The value of international accounting standards has been discussed for a number
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Question
The value of international accounting standards has been discussed for a number of years, but with the increased global activity in business in recent history, the need for such has grown in importance. As you may have discussed in financial accounting courses or have seen in business news reports, the international standards [IFRS] have been in use by a number of countries, but not the US. The US has continued to report under GAAP, but the FASB is currently in process of the convergence of the two sets of standards, amid much debate, including the impact convergence may have on SEC reporting for US companies and the adequacy of the international standards in addressing complex issues. Should the US move ahead with the convergence of GAAP and IFRS? Why or why not?Explanation / Answer
Globalization, the Sarbanes-Oxley Act, the Securities and Exchange Commission (SEC)'s adoptv ion of international standards, and the economic and financial meltdown of The Great Recession in recent years have been exerting pressure on a number of countries, including the United States, to eliminate the gap between the International Financial Reporting Standards (IFRS) and the U.S. Generally Accepted Accounting Principles (GAAP). Such initiatives have consequences on the world of accounting diversity, and the standards convergence of the U.S. GAAP along with the IFRS largely impacts corporate management, investors, stock markets, accounting professionals and accounting standards setters. Additionally, the convergence of accounting standards is changing the attitudes of CPAs and CFOs toward the harmonization of international accounting, affecting the quality of the International Accounting Standards and the efforts made toward the goal of convergence of GAAP and IFRS standards.
Financial reporting standards and requirements vary by country, which creates inconsistencies. This problem becomes more prevalent for investors when they are considering funding capital-seeking companies that follow the accounting standards and financial reporting of the country in which they are doing business.
The main difference between the GAAP and the IFRS is one of approach: The GAAP is rules-based while the IFRS is a principles-based methodology. The GAAP consists of a complex set of guidelines attempting to establish rules and criteria for any contingency, while the IFRS begins with the objectives of good reporting and then provides guidance on how the specific objective relates to a given situation.
*** There are following reasons which shows that US should move ahead for convergence of IFRS & GAAP . These are as follows:
1) Impact on Corporate Management:
Corporate management will benefit from simpler, streamlined standards, rules and practices that apply to all countries and are followed worldwide. The change will afford corporate management the opportunity to raise capital via lower interest rates while lowering risk and the cost of doing business.
2)Impact on Investors:
Investors will have to re-educate themselves in reading and understanding accounting reports and financial statements following the new internationally accepted standards. At the same time, the process will provide for more credible information and will be simplified without the need for conversion to the standards of the country. Further, the new standards will increase the international flow of capital.
3) Impact on Stock Markets
Stock markets will see a reduction in the costs that accompany entering foreign exchanges, and all markets adhering to the same rules and standards will further allow markets to compete internationally for global investment opportunities.
4)Impact on Accounting Professionals:
The shift and convergence of the current standards to internationally accepted ones will force accounting professionals to learn the new standard, and will lead to consistency in accounting practices.
5)Impact on Accounting Standards :Setters
The development of standards involves a number of boards and entities that make the process longer, more time consuming and frustrating for all parties involved. Once standards have converged, the actual process of developing and implementing new international standards will be simpler and will eliminate the reliance on agencies to develop and ratify a decision on any specific standard.
**** Reasons that shows US not willing the convergence of IFRS & GAAP:
There are specifically two areas that are directly impacted: a company's financial reporting and its internal control systems. Another cost involved in the transition and change to the IFRS is the public's perception of the integrity of the new converged set of standards. The SEC reporting requirements will also have to be adjusted to reflect changes of the converged system.
The major difference between GAAP and IFRS comes down to one being rules- based and the other being principles-based; this has posed a challenge in areas such as consolidation, the income statement, inventory, the earnings-per-share calculation and development costs. In consolidation, IFRS favors a control model whereas the U.S. GAAP prefers a risks-and-reward model. IFRS does not segregate extraordinary items in the income statement, but U.S. GAAP shows them as net income. IFRS does not allow LIFO for inventory valuation whereas the U.S. GAAP provides the option of either LIFO, average cost or FIFO. Under the IFRS the EPS calculation does not average the individual interim period calculations, but the U.S. GAAP does. Regarding developmental costs, IFRS capitalizes them if certain criteria are met while the U.S. GAAP considers them expenses.
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