Declaration: We hereby declare that this project entitled as The Current Situation and Issues of Convergence Project conducted

by IASB and FASB submitted to the Universiti Sains Malaysia, is a record of an original work free of plagiarism done by us under the guidance of Professor Dr. Fauziah Md. Taib from School of Management, Universiti Sains Malaysia.

Signature: .. Name : Bao Niuman Date :

Signature: .. Name : Nor Ihsan Bin Abd Latif Date :

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TABLE OF CONTENTS

BIL 1 2 3 4 5 6 7 8 9 10 11 12 13 14 DECLARATION

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TABLE OF CONTENTS EXECUTIVE SUMMARY LITERATURE REVIEW QUESTION 1 QUESTION 2 QUESTION 3 QUESTION 4 QUESTION 5 QUESTION 6 QUESTION 7 CONCLUSION REFERENCES APPENDIX

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EXECUTIVE SUMMARY Recent years, Convergence project becoming global issue and has been discussion or debate among people all around the world whether US GAAP should convergence with IFRS or not. This converge project will make IFRS as a single set of globally accepted accounting standards. This project will discuss about why convergence should do and what major problem facing in order to convergence between IFRS and US GAAP. In addition, this project also will highlight difference between IFRS and US GAAP which will impact on convergence project. In order to answer about convergence project, we will answer based on the seven questions that have been provided as guideline to complete this project paper. Below is the question that will be answered and discuss throughout this project paper. 1. Discuss the history, background leading to two sets of accounting sets of standards. 2. What are the major differences between IFRS and US GAAP 3. Document the major success out of the two sets of standards. 4. Which of the two standards are more successful? 5. Discuss the major problems that are facing the convergence project. What are the major impediments and factors leading to a successful convergence project? 6. Why many companies are using IFRS than US GAAP? What are the main motivations for companies to use one standard over another? Explain.
7. In your opinion, how fast can the convergence take place and how to speed up the

whole process? What are the major factors that have to be there before the convergence can run on smoothly?
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LITERATURE REVIEW IFRS and US GAAP are two most widely used accounting standards all over the world. IFRS is exercised in more than 120 countries all over the world (Grant Thornton). US GAAP is main accounting standard exercised in American capital market (SEC). As the demand for higher quality of financial information by stakeholders, the converged high-quality accounting standard is highly required, it can benefit stakeholders by providing comparable information for decision making (Jermakowicz. E.K, Mcguire B), the trend of convergence is certain and unavoidable. Before put the convergence project on the table, FASB had done an overall check between IFRS and US GAAP, according to their conclusion the US GAAP can provide higher reliable and informative information than IFRS (FASB), and there were around 250 key differences between US GAAP and IFRS. IFRS and US GAAP all are structured as principlebased accounting standards, but US GAAP is more detailed in rules and regulations (KPMG). After reached the Norwalk Agreement, the US GAAP started to switch to adopt IFRS, the convergence bodies need to overcome technical challenges, the traditions and approaches of different countries, professional development and political concerns (Jermakowicz. E.K, Mcguire B). Despite the difficulties to the convergence project, the bodies have achieved several remarkable monuments (PWC). However there are still some arguments on issues as financial instrument, revenue and so on. It still needs time to finish the whole convergence work. Currently convergence project of IFRS and US GAAP is top priority both on IASBs and FASBs agenda (PWC). Accounting professions are looking forward to the benefits brought by ultimately converged accounting standard.

1. Discuss the history, background leading to two sets of accounting sets of standards. Recently, there have two set of accounting standards widely been used by many companies all over the world. The two accounting standard are International Financial Reporting Standards also known as IFRS and US GAAP stands for United States Generally Accounting Principles. For information, companies operate in the United States are required to us U.S GAAP as their accounting standard or framework to report their financials. Meanwhile, IFRS is an accounting standard that have been develop and widely used in more than 100 countries around the world. The International Financial Reporting Standards was developed by the International Accounting Standards Board (IASB) which operating in London. This accounting standard becoming global standard for the preparation of financial statement for public company. The process of develop IFRS standards has been started from June, 1973 under organization known as the International Accounting Standards Committee (IASC) which were formed to fulfill the need for standard that could be used by smaller nations in order to create their own standard. In 1973, IASC consists of the professional accounting bodies of Australia, France, Germany, Canada, Japan, Mexico, Netherlands, United Kingdom, Ireland and United States. International Accounting Standard (IAS) resulted from formation of IASC which this standard widely used and championing the uniformity and standardization of accounting principles over two decades (Carlos, P.1997). From the middle in 1980 until to the early 2000, economy became global and make many companies all over the world realize the benefits they get resulted from utilizing a single set of international accounting standard. Thus, make many companies especially in European had begun using a modified version of US GAAP in preparing their financial statement in order to participate global economic. This situation resulted IASC to promote the

