Both the US and China made a decision to converge

with IFRS. Compare and contrast the progress of both

countries towards this convergence

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The theme whether a standard set of accounting reporting standards should be applied
to the firms has been widely discussed among the scholars. Apparently, by adopting a
common standard, the transparency level of the companies financial reports could
increase and consequently positively affect the investors confidence. Currently, two
standards have been widely used around the world, namely IFRS and US GAAP. The
IFRS (International Financial Reporting Standards) is created by International
Accounting Standards Board (IASB), which objective to developed a single set of
high-quality, understandable, enforceable and globally accounting standards (IFRS,
2013). Meanwhile, the US GAAP is much more target on the firms that are listed on
the US rather than international. In recent years, with the incredible economy increase
in China, the China GAAP has also drawn great attention. After the restructuration of
Chinese market, the majority concepts of the Chinese GAAP have been changed base
on IFRS (Pacter, 2007); and in the US, the SEC is trying to converge the US GAAP to
IFRS (Bunting and Frank, 2008). In this essay, each countrys processes of the
convergence will be addressed initially, and then the comparison will be provided.

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The publication of the Memorandum of Understanding (MoU) is a major convergence

event (US GAAP and IFRS) in 2006. At that time, the full-time standard-setting body
(FASB) and International accounting standards board (IASB) agreed to make efforts
to provide a high-quality standard for implementation in the global capital market
(FASB, 2006). In 2008, two years after this document announced, the FASB and
IASB reevaluated their priorities that contain several joint projects because of the
missing of the earlier targets (Gornik-Tomaszewski and Showerman, 2010).
Meanwhile, the SEC submitted a roadmap for the possible adoption of IFRS by the
USA, which includes: the improvements of the monitoring processes in accounting
standards by the FASB and IASB; the stable funding and autonomy of the IASE
Foundation, and the control education and training (Randy, 2014). Among these
milestones, the last one, education and training has been treated as an essential step,
since a survey that has been conducted by KPMG (2008) indicated 5% professors
would expect their students contain sustainable knowledge of the IFRS rather than US
GAAP. Though this figure is not persuasive enough, a trend can be detected quickly,
and the US GAAP should converge to the IFRS. However, it is not an easy way to do

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that, considering the limited budget on the staff training and, accounting and legal
fees; also the maintenance fee when the two systems are both existing (Outa, 2013).

Similar to the US, the Chinese GAAP also has to face the fact of the convergence to
IFRS, because the difficulties that Chinese GAAP made for the foreign investors,
comparing to the other western terms (Winkle et al., 1994). Therefore, it is logical to
develop a single set of high-quality accounting standards as China has the trend to
become the center of the economic globalization. Moreover, to attract the foreign
investors and also accelerate the speed of Chinese economy, the socialist accounting
model within Chinese GAAP should be changed to the market-oriented model. Under
these conditions, the new accounting standards have been issued by the ministry of
finance. These new standards are in line with IFRS, nevertheless considering the
unique circumstances and environments, the MOF has not fully adopted the IFRS, but
with some changes (38 in special), particularly, the entity s financial position and
performance will have a significant effect. Nevertheless, the different national
conditions have created the gap of the convergence. Firstly, Chinas economy is based

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on the public ownership, which is quite distinct from the other western countries,
where the IFRS has created; like the UK. Secondly, the different government system
has given the Chinese MOF the right to issue these standards, while the US cannot.

The considering the difference between the US GAPP as well as the China GAAP.
Firstly, US GAAP is created by the FASB, which is a non-government organization
on behalf of the profit of the numerous organization, moreover, the SEC has no legal
binding power. While the MOF in China has the force of law to exercise these
standards, and it purpose is to protect the profit of both government and public. To
explain more in details, three aspects should be addressed. Initially, the fundamental.
The US GAAP is based on the rules, which is more focus on the technical operation;
while the China GAAP pays more attention to the principle, and the explanation of
the principle. Secondly, the objective. Under the different national condition, the US
GAAP is much more focus on the application in the US soil, while because the China
GAAP is relied on the IFRS. Therefore it is more flexible than the US GAAP. Finally,
the different standard details. Under the standards of US GAAP, the spend of the R &

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D could be expenditure in most of the case, while it will be capitalization in IFRS;

furthermore, US GAAP allows the last-in-first-out, while the IFRS does not.
Secondly, after understanding the general difference between these two standards,
some specific detail should be mentioned as well. The most important item is the
depreciation. Though the China CAAP also indicates the requirement of the
depreciation, fewer firms have pay attention to this item, because most of the accounts
in China are used to use the historical cost. Therefore the depreciation has been less
taken into consideration. One case explains this condition under both US GAAP,
China GAAP, and IFRS. Suppose one company A has purchased an equipment (with
depreciation in RMB 100 in the following years) with RMB1000 at the beginning of
the year, and at the end of the year, the market price of this equipment has been
increased by 500 RMB. Hence, under the China GAAP and US GAAP, in the
financial statement, the account should write RMB 900 because of the depreciation,
rather than RMB 1500 in IFRS (China Briefing, 2013). Next, the item named
restricted cash has been considered in the US GAAP while in China it is not; the same
situation happened in the fixed asset, under the US GAAP, the rent in the fixed asset

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should take account of the fixed asset. Then the disclosure requirement, China GAAP
require the same day of the financial year and the calendar year, while the US does
not; under the US GAAP, firms usually have the comprehensive income statement,
while in China, firms usually do not.

And finally, the transparency of the China GAAP is not clear enough comparing to
the US, because China is still a developing country, the policy makers have not taken
everything into consideration, besides the law-enforcing department sometimes are
restricted because of the less right to act on behalf of the law. Therefore, to develop
the accounting standards in China, the other policies should also be improved as a
consequence, which should take more time than expected. While, in the US, as a
developed and super country, it is quite easier for the US to change its accounting
standards comparing to China.

Because of the difference between these two standards, the process when converting
the original standard to the IFRS should be different as a consequence. Though the

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US GAAP has been recognized as the best accounting criteria in the world for the last
decade, the tremendous loss of the multinational firms (like Enron) has brought
attention by the scholars to re-think the drawback of this standards. Therefore, as this
essay mentions before, both IASB and FASB had the meeting and sign the Norwalk
agreement to provide better accounting standards that can suit for more firms.

This essay firstly explains the history progresses when both standards (US GAAP and
China GAAP) converting to the IFRS. Undoubtedly, it is not an easy step to achieve,
the US faced the budget restriction, especially on the staff training; while in China,
because of the different properties of government, and the China GAAP cannot fully
adopt the IFRS. Therefore, some changes have been made by the MOF. Secondly, the
differences between two standards have been discussed. There are slightly different
between both standards in general. However, several differences can be found in the
specific item, like the fist-in-first-out and last-in-first-out; or the expenditure and
capitalization.

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