Discuss Convergence efforts between FASB and the IASB standards that outline accounting practice between the US GAAP and the IFRS begins with the balance sheet (Schmid, DeSmith and Klein, 2014). The IFRS 1 asserts that all the IFRS opening balance sheet
Introduction
The International Accounting Standards also known as the IAS is a global body that regulates the accounting standards throughout the world in conjunction with the International Accounting Standards Board. The International Financial Reporting and Interpretations Committee oversees the activities of the International Financial Reporting Standards. The Financial Accounting Standards Board in the US oversees and largely interprets the US GAAP (Generally Accepted Accounting Principles). The IAS was established in the year 1960 and rolled out its first accounting standards in 1966 beginning with the IAS1 to IAS 41 in 2000. The operations of the IAS that were placed under the International Accounting Standards Committee (IASC) in 1973 lasted until the year 2001 when the IASC was restructured and later changed to International Accounting Standards Board IASB while the new standards were renamed the International Financial Reporting Standards.
In the United States, the Financial Accounting Standards Board (FASB) is made up of members who independently create and also interpret the US GAAP. The SEC (Securities Exchange Commission) in the US is responsible for establishing and maintaining the Generally Accepted Standards for all professional accountants. The FASB was established in 1973 with a prime objective of publishing accounting rules and clarifications of how accounting ought to be practiced in the United States. FASB is not concerned with financial and accounting ethics among professional accountants it’s only mandated to deal with fundamentals of accounting practice in the US. For example, FASB deals with the guidelines for publishing and reporting of a company’s cash flow. The activities of the FASB are guided by the policies made by the Financial Accounting Foundation. FASB ensures that its policies are followed and all corporations fully account for their incomes (American Institute of Certified Public Accountants, 2015).
The convergence efforts between FASB and the IASB standards that outline accounting practice between the US GAAP and the IFRS begins with the balance sheet (Schmid, DeSmith and Klein, 2014). The IFRS 1 asserts that all the IFRS opening balance sheet;
- Include the total assets and liabilities that are required under IFRS
- All the assets and liabilities not required by IFRS to be excluded
- All the assets, equity and liabilities to be classified in accordance with the requirements of IFRS
- All items must be measured as required by the IFRS.
The preparation of the IFRS balance sheet that require opening balances may require the collection of financial information that was not necessary under the US GAAP. Companies would need to plan and as well as identify all the differences between the previous standard that is the US GAAP and the new IFRS standards. For example, some information may be required under the SEC requirements but not under IFRS like historical data that is required under US GAAP but not under the IFRS guidelines. The reviews provided under the convergence reports suggest that, the historical reports required under SEC are also critical and they should be labeled clearly while the other adjustments must be as required by IFRS. Other financial information that may be a little extra for the IFRS but mandatory under the SEC like the inclusion of a two year comparative analysis in financial statements where as IFRS only requires one year for the same.
The US GAAP principles of consolidation differ from those presented by the IFRS. The differences may compel some companies to consolidate or deconsolidate that were previously not consolidated/consolidated under the US GAAP.
Several standards under IFRS allow companies or corporations to decide the alternative policies to adopt in their accounting measures like those applied when opening the balance sheet. Companies would have to reconsider the policies that reflect negative economic substances and instead opt for the positive alternatives that provide economic substance to their transactions as required by IFRS. However the other differences are:
| Differences | ||
| Accounting Framework | IASB/IFRS | FASB/US GAAP |
| Subject | ||
| Historical Cost or | Applies Historical Costs but other | No revaluation except only on some |
| Valuation | intangible assets, plant, property & Equi | Limited financial instruments. |
| may be revalued to fair value | (Schmid, DeSmith, and Klein, 2014). | |
| Balance Sheet | Does not prescribe a specific format | Entities may present classified or non- |
| Current/non-current presentation of | Classified balance sheet. The items | |
| assets as well as liabilities unless other | presented in the balance sheet must | |
| wise stated. Some items must be | be presented in a decreasing order | |
| presented on the face of the balance | of liquidity. | |
| sheet. | SEC requirements must be followed. | |
| Income Statement | No standard format prescribed but | Must present as either single or multi- |
| expenditure must be presented in | step format. Expenditures at are presen- | |
| function of nature formats and some | ted in function format and SEC requirem- | |
| type of transaction as must be presented | ent must be followed. | |
| on face of the income statement | ||
| Extraordinary Items | Prohibited | Defined as being infrequent and unusual |
| Negative goodwill is presented as extraord | ||
| inary item. | ||
| Accounting Policies | Adjustment made only for consolidation | No adjustment to accounting policies is |
| of Associate | purposes for the associate’s policies | needed if the associate follows the US |
| to comply with those of investor | GAAP treatment. | |
| Presentation of | Proportional and Equity methods are | Equity method is applied except in certain |
| Joint Ventures | Applicable. | Circumstances. |
Most of the world’s financial and capital markets require IFRS compliance in all financial statements that are of public interest. The continued expansion and adoption of the IFRS continues to affect the expansion of the US businesses globally as most countries require IFRS as statutory procedures for all reporting purposes as well as on all public fillings. The other effect of IFRS on business is that it impacts negatively on cross-border movements of goods that have to be declared, in financial statements that are required in mergers & acquisition activities.
