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SEAH SHIN HUA Abstract

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In todays business, markets are demanding increasing conformity due to worlds capital markets tend to globalisation. This lead to the introducing of International Financial Reporting Standards (IFRS) which is a comprehensive, principles-based system of accounting standards and developed by the International Accounting Standards Board (IASB) as a common standards apply in everywhere. However, only United States still remains its own U.S. Generally Accepted Accounting Principles (U.S. GAAP) which is developed by Financial Accounting Standards Board (FASB) which is not a rigid set of rules but flexible guidelines and are rules based. Recently, FASB has decided to adopt IFRS in United States. Nevertheless, the convergences of US GAAP and IFRS have bring some benefits which included increase comparability, reduce the complexity and reduce the international differences of financial statement and problems which included loss contingency, dual reporting system and human capital readiness. Currently, they have work together to achieve the converged solution for Revenue Recognition and Fair Value Measurement. At last, I also included the evaluation on the convergence of US GAAP and IFRS. (150 words)

SEAH SHIN HUA Introduction

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In todays business, markets are demand for increasing conformity due to worlds capital markets becomes globalised. Thus, it becomes more difficult for the investors and creditors to make comparison on companies financial statements among different countries. This, lead to the introducing of accounting standards which is a guidelines regarding to the principles and methods on preparing the financial statements to provide a true and fair view to the investors and creditors about the companies economic performance (Tulsian 2006). Nevertheless, many countries have converted to and implemented the International Financial Reporting Standards (IFRS), but, only United States is still remains its own U.S. Generally Accepted Accounting Principles (U.S. GAAP) (Deegan 2012, pp25-33). Historical of Convergence IFRS (Ball 2006) is a comprehensive, principles-based system of accounting standards which is developed by the Interntational Accounting Standards Board (IASB), which is an independent organisation, based in London. They are responsible in setting a single set of high quality, enforceable standards that can apply equally to financial reporting by public companies globally to provide a general guidance on preparing financial statement (Scanlon & Patch 2010, p11). US GAAP (Luxottica Group 2013) is a standard guideline of accounting rules for financial accounting and preparing financial statements to private and public trading companies in United States. They are developed by the Financial Accounting Standards Board (FASB) and which is not a rigid set of rules but flexible guidelines and are rules based. The idea of convergence of US GAAP and IFRS is actually arise from the collapsed of Enron and the scandals have shaken the complacency of American regulation to the core. Hence, on September 2002, after joint meeting of IASB and FASB and issued the Norwalk Agreement (Alexander, Britton & Jorissen 2011, p48) which affirmed their mutual commitment to work towards converging the US GAAP and IFRSs (Picker et al. 2009, p24). The purpose of the convergence is to develop common, high-quality standards with ultimate goal of a single set of highquality accounting standards (Derstine & Bremser 2010, p6). They are trying to reduce the differences between two standards in order to develop a common standard which is better quality so that investors can use the financial information to make decision (Alexander, Britton & Jorissen 2011, p49; Pacter 2003). However, they are also trying to replace the weaker standards with stronger standards to satisfy the needs of investors (Alexander, Britton & Jorissen 2011, p49).

