Accounting graders: use points by question to assign points. 20 points total. Co

Question

Accounting graders: use points by question to assign points. 20 points total.

Communication grader: 10 points for communication.

1.     What is meant by “convergence”? (2pts.)

2.     Briefly describe at least two major benefits of a single set of financial standards. (4 pts.)

3.     What might explain the fact that different accounting standard-setters have developed accounting standards that are quite different in nature? (4 pts.)

4.     Discuss the difference between a rules-based approach and a principles-based approach to developing financial accounting standards; which set of standards is more rules-based and which is more principles-based? Which do you think is better and why? (6 pts.)

5.     Give two examples of specific differences between IFRS and U.S. GAAP. (4 pts.)

Explanation / Answer

1 . In general terms convergence refers to the process of use of various technologies towards the establishment of the common goal. In accounting it refers to the process of harmonising the various accounting standards and principles that can be used worldwide without holding any differences in terms of place, currency, principles etc. So that the outcome of the process of accounting will be the same everywhere.

2 . Benefits of single set of financial statements:

3. The fact that different accounting standard-setters have developed accounting standards that are quite different in nature is due to the objective and mind set with which these accounting standards are being developed.

The accounting standards are developed with different approaches like some accounting standards are developed using a principle base approach, whereas some are developed as rule base or some may be tax oriented. As the objective of every standard changes , it approach also changes and so its nature.

4. Difference between principle based approach and rule based approach:

     Principle base approach: This approach states that company must follow the basic principles of     the accounting i.e. the principles on which basic foundation of the accounting lies it includes principles of consistency, regularity, prudence, continuity etc.

The aim behind principle base approach is that company must include these principles in their daily operations

Rule based approach: According to this approach, rules are designed that are required to be followed by the enterprises in reporting their financial information. These rules are mandatory in nature and required to be followed in every circumstances.

The objective behind rule base approach is having a financial reporting system which if not being followed will lead to penalties.

GAAP is rule base approach and IFRS is principle based.

Every approach has its advantages and disadvantages. So, a hybrid of both is required to get the maximum of the accounting process .

5. Difference between US GAAP and IFRS:

    1. Under US GAAP companies are allowed to use any of the method (LIFO or FIFO) for inventory valuation but under IFRS only FIFO method can be used. IFRS does not support LIFO method of inventory valuation.

2. Under US GAAP development costs are always treated as expenses. However under IFRS it can be capitalized if certain conditions are met.

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