The adjustments required under the IFRS guidelines require more input in terms of personnel hence increased costs to businesses. Companies would require significant changes in accounting policies in order to comply with the provisions of IFRS in areas such as in inventory accounting, financial instruments, hedging, revenue recognition, stock based compensation, impairment testing or on employee benefit plans (Holgate and Fuchs, 2010).
Convergence would impact business decisions differently. Under IFRS standards, business would consolidate or deconsolidate as a result of the new standards that have been by UD companies. Some historical reports that require detailed history would be included in IFRS as they are required under the SEC requirements. Other financial information that may be a little extra for the IFRS but mandatory under the SEC like the inclusion of a two year comparative analysis in financial statements where as IFRS only requires one year for the same (IFRS, n, d)
The balance sheet under converged standards require the unspecified format in current and noncurrent assets to be implemented while ensuring that specified items are presented on the IFRS balance sheets. The income statement under converged standards has no official format but sets the expenditure format as function. The inclusion of extraordinary items in IFRS is prohibited while under US GAAP negative goodwill is classified as one of the extraordinary items. Converged standards require either proportional or equity methods in joint Venture financial statements presentation (Holgate and Fuchs, 2010).
The major reason why the convergence is important especially to American companies is that the International Financial Reporting Standards makes its convenient for comparison purposes as its internationally understood and it also assists multinational companies to be up-to-date in their financial statements besides being competitive in the global market. It’s easier to compare statements especially before mergers or acquisitions. After the convergence, corporations and other multinational companies would be presenting their financial statements on the same format or basis globally hence comparisons would be much easier than when all countries have different standards. It would be even more difficult for multinational companies that have different subsidiaries in different countries and have to comply with the standards of different countries. Comparisons are mostly difficult as lack of consistency in reporting standards exist between different countries. Without a global standard for accounting practice it’s literally impossible to compare companies with their competitors. The development of the IFRS has brought about an international language for financial disclosures as well as transparency in international reporting standards. IFRS would assist investors make informed decisions before investing (Deloite, 2015).
IFRS also allows more efficiency as more comparisons would enable cost savings and better credit ratings. Funding from foreign financial institutions would also be easy as financial statements and company records would be understandable internationally (American Institute of Certified Public Accountants, 2015). For example, IFRS 15 that deals with revenue recognition was developed by the convergence efforts between IASB and the United States Financial Accounting Standards Board (FASB). The revenue model is only applicable to all construction contracts with company clients but it’s not applicable to other standards in IFRS like financial leases and instruments or insurance. Other transfers of assets that are unrelated as per the firms ordinary activities like the purchase or sale of plant and equipment, properties or real estate are also required to follow the new model for recognition and measurement (Deloite, 2014).
Different firms may pool their resources and contract so as to share benefits or the risks that may accrue from the process. The arrangement is referred to as collaborative but both parties must confirm that all transactions involving both associates are all covered under the new standard.
To conclude, the current markets and economy are more global and require international participation. By accepting the switch to IFRS, the US is moving much closer to international markets that were not open to its companies and it would also allow most Americans to understand the IFRS standards. The world would also be moving closer to more teamwork and unity. The American companies would also be able to compete favorably in the international market with less costs of restructuring accounting records to meet each standard for all the countries that their subsidiaries are located.
References
American Institute of Certified Public Accountants. (2015) International Financial Reporting Standards. Durham, NC: AICPA. On-line.
Deloite (2015) IFRS in Focus; IASM Standard on Earnings Per Share, IFRS Global Office,
Deloite (2014) IFRS in Focus; IASM Issues New Standard on Revenue Recognition,
Holgate, P., and Fuchs, R., (2010) Similarities and Differences-A Comparison of IFRS and US GAAP, PWC Publication October 2010.
IFRS (n,d) International Financial Reporting Standards,
IFRS (n,d) Technical summaries, International Financial Reporting Standards,
IFRS, n, d, International Financial Reporting Standards,
Schmid, D., DeSmith, S., and Klein. G. (2014) The IFRS and US GAAP: Similarities and Differences, PWC Publications,
Schmid, D., DeSmith, S., and Klein. G. (2014) US IFRS Resources, PWC Publications,
