IFRS and GAAP Convergence - Essay Example

When the financial statements are available in annual reports, it is the responsibility of the managers to evaluate and discuss results of company performance. External parties use these financial statements to analyze the company’s financial performance. Therefore, external users of financial statements are requires to be familiar with the tools and techniques which are used in financial performance analysis (Needles, Powers and Crosson, 2010, p.1270). Financial analysis includes the analysis of income statement and the assets and liabilities in the balance sheet.

It can be done by implementing various tools and techniques such as: common size financial statements, comparative financial statements, ratio analysis, trend analysis, fund flow statement and cash flow statement (Murthy and Gurusamy, 2009, pp.8-9). Accounting Convergence A single set of global accounting standards has to be developed that would be used internationally for international and domestic financial reporting. In order to persuade this practice, the International Accounting Standard Board (IASB) and the US Financial accounting Standard Board (FASB) signed a memorandum of understanding, honoring their commitment towards the convergence of International Accounting Standards and the U.S. .

After the IASB and FASB liberated their disclosure draft on revenue recognition, they got many comments which include the lack of transparency about the transfer of control of services, the accounting for warranties, difficulties in recognizing and separating performance obligations, and the model proposed for licenses of intellectual property. It is found that the proposed standard will cause in the considerable shift in how revenues is documented in many situations. Most respondents believe that the proposed standard will have high impact on their financial reporting and in the process of implementing this standard, additional technology and resources will be required.

More or less 41% of the respondent agrees upon the implementation of the IFRS in either 2015 or 2016. Difference between U.S. GAAP and IFRS There are many differences between the U.S GAAP and IFRS rules regarding the revenue recognition, provisions and contingencies, income taxes, leases, financial instruments, intangible assets, interim financial reporting, and the financial statement presentation. But the most important difference would be in the financial statement presentation. Under the US GAAP rules, normally comparative financial statements are prepared, though a single year may be accessible in certain events.

For the public companies, balance sheets for the two most current years are needed, whereas other statements must contain three year period which should be ended on the balance sheet date. Under IFRS rules, comparative information must be revealed with respect to the prior period for all amounts which are shown in the financial statements. Under US GAAP rules,