In the world of accounting the word ‘convergence’ has become very popular. Convergence describes the elimination of differences and it has become a priority for both the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB). Both the IASB and FASB understand that there is a lot that needs to be done in order for both of them be able to converge the two sets of standards. The goal of the FASB and the IASB is to decrease costs for multinational corporations and to give investors the opportunity of making suitable comparisons between companies across different countries, and this requires convergence. By adopting IFRS, companies can present its financial statements in the same form as their foreign competitors. This would benefit companies with subsidiaries in different countries that also allow IFRS since they will be able to use the same accounting language. On the other hand, many people in the accounting world believe that there are a couple of disadvantages of adopting IFRS. They believe that US GAAP is the gold standard and that if we fully accept IFRS in the US we will lose a certain level of quality and that the cost of implementing IFRS can outweigh the benefits.
The projects toward convergence are significant and will help all countries achieve the same accounting framework. A common accounting framework is essential in the accounting profession and it is a necessary part of the globalization of business and investment. The main question that arises when discussing GAAP vs. IFRS is where the two sets of standards are similar and also where they diverge. IFRS or International Financial Reporting Standards are a set of accounting standards that were developed by the IASB that is becoming the global standard for the preparation of public company financial statements. Many people in the accounting profession also wonder why do these differences exist and what could be done to eliminate them, if they are ever eliminated.
First, before explaining the differences that exist between the two sets of standards, we have to make it clear that while the US and international standards do contain many differences, they have far more similarities. The IFRS is mostly grounded on the same fundamental principles and shares similar accounting results and conceptual framework as the US GAAP. What sets the international standards apart from the US standards is that it contains elements of accounting standards from a range of countries. When creating these standards the IASB was able to look at the US standards and determine where it could make changes to avoid some of the apparent problems in the US standard. In other words, it was able to take a new approach to the existing US standards and make an effort to improve them. This explains why the major difference between the IFRS and US GAAP is basically the deviations of the standards from US requirements. Other differences have been developed through different interpretations. The IFRS generally has broader standards than the US GAAP and prefer to leave implementation of the principles to preparers and auditors.
Many wonder if the differences between these two sets of standards will ever be eliminated. Both the IFRS and US GAAP have made major efforts to achieve that goal. In 2002, they signed the “Norwalk Agreement” in which they made an agreement and commitment to work towards the convergence of the two sets of standards. The Securities and Exchange Commission has played a major role in the proposed roadmap of the convergence. Until the SEC issues a rule allowing the convergence of the US companies to IFRS, companies must continue to follow the US GAAP. The SEC hopes to have all companies adopt IFRS beginning in 2014 and have US issuers report under this new system by 2015 or 2016. However, we must realize that convergence does not mean all differences will be eliminated. They may continue to exist in standards even when convergence has been made.
Finally, once the Securities and Exchange Commission determines when to incorporate IFRS, a possible timeline will be used to follow the next steps in the IFRS adoption. Many large companies like Pricewaterhouse Coopers support the FASB and IASB convergence efforts; however, they also understand that convergence alone will not result in a single set of high quality standards. However, we have to be aware that conversion to IFRS is not only an accounting exercise. The convergence will affect many areas of a US company’s operations. Information technology systems, internal reporting, and tax reporting requirements are just a few examples of these areas.