SEAH SHIN HUA Benefits

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The convergence of US GAAP and IFRS will bring some benefits to the investors and creditors in United States. Firstly, it helps to increase the comparability of financial reporting which prepared by different countries and improve quality information about the investment and credit decisions in order to provide better quality information to participants in international capital markets (Deegan 2012, p33). Hence, this lead to the increasing investors understanding and confidence on the financial reports (Securities and Exchange Commission 2010) so that they can make a precise investment decision. At the same time, with single set of financial reporting standards it will reduce the financial analysis costs through analysts not having to recast information on a common basis and requiring knowledge (Deegan 2012, p33). Secondly, the convergence of IFRS and US GAAP help to diminish the international differences on the requirements of financial reporting for participants in international capital markets by removing the barriers to international capital flows and also enhance the understanding of foreign investors (Deegan 2012, p33) in order to assist them on cross-border acquisitions and divestitures so that the investors will be rewarded with increased takeover premiums (Ball 2006). Lastly, there is a potential to reduce the financial reporting complexity for large multinational companies that presently prepare many different sets of financial statements in different forms and at the at same time reduce the financial reporting costs (Deegan 2012, p33; Paul & Burks 2010, p4). Problems However, there are still some problems which are potentially influence the convergence of US GAAP and IFRS successfully. Firstly, the transition of US GAAP to IFRSs existing standards will cause the US public companies loss contingencies (Scanlon & Patch 2010, p12). This is because of the lower recognition and disclosure thresholds which create problems for financial reporting in the highly litigious US business environment. Thus, the companies will be required accruals on a more frequent basis and increased disclosure of litigation contigencies which could diminish the reliability of financial statements and threaten important attorney-client protections. Secondly, the conversion of US GAAP to IFRS will probably create a risk on dual-reporting system (Scanlon & Patch 2010, p12). Although Securities and Exchange Commission (SEC) has the authority to determine methods of financial reporting under the federal securities laws, some issuers report financial information to other federal and state regulators but are limited. As under the tax reporting system, SEC has no statutory authority to alter issuers' other financial reporting obligations, so a transition to IFRS as under the
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federal securities laws could lead to a double tax reporting under both IFRS and US GAAP(Scanlon & Patch 2010, p13). At the same time, with double reporting system will the lead to high cost of preparing financial reporting under two sets of accounting standards (James 2011). Thirdly, the transition of US GAAP to IFRS would require a significant investment on human capital readiness. All those involved in the financial reporting system including issuers, auditors, attorneys, regulators, and investors, would need to educate themselves about IFRS (Scanlon & Patch 2010, pp13-14). According to Heffes (2008), the US compnies states that the systems and processes which related to data collection and financial reporting controls must be evaluated and revised therefore IFRS can becomes ingrained in companies processes. But, those problems can be resovable and just needs some times. Major Milestones The first milestone on the convergence of IFRS and US GAAP is about Fair Value Measurement. According to IFRS Foundation (n.d.), on 12 May 2011 the IASB and the FASB have worked together issued a new guidance about the fair value measurement and disclosure requirements for IFRS and US GAAP. The guidance set out the IFRS 13 Fair Value Measurement and which is update to Topic 820 in the FASBs Accounting Standards Codification and referred to as SFAS 157(IFRS Foundation 2009). However, before IFRS 13 was issued, there were difference between the requirements for the fair value measurement and disclosing information about the fair values across many standards and those standards did not articulate a clear measurement. But, after IFRS 13 developed, it has reduces the complexity and also improve the consistency on the fair value measurement, clarify the definition of fair value in order to make the measurement clearly; improve the transparency and increase the convergence of IFRSs and US GAAP(IFRS Foundation n.d.). Thus, this shows that the project was completed due to IASB and FASB have achieved converged solution for it and it only mandatory from 1 January 2013(IFRS Foundation n.d.). Moreover, the second milestone is about the Revenue Recognition. According to PricewaterhouseCoopers LLP (2012), in 2010, FASB and IASB have released an exposure draft(ED), Revenue from Contracts with Customers, which proposing a converged model that would have a significant impact on the current revenue recognition among US GAAP and IFRS. In 2011, the boards believe that a more consistent application can be achieved by exercising a single, contract-based model where revenue recognition is based on changes in contract assets and liabilities (PricewaterhouseCoopers LLP 2012). So, the boards have proposed a model which contains five-step process and the entities would need to follow it if successfully converged. First, need to identify the contract with a customer. Second, identify the separate
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performance obligations in the contract. Third, determine transaction price. Fourth, allocate the transaction price to the separate performance obligations. Fifth, recognize revenue when each performance obligation is satisfied (Lamoreaux 2012). Thus, in February 2013 (IFRS Foundation 2013), the boards have achieved converged solutions for Revenues Recognition accounting. However, according to Financial Accounting Standards Board (2013), they also updated project plan to communicate information about its standards-setting activities to stakeholders which on 3 April of 2013, they have made the final decision on the Revenue Recognition but not yet announce the effective date. Conclusion In a nutshell, there is no right or wrong on the convergence of IFRS and US GAAP. But, based on my opinion, the decision on the convergence of US GAAP and IFRS will be correct decision. IFRS is an international accounting standard and many countries have developed it as guideline for them to prepare financial statements for investors and creditors compare the company economic performance. As compare with US GAAP, IFRS will be easily for investor to company due to many companies have used it whereas US GAAP is only use in United States and it will be very difficult for investor to compare among different countries. Although US GAAP is more rule based and flexible than IFRS which is less detail and more principle based but US GAAP cannot apply to every country. This convergence may bring higher accounting cost for FASB but is only the first two years and after that they can save the cost and prevent double accounting system. However, there is a need of collaboration between IASB and FASB so that this convergence can be successful. Whenever there is a problem, they should work together to find out the problem and solve it. Therefore, it can help to develop a harmonisation accounting standards. (1500 words)

