The Generally Accepted Accounting Principles and The International Accounting Standards - Term Paper Example

In looking into bringing the differences between FASB and IASB into a common based accounting standards framework, there is a multitude of areas that are being addressed. The Norwalk Agreement2, which is the name given to the convergence undertaking, as it was set forth in Norwalk, Connecticut in the United States, represents the commitment for both accounting systems to seek solutions to arrive at accounting standards that are compatible in domestic as well as cross border financial reporting.

In working toward convergence, there are a broad number of issues involved, however, the most important is finding a solution to the two conceptual differences that separate the two accounting systems. The preceding represents the ‘rules-based’ foundation and framework for accounting standards as utilized by the Financial Accounting Standards Board and the ‘principles-based’ accounting foundation that is used by the International Accounting Standards Board3. The difference between these two approaches is as follows.

The rules-based accounting standard is based upon the utilization of specific details that address “…address as many potential contingencies as possible”4. This makes the FASB standards highly complex, along with being longer, thereby creating the situation whereby arbitrary criteria is used for accounting treatments5. The foregoing has permitted U.S. companies the latitude to structure their transactions so that unfavorable reporting can be avoided6. Both Nelson et al7 and Shortridge and Myring8 agree that the rules-based approach creates an environment that is conducive to transaction structuring, a negative application, whereby the accounting outcome that is desired is achieved, as opposed to operating within the spirit of the standard.

Under the IASB principles-based accounting standard, a conceptual framework is utilized for accountants to adhere to as opposed to using the detailed rules listing of the FASB9. An understanding of the principles-based IASB method is provided by the chairman of the FASB, Robert Herz, in his speech before the United States Subcommittee on Capital Markets stated that the principles-based approach is based on setting forth what the key and critical objectives are in good reporting in the various subject areas, then providing the guidance that explains the objective, along with relating the preceding to a few common examples.

Herz10 continued that the principles-based IASB approach does employ the use of rules, however that the intent does not rest upon the providing of specific examples (and or rules) for all potential situations. Conclusion In reviewing the foregoing, one can see from Robert Herz’ testimony, that the divide between the FASB rule-based approach, and the IASB principles-based standard are not opposite sides of a coin, but rather different ways of looking at the same side of a coin. Leisening11 advises that in both frameworks the manner of approaching issues in terms of detail differs, however, the foundational conceptual underpinnings are very similar.

Bullen and Crook12 concur with the assessment of Leisening13, stating that the Concept Statement of the FASB, along with the IASB Framework provides for a common ground whereby principles-based accounting represents the conceptual and guidance approach, using elements of rules-based accounting to provide specifically in areas that require such to remove vagueness. Thus, the two standards are not in essence that far apart, they simply need to agree on what both standards already use in some degrees of each other’s approaches.