Accounting Standards and Rules
Instructions: In your paper, discuss the Convergence Project between FASB and IASB, and be sure to include the history, current progress made, current status and future goals of the project.
Identify and write about three major differences between GAAP and IFRS. In addition to listing the differences between GAAP and IFRS, discuss what has been done to minimize the differences (if any), and how the differences will affect United States Companies if they are implemented.
Finally, research and discuss the differences between principles based accounting rules (IFRS) and rules based accounting rules (GAAP) and present your opinion on what method is better. Justify your opinion in your paper.
Your paper must be formatted using APA format (double space, 1” margins all around, etc. minimum of 2 pages.
Solution.
Accounting Standards and Rules
Part One
The convergence project between FASB and IASB
The objective to launch this project was to get rid of the differences between the two financial accounting systems, International Financial Reporting Standards(IFRS) and the US Generally Accepted Accounting Principles. October 2002, an agreement was passed between the two boards, FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board). The agreement was known as the Norwalk Agreement. The project has particular significance as the leaders of the G20 issued a statement in the year 2009 requesting for a convergence of the accounting standards in the nations involved. Still the commitment to achieve the convergence of the standards is alive as reaffirmed in the 2012 and 2013 G20 meetings (IFRS Foundation, 2016).
The two boards have launched both short term and long term convergence projects intended to eliminate the differences. In November 2007 the project made a milestone achievement towards the use of IFRS. The board achieved that it would be better if all the public companies in the US to use standards propagated by a unitary global standard setter as the primary basis for preparing their financial reports. Therefore, it was advised that the use public companies be moved to the improved version of IFRS. Some convergence projects are completed as planned. Other projects have been carried out partially others have been discontinued or resulted in the differences between the two boards. Future goals for the convergence project include revenue recognition, leases, and financial instruments.
Part Two: The GAAP and The IFRS
The International Financial Reporting Standards(IFRS), is a standard that is utilized by the 110 countries around the world has major differences in with the GAAP. Conceptually, the IFRS is principle-based as US GAAP is considered as “rules-based.” Therefore, IFRS represents and captures the transactional economics better than the US GAAP. One of the key difference is in the treatment of intangibles, such as R&D and advertising costs. The acquired assets, under the GAAP, are documented at fair value. Under the IFRS, the acquired intangible is an asset that will have a future economic benefit and is reliable. Also, another difference comes up in the treatment of inventory costs. Under the IFRS, the method of inventory costs called LIFO (last -in, first-out) is not allowed. Under GAAP, either of the estimated inventory costs can be used. This has an effect on the comparability between nations hence removing the need for analysts. Lastly, IFRS a written inventory can be reversed for future periods if all the criteria are met. The US GAAP does not allow reversal on any written inventory (Kemp & Waybright, 2015, p. 260).
Minimizing such differences; the two boards formed a convergence project mentioned earlier. These convergence has impacted on companies in the country. Research shows that firms that apply international standards experience a higher change in the net income, significant lower relationship between accruals and cash flows, high changes in cash flow. In short, the companies in the US that apply this method that eliminates differences between the GAAP and IFRS show more top quality in their accounting procedures. On the downside, most CEO’s in the firms in the US do not approve of it because of the costs involved. The method when used impacts on the company’s internal control system and financial reporting. Another cost-sucking way is the public perception of the integrity of new standards (Barniv & Myring, 2015).
The convergence project is indeed a new hope for accountants
unlike the periods of the US GAAP. Not only does companies adhere to this
convergence benefit but also it leads to disclosure of qualitative and
quantitative information about contracts. However, its benefit of is
recommended because the it is responsive to the changing
environment. Convergence will require learning a new system of financial
accounting in which most of the accountants will be resistant. Some CEOs claim that IFRS lacks guidance as compared to
the US GAAP. With all this said the convergence should provide for less
confusion and complexity that exists between the two accounting systems.
References
Barniv, R. R., & Myring, M. (2015). How would the Differences between IFRS and US GAAP affect US Analyst Performance? Journal of Accounting and Public Policy, 34(1), 28-51.
Ewert, R., & Wagenhofer, A. (2005). Economic Effects of tightening Accounting Standards to restrict Earnings Management. The Account`ing Review,, 80(4), 1101-1124.
IFRS Foundation . (2016, June 6). Retrieved from International Financial Reproting : http://www.ifrs.org/use-around-the-world/global-convergence/convergence-with-us-gaap/Pages/convergence-with-us-gaap.aspx
Kemp, R., & Waybright, J. (2015). Financial accounting. Pearson Higher Ed.
Revsine, L., Collins, D. W., Johnson, W. B., & Mittelstaedt, H. F. (2005). Financial reporting & analysis. New York, NY: Pearson/Prentice Hall.
Tysiac, K. (2015). Revenue Recognition Revisited: One-Year Delay and Other Clarifications Proposed in Convergence Project. Journal of Accountancy, 219(4), 20.