use of International Accounting Standard as opposed to using US GAAP. Meanwhile, in April 2011, the International Accounting Standards Board (IASB) was established and took over the International Accounting Standards Committee. The objective of IASB is to develop a single set of understandable, high quality and enforceable accounting standards to help participants in the worlds capital market and other users to make economic decision (www.iasb.org). From 2001, IAS has been renamed as International Financial Reporting Standards (IFRS) and was manage by IASB. Furthermore, IASB is independent standard setting boards which mean this body doesnt represent any particular country. Today, IFRS is now widely accepted by more than 101 countries require or permit use the IFRS. However, the United Sates is the only countries have not yet to decide either to permit or require U.S companies to use IFRS instead using US GAAP. Seeing what the FASB is doing, one can rightly conclude that accounting is too important to leave to the accountants. (Letter from Malcolm S. Forbes, Jr. to Dennis Beresford, Financial Accounting Standards Board January 28, 1994) As we know, companies operate in U.S are required use US GAAP in preparing and reporting the financial statements. GAAP is the term in financial accounting which is about framework, principle and procedures developed by Financial Accounting Standard Board. The process development of US GAAP begins after Securities Act of 1934 has been passed and thus, the Securities and Exchange Commission (SEC) was formed and has the power to establish standards for financial reporting of U.S companies. However the power to develop standards has been change to the American Institute of Certified Public Accountants (AICPA). From that moment, AICPA was responsible for establishing accounting standard

and there have two committees in different time get involved in that process which is the Committee on Accounting Procedure (1938-1959) and the Accounting principles Board (1959 1973). In the 1973, Financial Accounting Standards Board have been created as new organization (nonprofit organization) appointed by SEC which is responsible to develop unbiased accounting standards. The standards are recognize as authoritative by SEC and widely used most of companies in United States.

2. What are the major differences between IFRS and US GAAP? Due to the different in IFRS and US GAAP, the convergence between both standards become complex. There have few major different between two standards. One of them is underlying difference concept. US GAAP is tend to be rules-based while IFRS tends to be principles-based. Normally, rule-based standards are easily applied and implement rather than principle-based standards. Rules-based defined as a list of detailed rules that must be followed when preparing the financial statements. Meanwhile, principle-based rules is used as a conceptual basis for accountant (The CPA Journal Online). Thus, it resulted this standards more flexible and allows different interpretation of similar transactions. Furthermore, rules-based will create misleading or fraudulent in financial reporting due to the exceptions of the rules (e.g., Enron) (Vincent et al.2003). Next differences is inventory valuation or costing method between two set of standards. IFRS does not permit Last In First Out (LIFO) while, US GAAP have freedom to choose either First In First Out (FIFO), LIFO, or weighted average cost. According to the investopedia, LIFO defined as an asset-management and valuation method that assumes that all assets acquired last are the ones that are used, sold or disposed of first. The reason most companies in U.S use LIFO method is because tax advantageous. However, disadvantage using LIFO is it will impact on tax liabilities due to the revalue inventory. Furthermore, significant difference is defining equity and debt. US GAAP require companies to reevaluate whether an embedded derivative should be separated at the end of reporting period, while IFRS only requires this if there is a change in terms that significantly change or modified the cash flows. In addition, US GAAP recorded convertible debt as long term debt, while IFRS records convertible bonds separately into the equity component and the debt component.