SEAH SHIN HUA REFERENCE

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Alexander, D, Britton, A & Jorissen, A 2011, International Financial Reporting and Analysis, 5th edn, Cengage Learning EMEA, Hampshire, United Kingdom. Ball, R 2006, International Financial Reporting Standards (IFRS): pros and cons for investors, Accounting and Business Research, vol.36, no.1, pp5-27. Deegan, CM 2012, Australian Financial Accounting, 7th edn, McGraw-Hill Australia Pty Limited, New South Wales. Derstine, RP & Bremser, WG 2010, The Journey Toward IFRS in the United States, The CPA Journal, vol.80, issue 7, pp6-8. Financial Accounting Standards Board 2013, Current Techinical Plan and Project Updates, accessed date 10/04/2013, http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid =1218220137074 Heffes, EM 2008, Global Accounting Firm CEOs on Challengs-Transitioning From GAAP to IFRS, and More, Financial Executive, vol.24, issue 4, pp14-16. IFRS Foundation 2009, FASB and IASB Reaffirm Commitment to Memorandum of Understanding, accessed 10/04/2013, http://www.ifrs.org/Use-around-the-world/Globalconvergence/Convergence-with-USGAAP/Documents/JointCommunique_October2009FINAL4.pdf IFRS Foundation 2013, Meeting of the G20 Finance Ministers and Central Bank Governors 15-16 February 2013 Update by the IASB and FASB, accessed 10/04/2013, http://www.ifrs.org/Usearound-the-world/Global-convergence/Convergence-with-US-GAAP/Documents/IASB-FASBG20-Update-February-2013.pdf IFRS Foundation n.d., Fair Value Measurement, accessed 10/04/2013, http://www.ifrs.org/CurrentProjects/IASB-Projects/Fair-Value-Measurement/Pages/Fair-Value-Measurement.aspx# James, ML 2011, Integrating International Financial Reporting Standards Into The Accounting Curriculum: Strategies, Benefits and Challenges, Academy of Educational Leadership Journal, vol.15, special issue, pp127-142. Lamoreaux, MG 2012, A new system for recognizing revenue, accessed date 08/04/2013, http://www.journalofaccountancy.com/Issues/2012/Jan/20114806.htm Luxottica Group 2013, U.S. GAAP-Generally Accepted Accounting Principles, accessed 07/04/2013, http://www.luxottica.com/en/governance/us_gaap_accounting_policies/ Pacter, P 2003, Convergence of IFRS and U.S. GAAP, The CPA Journal, vol.73, issue 3, p67. Paul, A & Burks, E 2010, Preparing for International Financial Reporting Standards, Journal of Finance and Accountancy, vol.4, pp1-8. Picker, R, Leo, K, Loftus, J, Clark, K, Wise, V & Dyki, M 2009, Australian Accounting Standards, 2nd edn, John Wiley & Sons Australia, Queensland.
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PricewaterhouseCoopers LLP 2012, IFRS and US GAAP similarities and differences, accessed 08/04/2013, http://www.pwc.com/en_US/us/issues/ifrs-reporting/publications/assets/ifrs-and-usgaap-similarities-and-differences-2012.pdf Scanlon, MJ & Patch, DP 2010, A Tough Road Ahead: The SECs Work Plan for Assessing IFRS Adoption by U.S. Public Companies, Insights: The Corporate & Securities Law Advisor, vol.24, no.5, pp11-15. Securities and Exchange Commission 2010, Commission Statement in Support of Convergence and Global Accounting Standards, Securities and Exchange Commission, Washington DC. Tulsian, PC 2002, Financial Accounting, Dorling Kindersley (India) Pvt. Ltd, New Delhi, accessed 02/04/2013, http://books.google.com.my/books?id=02Bke8azRtgC&pg=SA2PA11&dq=meaning+of+accounting+standards&hl=en&sa=X&ei=bHhhUeziNoHprAeShYGICw &ved=0CDgQ6AEwAQ#v=onepage&q=meaning%20of%20accounting%20standards&f=false