The International Accounting Standards Boards and the Financial Accounting Standards Board are making an effort to converge US Generally Accepted Accounting Standards (GAAP) and International Financial Reporting Standards (IFRS) acceptable to generate a single set of high-quality, compatible accounting standards that possibly will be used for both national and international financial reporting which is recognized as 'The Norwalk Agreement'. The convergence efforts have focused on harmonizing standard setting and reducing differences in accounting standards. However due to certain ins and outs the convergence projects was not finished and have been delayed. The FASB and IASB restated that growth of a common set of high-quality global standards leftovers a tactical significance of both FASB and IASB. FASB and IASB later issued a Memorandum of Understanding (MoU) which was based on three principles, in developing MoU, the Board agreed on priorities and established milestones to complete major joint projects and short-term convergence projects as the work plan. However, either the convergence of US GAAP and IFRS successful or not are based on the completion of the projects. The purpose of this report is to address what convergence is, the background of the convergence, advantages and disadvantages of convergence, the rule-based versus principle-based arguments, followed by the role of standard setters, the global adoption of IFRS and also joint work projects of the convergence of US GAAP and IFRS, continued with the conclusion of the overall convergence of US GAAP and IFRS.
CONVERGENCE OF US GAAP AND IFRS
Memorandum of Understanding called 'The Norwalk Agreement' was issued on October 2002, for the FASB and IASB to official their obligations to the convergence of US GAAP and IFRS. The two boards use their exertions to coordinate their upcoming work programs and ensure to make their existing financial reporting standards fully companionable and once achieved, compatibility is sustained. Compatible refers to two sets of standards does not comprise conflicts and the existing standard in US is more detailed than IFRS. Moreover with numerous cross-references, links to other bodies, links to auditing and other professional literature is an integrated body for each set of standards. Non-profit entities are the scope of responsibility of FASB and business entities focusing on IASB.
BACKGROUND OF CONVERGENCE OF US GAAP AND IFRS
Investors have demand for international convergence because they want an excellent and comparable financial information which makes worldwide capital markets easier to make decision. Due to this, Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) started working together in 2002 to unite the two accounting methods to convey Generally Accepted Accounting Principles (GAAP) towards compatibility thru International Financial Reporting Standards (IFRS). The agreement was issued at the FASB's headquarters in Norwalk, Connecticut, and was documented in a Memorandum of Understanding titled 'The Norwalk Agreement'. According to the Norwalk Agreement, to improve US GAAP and IFRS and exclude the differences between them through the joint efforts by the FASB and IASB, development of the convergence into a single set of high-quality and compatible international accounting standards required which can be used by both national and international financial reporting. To achieve towards convergence by 2008, the FASB and IASB issued a Memorandum of Understanding (MoU) in 2006 that describes the progress hoped. In 2007, the Securities and Exchange Commision (SEC) eliminated the requirement to include a reconciliation of IFRS to US GAAP in their financial statements for foreign companies who issue stock in the United States (US). In 2008, SEC planned a Roadmap that the Boards should aim to attain a single set of standards to hasten the convergence of US GAAP and IFRS. By 2015, this Roadmap planned to have a completed project but due to complications it has been delayed. The complication for the delay was because US GAAP uses rules-based approach for their accounting standards which sets specific rules to be followed to comply with the regulations while the IFRS uses principle-based approach which has a few rules and guidance on how to implement them. An ethical professional requires to represent the principles for the financial statements fairly and accurately. In 2009, FASB and IASB confirmed their commitment to convergence, to complete the major joint projects described in the MoU, and committed to make quarterly progress reports on these major projects presented on their websites. As a further declaration of that commitment, by mid-2011 the Boards agreed a joint statement describing their plans and milestone targets for achieving the goal of completing major MoU projects. In 2011, the FASB and IASB issued a half progress report on their work and decided to modify their joint work plan to develop and achieve convergence. The FASB and IASB spread a periodical joint progress report describes the modified work plan and also issued a half progress report on the status of their work to complete the MoU. The progress report defines the Board's affirmation of the significances and describes how the Board's adapted aspects of their approaches for other projects to put them in the best position to complete the main concern projects. In 2011, FASB and IASB described on their development toward achievement of the convergence work program. The Boards were giving priority to three remaining projects on their MoU. The Boards also agreed to extend the timetable for those priority projects beyond June 2011 to permit further work and discussion with stakeholders in a manner consistent with an open and comprehensive due process.