3. Document the major success out of the two sets of standards. As mentioned before, IFRS and US GAAP are two sets of most successful accounting standards existed in the world; Both of IFRS and US GAAP are as the guidance providing relatively high quality of accounting statements. IFRS and US GAAP could achieve current successes mainly rely on their features. To go by appearances, the IFRSs success is embodied in widely acceptances all over the world, according to the Comparison between US GAAP and International Financial Reporting Standards by Grant Thornton, May 2013 there are roughly 120 countries currently using IFRS. European Union has boost IASB a lot, UN regulates all the listed companies on the European Stock Exchanges must follow by IFRS. However the IFRS is not applied in the United State of America, US companies are required to under US GAAP as guidance. US GAAP is always regarded as benchmark to evaluate high-quality accounting standards as stated by Arthur Levitt, the ex-chairman of SEC (Levitt, 1998). From the view of looking into the substances of IFRS and US GAAP, IFRS is more likely to regard as principle-based accounting standard and US GAAP is commonly treated as rule-based accounting standard. Therefore the overriding requirement of IFRS is giving a fair interpretation and presentation to the financial statements, and for US GAAP, the ultimately destination is giving fair interpretation and presentation to the financial statements by complying with US GAAP strictly (KPMG, November 2013). IFRS as principle-based standard usually is more flexible, it requires companies and their auditors to exercise professional judgment. US GAAP is thought of more prescriptive rule-based standards (PWC, June 2013), it is largely based on principles but supplemented by extensive rules and regulations (Jermakowicz, Mcguire, 2002). The more detailed US GAAP fits the situations of American markets well, especially after the financial scandals of Enron and WorldCom, the US GAAP is dedicating to ensure and maintain the high quality of financial statements.

Therefore the two sets of accounting standards all could provide relatively high quality financial statements; both of them have their acceptance and market. IFRS is more flexible and US GAAP is more prescriptive, these characteristics are help to build their success.

4. Which of the two standards are more successful? Nowadays, the International Financial Reporting Standard (IFRS) became most successful accounting standards due to the over 12,000 companies in more than 100 countries used and practice this standard in order preparing financial statements. Some countries that has been adopted using IFRS as their national standards are Australia, New Zealand, Brazil, Chile etc. Meanwhile, Mexico are newly country adopted IFRS on 2012. It will followed by other countries such as Japan in future to adopt IFRS or converge their national standards with IFRS. This show IFRS becoming global standard for preparing and reporting business financial statement. The factor of IFRS success is the transparent in standard setting process and comparable financial statements which clearly reflect economic condition. Thus, it will increase the confidence level of investor and also to ensure the integrity and quality of the standards. In addition, the underlying approach which is based on principle-based approach is the factor of IFRS success. This approach result a clearer and more understandable and also flexible. The successful of IFRS as accounting standard is because it created in the interest of investors. Its mean financial report as reference for investor in order to invest and serve as communication between company and investor. Thus, it become responsible to IASB to ensure that investor interest remain primary concern in development of IFRS. In addition, IFRS will make investor from anywhere become understandable of financial statement which means investor can read and able to understand IFRS financial statement from any country in his or her own native language. Todays, the IFRS is likely lingua franca to our planet.

5. Discuss the major problems that are facing the convergence project. What are the major impediments and factors leading to a successful convergence project? Convergence project by IASB and FASB had been activated from the Norwalk Agreement since the year of 2002. In this convergence project, US GAAP is the part moving toward IFRS. Without question the biggest barrier of the convergence project is the main difference between IFRS standard and US GAAP standard. Based on the FASBs early research there were more than 250 key differences between IFRS and US GAAP (FASB, 1999). Moreover due to the differences between principle-based and rule-based accounting standards, understanding the similarities and differences is very important for constructing convergence between IFRS and US GAAP. In that early report FASB also believed that US GAAP could provide more informative and better quality of accounting statements than IFRS because of US GAAP is more detailed in order to reduce the uncertainty and IFRS has left too many spaces for stipulating. Other than the differences between IFRS and US GAAP, there are some other problems concerning about convergence project. Those problems are such as different nations situation, political variances and so on. At the same time due to the complexity of convergence, the convergence cost is extremely high and it requires massive involvement of professions. Lastly convergence is a long step-by-step process, it consumes lots of time. Despite many problems faced by convergence project, there are still many factors to encourage the convergence project. The globalization of economy can be treated as the most significant incentive to convergence project; the global economy has largely increased the demand for single set of high-quality international accounting standards to provide highly reliable financial statements. The users desire to have comparable information to assist decision making. The convergence project will also relieve the burden of international organizations (Hail L, Leuz C, Wysocki, 2009) for example the European multi-country
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company need not to prepare one set of financial statement under IFRS to adapt European market and at the same time prepare one the other set of financial statement under US GAAP in order to fulfill the requirement of SEC.

