Convergence of Accounting Standards
Convergence of Accounting Standards
Convergence of Accounting Standards
Introduction
The idea of combining international accounting standards and generally accepted accounting principles has existed for some time. With the ever expanding global economy, the time has never been better than now to introduce a globalized accounting standard that will help the United States within the multinational market. That globalized accounting standard is the International Financial Reporting Standards. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have many similarities but also differ from one another. Although compliance with these standards is completely voluntary, many countries are beginning to base their accounting standards on International Financial Reporting Standards (IFRS). There are differences between IFRS and GAAP, advantages and disadvantages of conversion to IFRS, and what the impact could be during the implementation of IFRS.
Standards and Boards
The FASB is the board in the United States that the private sector has appointed to set accounting standards. The FASB issues a body of standards known as generally accepted accounting principles (GAAP). The IASB is an international board that is dedicated to developing a single set of global accounting standards. The IASB issues standards of its own, International Financial Reporting Standards (IFRS). “International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements” (AICPA IFRS Resources, n.d.).
In 2010, the Securities and Exchange Commission (SEC) announced that they believed that the convergence with IFRS would be advantageous for the United States. Even though the United States has always had a really strong set of domesticated standards, the SEC felt that the convergence between the two would be in the best interest for all parties involved. This began the push that encouraged the merging of Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards. “In February 2006, SEC Chairman Christopher Cox reaffirmed the SEC’s commitment to achieving one set of high quality, globally accepted accounting standards and opened the possibility that U.S. financial statements could be prepared using IFRS or U.S. GAAP” (AICPA IFRS Resources, n.d.).
Convergence
“The idea of convergence can have different interpretations but the overall goal is for the managing bodies, such as the FASB and the IASB, to implement a singular set of high-quality accounting standards that would be used in all major global markets” (Doupnik & Perera, 2014). In the past, companies around the world had to use the United States generally accepted accounting principles (GAAP), or translate their financial statements so that interested parties could examine what their financial position would be if they had used GAAP.
The IASB and the FASB began working together towards the common goal of achieving convergence between the International Financial Reporting Standards (IFRS) and the U.S. GAAP, by removing the differences among the two as per the Norwalk Agreement. The Norwalk Agreement was signed in 2002 by the FASB and the IASB to remove differences and to work together to develop new standards. The Agreement set out a number of initiatives, including a move to eliminate minor differences between US and international standards, a decision to align the standard setting process and a commitment to work together on joint projects. “In 2007, the SEC eliminated the requirement for foreign companies registered in the U.S. to reconcile their financial reports with U.S. GAAP if their accounts adhered to IFRS as expressed by the IASB” (Convergence between IFRS and U.S. GAAP, 2015).
Advantages
With the convergence and adoption of any new standard, there will always be pros that everyone can benefit from. Along with that, the growing globalization of business has made this change seem much needed in order for the United States to keep up with our international partners. “By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier. Furthermore, companies with subsidiaries in countries that require or permit IFRS may be able to use one accounting language company-wide…Companies may also benefit by using IFRS if they wish to raise capital abroad” (The AICPA IFRS Resources, n.d.). Using a universal accounting standard will ultimately save many companies money because they will no longer need to spend a countless amount of time rearranging and rewording the IFRS standards to fit the standards that they prefer and use. “Professionals have widely touted advantages of a universal or global system of accounting as a benefit to investors because it would allow them to easily compare financial statements prepared in different countries.