to capitalize development costs as long as they meet six criteria. However, research costs are still expensed. U.S. GAAP requires that all R&D costs be charged to expense when incurred. Funding is a major obstacle to IFRS in the United States, the biggest obstacle to IFRS adoption for U.S. public companies may be the funding of the IASB. Voluntary funding was critical for the IASB as it got off the ground in the early 2000s; the SEC report said that until 2008, the IFRS Foundation financed the IASB largely through voluntary contributions from a wide variety of participants across the world’s capital markets. The concern with that model is that it leaves the IASB open to the perception that organizations that provide funding could try to influence accounting standards. Another reason why U.S. companies are resistant to converging the GAAP with the IFRS is that there is a prevailing opinion that the IFRS lacks guidance compared to the U.S. Standards because the U.S. Standards are rules-based while the IFRS methodology is principles-based. U.S. accounting professionals and corporate management perceive the IFRS to be lower quality than the GAAP. With all of this said, the converged international accounting standards should provide for less complexity, conflict and confusion, which is created by the inconsistency and lack of streamlining that exists with two different accounting systems.

The Bottom Line

Despite the convergence efforts made on financial performance reporting, it appears that the main issues lie with the difference in the approach of the U.S. GAAP and IFRS. The IFRS is more dynamic and is continuously being revised in response to an ever-changing financial environment.

It's anyone's guess how this convergence will evolve and impact the accounting profession in the U.S. From a legal perspective, companies will be required to disclose qualitative and quantitative information about contracts with customers, including a maturity analysis for contracts extending beyond a year, as well as the inclusion of any significant judgments and changes in judgments made in applying the proposed standard to those contracts. Maybe the answer lies in the need to consider a more in-depth study and an examination of the factors influencing the molding or development of a country's accounting system.

In my opinion convergence of IFRS and GAAP would be a great idea because it would yield a positive results, for example research indicates that firms that apply the international standards show the following: a higher variance of net income changes, a higher change in cash flows, a significantly lower negative correlation between accruals and cash flows, a lower frequency of small positive income, a higher frequency of large negative income and a higher value relevance in accounting amounts. Additionally, these firms have less earnings management, more timely loss recognition and more value relevance in accounting amounts compared to domestic (U.S.) firms following the GAAP. Therefore, firms adhering to the IFRS generally exhibit higher accounting quality than when they previously followed the GAAP.

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Financial reporting standards and requirements vary by country, which creates inconsistencies in financial reporting. This problem becomes more prevalent for investors trying to identify accounting reporting differences when they are considering providing funding to capital-seeking companies that follow the accounting standards and financial reporting of the country in which they are doing business. Hence by this convergence of IFRS and GAAP international investors find it easier to understand the accounting reports.