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6. Why many companies are using IFRS than US GAAP? What are the main motivations for companies to use one standard over another? Explain. As mention earlier, many companies using IFRS rather than US GAAP because their foundation or underlying concept. US GAAP based on detailed rules rather than principles. Thus, IFRS have advantage of being use principle-based approach which IFRS is less complexity and flexible and also allow for more interpretation. In addition, using IFRS by different countries will increases the level of foreign investment by reducing the information asymmetry (Gordon and Bovenberg, 1996). Furthermore, IFRS is the high quality financial standard which financial reporting becoming comparable. Moreover, by using IFRS as single set of accounting standards or global reporting language (Flynn, 2008) will make easier to compare the financial reporting entities from different countries. Thus, it will also help investor understandable. Due to global reporting language, it will saves cost for companies with foreign operation. This because the cost will be reduced since all the financial reporting are going to be done in a uniform manner in all the different branch of the companies.

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7. In your opinion, how fast can the convergence take place and how to speed up the whole process? What are the major factors that have to be there before the

convergence can run on smoothly? Up to the year of 2013, it says that the IASB and FASB have made some key accomplishments about the convergence project (PWC, 2013). As said by PWC the convergence boards have committed to issue a final version of converged revenue standard in the July of 2013. This converged revenue standard will influence a branch of industries but it will not start to work until the year of 2017. The boards also issued a revised exposure draft about lease in the May of 2013, but it seemed there are some oppositions. While the boards having issues about financial instruments and insurance contracts as well. However it seemed that the convergence project is still the preference on the IASB and FASBs agenda. As said before the convergence project requires large number of specialists, money and time. The boards need to think of how to diminish the differences and reach similarities between IFRS and US GAAP, and how to let the converged accounting standard suit each countrys situation well. The motivation of accelerating the pace of convergence project is international high-quality comparative financial statements prepared under the converged standard. From long-term perspective, the convergence project can enhance the confidence of decision makers, and convergence project could regulate and unify the international capital market. Convergence project can benefit more than its cost.

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CONCLUSION In recent year, there have discussion among us about the convergence project which will involve FASB and IASB. This process were begin in 2002, an agreement between FASB and IASB on a plan to formally undertake efforts to converge two set of standard, IFRS and US GAAP. This agreement call the Norwalk Agreement. By referring to the timeline, this process of convergence may take long time before the full convergence can be implemented. This is due to differences between both standard that should eliminate or reduce in order to convergence. This process very complex because some of American companies will not be likely to fully adopt IFRS because IFRS differ from US GAAP. However SEC and IASB should sit together and discuss among them on how to do convergence between IFRS and US GAAP. This convergence project should be implement even it will may take a long time before can be fully convergence because it will give many benefit not only for company but it will also to investor and country that adopt this convergence.

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REFERENCES Christian Leuz, 2000. "IAS versus US GAAP: A "New Market" Based Comparison," Working Paper Series: Finance and Accounting 48, Department of Finance, Goethe University Frankfurt am Main. Arthur Levitt (1998), The Importance of High Quality Accounting Standards, Accounting Horizons, Vol. 12, No. 1, pp. 79-82. Rehberg, M. (2008), Worldwide adoption of IFRS, Emerging Markets Weekly, February Eva.K.Jermakowicz, Brian.L.Mcguire, (2002), Rules-Based v Principle-Based Accounting Standards: Potential Impact on Financial Reporting IFRS compared to US GAAP, KPMG, November 2013 IFRS compared to US GAAP, KPMG, November 2013 US GAAP convergence and IFRS: What you need to know about the IASB and FASBs joint projects, PWC, June 2013 FASB (1999), The IASC-U.S Comparison Project: A Report on the Similarities and Differences between IASC Standards and U.S. GAAP, second edition, Norwalk Luzi Hail, Christian Leuz, Peter Wysocki (2009), Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors, February 2009

http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176154526495 http://www.scribd.com/doc/37235418/USGAAP-Overview http://www.ehow.com/about_4706103_who-founded-gaap.html

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APPENDIX

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Difference between IFRS and US GAAP

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