International convergence of accounting standards is not a new idea. The concept of convergence was brought up towards the end of 1950s in response to the economic integration which took place after WW2. The International Accounting Standards Committee was formed in 1973 and was the first international standards-setting organisation. Since then, the use of international standards has progressed. As of 2013, the European Union and more than 100 other countries use the international financial reporting standards (IFRSs) issued by the IASB. Since 2002 the FASB and the IASB have been working together to improve and converge U.S. generally accepted accounting principles (GAAP) and IFRS. Also in 2013, Japan and China were also working to converge …show more content…
A convergence would mean that they will need to learn a new system, which is what most people are resistant to. One common theme has been that U.S. GAAP accounting standards are rules-based, whereas IFRS has a principles-based approach. This has been a challenge in areas such as consolidation, the income statement, and inventory and development costs. In consolidation, IFRS favours a control model whereas the U.S. GAAP prefers a risks-and-reward model. IFRS does not isolate abnormal items (events that is infrequent) in the income statement, but U.S. GAAP shows them as net income. IFRS does not allow last-in, first-out. (LIFO) for inventory valuation whereas the U.S. GAAP provides the option of either LIFO, first-in, first-out, (FIFO). Regarding developmental costs, IFRS record the expense as a non-current asset if a certain criteria is met while the U.S. GAAP considers them expenses. U.S. companies aren’t eager to converge the GAAP with the IFRS because most people believe that IFRS does not have the guidance that U.S GAAP offers due to the fact that the U.S. standards are rules-based while the IFRS’s is principles-based. U.S. accounting professionals and corporate management think that the IFRS has lower quality than the
I think that it would be beneficial for United States to switch to IFRS, but I think that SEC should not vote to switching to IFRS after companies spend millions of dollars on converting from GAAP (Maryland).
There also have differences on the effective date between this two standards. Under FASB, public companies will have to adopt the new standard for the fiscal year after December 15, 2019. While all of IFRS users will need to implement IFRS 16 for annual financial report period after January 1, 2019.
GAAP and IFRS have their similarities as well as differences. “GAAP is the accounting standard used in the US, while IFRS is the accounting standard used in over 110 countries around the world. GAAP is considered a more rules based system of accounting, while IFRS is more principles based” (Diffen). The Diffen site compared GAAP and IFRS elements using a chart. The chart is broken down into sections such as performance elements, required documents, inventory estimates and reversal, purpose of framework, etc. GAAP and IFRS both use revenue, expenses, assets, and liabilities as performance elements; but with GAAP gains, losses, and comprehensive income are added. GAAP and IFRS also use some of the same financial statements such as the balance
IFRS 1 requires companies to select IFRS accounting policies and apply those polices retrospectively to all periods presented in the IFRS financial statements. Assets and liabilities required under IFRS have to be recognized. For example, assets and liabilities under finance leases have to be recognized. Assets and liabilities that IFRS does not permit have to be derecognized. For example, deferred costs that do not meet the definition of an asset have to be derecognized. All assets and liabilities have to be reclassified in accordance with IFRS at the transition date. For example, debt issuance costs must be netted against the related financial liability. All assets and liabilities have to be measured in accordance with IFRS. ...
IFRS been used as a trail to make consistent accounting to the European Union but the value of IFRS quickly made the concept important around the world. However, it has been discussed that IFRS can really make a huge difference in financial world because that time IAS (International accounting standards) is been used for financial things and after a year is been replaced by IFRS.
So it appears that there would be some advantages for many aspects, such as accounting quality, when applying IFRS into various countries. Because IFRS would be able to exclude different options of accounting from national accounting standards which could reduce the divergence of management.[ Ahmed, A. S., Neel, M., & Wang, D. (2013). Does mandatory adoption of IFRS improve accounting quality? Preliminary evidence. Contemporary Accounting Research, 30(4), 1344-1372.](Ahmed, Neel & Wang, 2013) This change is likely to be more advantageous for more users, preparers and auditors to make their economic decisions. (Ramanna & Sletten, 2009)[ Ramanna, K., & Sletten, E. (2009). Why do countries adopt international financial reporting standards?. Harvard Business School Accounting & Management Unit Working Paper, (09-102).] Therefore, these expectations of changes would be beneficial for their local economic
Accounting for financial instruments and the issues that go along with it have been an ongoing issue throughout the years for businesses. As a result the Financial Accounting Standards Board have handed down decisions regarding the valuation method that should be used. Whether these decisions are truly the best way to value financial instruments has been up for debate. The earliest decision came down in May of 1993 when the Financial Accounting Standards Board passed Statement of Financial Accounting Standards No. 115. According to the Financial Accounting Standards Board this statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments are classified in one of three different categories. (Financial Accounting Standards Board [FASB], n.d.) For debt securities that a company intends to hold until maturity are classified as “held to maturity” securities. For debt and equity securities that are purchased and then held for the purpose of them being sold in the...
The benefit of switching to a global accounting standard is that a financial statements from a country will be using the same rules as another country’s financial statements. In an increasingly global market place, international comparability is critical to enable the effective allocation of scarce resources (Hicks, 2009). IFRS have allow companies and users of preparing the financial statements to speak the same language, resulting them to be easier to compare with each other. In the current system, if a company used a different rule i...
...GAAPs to IFRS (Zeff, 2012), decreasing their costs of financial reporting and benefiting investors by using one set of standards. This adoption was not without criticism by academics from Germany, Spain, and Austria that believed the proposed changes to the IASB Conceptual Framework were swayed intensely by the collaboration between the IASB and the FASB (Gebhardt, Mora, & Wagenhofer, 2014)
Latto and Sahlstom 2009 examined the impact of IFRS adoption on key financial ratios of Finnish companies. They also found out that liquidity ratio decrease under IFRS compared to local GAAP.
He highlighted that a common set of accounting standards increased the comparability of companies in different countries and facilitated the easy consolidation of group of companies based in different countries. Although IASB sets standards after close scrutiny from different national standard setters, it is evident that it is involved more with convergence than harmonisation. This may in a way also support the sentiments expressed by UK finance directors during a survey that IFRSs undermined UK (and obviously of all other countries) reporting integrity, (Elliott and Elliott, 2009). Countries still need to maintain their national pride as they exhibit substantial economic and cultural differences.
According to Godfrey & Chamlers (2007), GAAP is a rule - based set of standards whereas IFRS are principle - based standards, and switching from Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards(IFRS) will help companies to establish markets, compare financial reporting standards, and compete in the global market. They further stated that less than half of the nation’s worldwide now use the standards of IFRS, and the study also said that the international accounting standards are being accepted by countries like China, Canada, Japan and India. Adoption of International Financial Reporting Standards will help countries to provide stable financial reports and encourage economic growth along with the decrease in capital
The International Accounting Standards Board, (IASB), began life as the International Accounting Standards Committee (IASC) in the 1973. The IASC was created in June 1973 as a result of an agreement by the accountancy bodies of Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland and the United States. These countries constituted the Board of IASC at that time.
Hail, Leuz and Wysocki (2009). Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors. Page 5.
International Financial Reporting Standards (IFRSs) is a set of accounting standards developed by an independent, non-profit making organization popularly known as International Accounting Standard Board (IASB) which was created under the laws of state of Delaware, United States of America, on 8 March, 2001 (IFRS foundation) (IFRS.org, 2017) The objective of the IFRS is to present a unique and comparable accounting framework on how to prepare and disclose their financial statements globally. (Cotter, D., 2012) The most important change that occurred in the history of accounting was the adoption of International Financial reporting standards all around the world.