ADVANTAGES OF CONVERGENCE OF US GAAP AND IFRS
The use of one global reporting standards allow for comparability over all financial markets, regardless origin of the country will have enhanced information for decision making. IFRS uses principles-based and GAAP uses rules-based whereas transactions required to be reported using substance over form criteria. More professional judgment will be exercised to lead to a better disclosure. Financial reporting complexity can be reduced by a large, multinational company that organizes different sets of financial statements in many different forms. All levels of management will be involved in financial reporting and be aware of the transactions.
DISADVANTAGES OF CONVERGENCE OF US GAAP AND IFRS
IFRS can be adopted by small companies that have no dealings outside of US unless mandated. Claim to adapt IFRS may arise inconsistency but in reality only selected portions can best fit their needs. If IFRS is not adopted, companies will be required to have two sets of records, which are GAAP and also IFRS. Conversion of magnitude is too much to ask of executives and management during financial crisis. Two sets of books, both GAAP and IFRS need to be maintained a minimum of two years of financial information to meet requirement of financial statements to obtain three years of financial data. All the above will come to completion in a single set of high quality standards that would decrease cost, increase efficiency and provide better information for investors.
RULES-BASED VERSUS PRINCIPLES-BASED ARGUMENTS
There are arguments that both US GAAP and IFRS are principles based and US GAAP are. US accountings standards are written to operationalize the FASB's fundamental conceptual framework based on principles. US GAAP utilizes an 'incremental perspective' which rules are added to a standard increase the standards precision and its complexity. Rules-based are defined as specific criteria, examples, scope restrictions, exceptions, subsequent precedents, implementation guidance and etc. While both regimes may be principles-based, US GAAP typically incorporates many rules.
Arguments over rules-based versus principles-based standards is potentially moot unless it shows the regimes result in different reporting/disclosure outcomes. IFRS adoption in US revolves around lack of specificity associated with principles-based standards been criticism, and there are also arguments that less guidance and greater judgment will likely result in more diverse interpretations, treatments, and practices. Financial reports are more useful and more comparable across firms, industries and countries to help generate a high-quality standards based on principles instead of rules. General principle and calls for judgment in application is concise which necessarily vary across individuals and situations, giving rise to greater variability in application than a more detailed rule-presumably calling for less judgment will generate. Lack of specificity can raise volatility in reported accounting numbers. Consistency and comparability problems with principles-only standards and rule-based standards was acknowledges and discussed in the study on the adoption of principles-based acoounting standards.
Principles-only standards may present enforcement difficulties and rules-based standards often provide a vehicle for circumventing the intention of the standard. The SEC expressed that either too much guidance or little guidance can reduce the usefulness of financial statements to users. SEC also express that rules-based standards lead to poor reporting quality which tend to emphasize form over substance. Whereas principles-only standards as interpretations of the principles vary across time and companies hurt comparability and consistency. It is believed that use of regulatory context is not appropriate for principles-based standards that lack of specificity and they are of limited enforceability by design.
Arguments suggested that different accounting regimes will lead to different accounting outcomes. Former chairman of the International Accounting Standards Board (IASB), Sir David Tweedie asserted that world does not want a volume of guidance, where US GAAP is over 25000 pages and IFRS are just over 2500 yet the results are not far away. Different approaches to standard setting (i.e. principles-based versus rules-based) yield outcomes are essentially similar across reporting regimes which is made without appropriate support from specific empirical evidence. Research to explore whether principles-based standards lead to qualitatively and quantitatively different accounting outcomes when compared to rules-based standards has recently began.
ROLE OF STANDARD SETTERS
International Accounting Standard Board
International Accounting Standards Board (IASB) formed in 2001 to replace the International Accounting Standards Committee (IASC). International Accounting Standards Board (IASB) is a self-governing private-sector organization that progresses and approves International Financial Reporting Standards (IFRS). The IASB works under the lapse of the IFRS foundation. "IASB has responsibility for all technical matters of the IFRS under IFRS Foundation Constitution including: (a) Bound by certain consultation requirements with the Trustees and the public, full caution in developing and pursuing its technical agenda, (b) Preparation and issuing of IFRS's (other than interpretations) and exposure drafts, following the due process stipulated in the constitution, (c) Issuing and approval of interpretations developed by the IFRS interpretations committee".
