Convergence between GAAP and IFRS - Essay Example

Furthermore, consideration in respect of financial statement presentation and business combination is required significant convergence (Kaiser et al., 2012). Challenges and Benefits of Convergence As far as the convergence is concerned, it can be observed that US public listed companies will be benefitted more if they adopt IFRS as an obligation from SEC. There are various difficulties as well as benefits of adoption of IFRS as a means of convergence. The major difficulty that may arise due to such convergence is the transition of financial statements from US GAAP to IFRS.

The transition will cause a significant change in both the financial performance and financial position of the entities. There is likelihood that the entities may not be able to present better financial results due to such convergence which, otherwise they would have presented in case of applying US GAAP. However, the advantages of convergence still supersede the challenge of transition of IFRS by US listed entities. Some of these advantages are discussed as under: The first and foremost advantage of convergence to a single accounting framework is the comparability.

The benefit of comparability can be illustrated through an example. For instance, if a US entity plans to be merged with a European counterpart, the issue arising for both the firms would be of comparability. The US firm would be following US GAAP and European firm would be applying IFRS. In such case, both the financial statements cannot be matched with each other, as the accounting frameworks are different. Under US GAAP, inventories are valued at LIFO whereas IFRS asks the entities to use FIFO.

For that matter, one of the entities would have to translate its financial statements according to the counterparty’s accounting standards. The element of comparability can facilitate the international investors especially those who are interested in the stocks of listed entities. The uniformity of the accounting framework across the globe can help them interpret and compare the financial statements of those companies which are located in different geographical boundaries (Shamrock, 2012). This would make the financial statements more comparable across the globe and would result in an increasing investors’ base.

Comparability of financial statements can lead to increase in the inclination of international investors to participate actively in the global equity markets as this step can simplify the cross border investments along with amalgamation of different equity markets. Increased liquidity and reduced cost of funds are the additional benefits that can be reaped through comparability. In short, there would be increased access available to the US MNCs to reach across the globe and utilize their resources in an efficient manner.

The second most important benefit available to US entities regarding the adoption of IFRS is the reduced cost of financial reporting. Since these are the costs which US multinational companies have to face because their operations are spread widely across the globe and they have to prepare and translate the financial statements as per jurisdiction’s applicable financial reporting framework, thus causing increased cost of financial reporting. If US entities are obligated to adopt IFRS, it would result in the