Financial Accounting Standard Board (FASB)
FASB is a self-governing, self-regulatory board that forms and construes generally accepted accounting principles (GAAP) works underneath the principle that the economy and the financial services industry grind smoothly when reliable, brief, and strong financial information is accessible. FASB occasionally revises its guidelines to make sure establishments are following its ethics. The organizations are invented to completely account for different kinds of income, avoid unstable income from one period to another and appropriately classify their revenue.
GLOBAL ADOPTION OF IFRS
The implementation of International Financial Reporting Standards (IFRS) has developed in reply to the requirement to travel towards global accounting standards. IFRS is used in over 100 countries as the major accounting standards in the preparation of external financial reporting. Standard setters have three options in emerging convergence of standards. "The first option is opt for a FASB standard, second would be use an IFRS standard and the third option if both are inadequate; they may develop a completely new rule". In one case, they convinced to converge on IFRS standard to a US GAAP (Discontinued operations) standard. After revising FASB, the standard setters definite that FASB was the desirable standard. As a consequence, IASB allotted IAS which usually converged with FASB. In another case, a US GAAP standard converge to an IFRS standard and the standard setters definite that IFRS was superior to past US GAAP. In the third case, to progress a new standard and method, standard setters are working together.
For example FASB and IFRS standard setters were incapable to converge on the usage of unexpected items. Schedules towards IFRS determination to be converged are more expected to implement an unassuming or principled based resolution. Therefore, many areas of accounting standards persist to be involved and converged. Dimension of analyses including IFRS standards as related to US GAAP, most of it are wider and principle based US standards has solid supervisory and authorized desires and also essential ethics. A more strict method to financial reporting mandatory in the US as a outcome of the existing standards atmosphere and enforcement and transformations in implementation will make financial statements seem further constant than they essentially are in various countries.
JOINT WORK PROJECTS
project
Status
Borrowing costs
IASB reissued IAS 23 Borrowing Costs in 2008
Discontinued operations (IASB only)
The IASB issued IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations in March 2004
Fair value option for financial instruments (FASB only)
Completed
Government grants
Work on this project has been deferred
Impairment
Work on this project has been deferred
Income taxes
This project is currently on hold
Investment properties
The FASB is actively working on this project
Joint arrangements
IASB issued IFRS 11 Joint Arrangements in 2011
Research and development (FASB only)
Completed
Segment reporting
IASB issued IFRS 8 Operating Segments in 2008
Subsequent events (FASB only)
Major joint projects
Project
Status
Business combinations
Converged standards issued in 2008
Conceptual Framework
This project has been partially completed. Work on further phases is currently on hold
Consolidation
Converged standards issued in 2011
Derecognition
This project is ongoing
Fair value measurement
Converged standards issued in 2011
Financial instruments
This is a high-priority project of both boards and work is currently under way This project compromises a number of projects, some completed and some under way
Financial statement presentation
The comprehensive project is currently on hold. Some amendments to existing requirements have been made in relation to the presentation of the statement of comprehensive income
Insurance contracts
This is a high-priority project of both boards and work is currently under way
Intangible assets
The IASB and FASB decided in 2007 not to add this project to their joint agenda
Leases
This is a high-priority project of both boards and work is currently under way
Liabilities and equity
This project is currently on hold
Post-employment benefits
Work on the comprehensive project has been deferred
Revenue recognition
This is a high-priority project of both boards and work is currently under way
CONCLUSION
The world of accounting is changing rapidly. Many multinational companies have reached a level where foreign sales revenues exceed domestic revenues earned. Many comment letters sent to the SEC indicates that there are still have many differences between IFRS and US GAAP need to be resolved. Accounting standards are frequently updated so that they can continuously improve. The overall conclusion is that it is both timely and necessary to converge and harmonize IFRS and US GAAP into a single set of Global Accounting Standards which lead to a more stabilized and prosperous world economy and it will help to resolve many of the worlds financial reporting problems.
