IFRS US GAAP Convergence Programme - Example

US-GAAP and IFRS Convergence of Introduction This paper seeks to critically discuss the potential advantages and problems arising from IFRS – US GAAP convergence programme. This is being done in view of the US Securities and Exchange (SEC) having declared support for the convergence of global accounting standards although said Commission has not decided to incorporate IFRS into the US financial reporting system. This paper will also review the advantages and disadvantages of the convergence programme in relation to the need or purpose in the first place. 2.1. Status of Convergence of GAAP and IFRS - As of January 2014, the final standard on revenue recognition is set to be issued in the first quarter of this year (PWC, 2014b). Similar completions of parts of the convergence projects have been observed periodically. Another latest development is the output of FASBs Emerging Issues Task Force (EITF) after the exposure draft issued for consensus-for-exposure has been reached. In the order of things, this would be followed by the issuance of final standard. (PWC, 2014b). There are many similarities of US GAAP with European style IFRS (Clarke and Chanlat, 2009, p. 264) as found by KMPG (2013) that could make convergence friendly. Two years earlier or in 2012, both the IASB and FAB have published a joint progress report in which they describe the progress made on financial instruments, including a joint expected loss impairment approach and a more converged approach to classification and measurement (IFRS, 2012). In 2013, a publication of a high-level update on the status and timeline of the remaining convergence projects was done (IFRS, 2012). It may be recalled that it was in September 2002, that both IASB and the FASB came to work together. Such high level of commitment from the two boards came into reality as they further strengthened sometime in 2006 when they set specific milestones and meeting these miles come 2008. In other words, they put a roadmap towards 2008 to guide and move them. Setting such a road map focussed on results at a given period of time (IFRS, 2012). The progress of this commitment produced a concrete move by the US Securities and Exchange Commission (SEC) when in 2007, the latter removed the requirement for companies to reconcile their financial reports with the US GAAP if their accounts complied with IFRS as issued by the IASB. Similarly in time, the SEC had made known to public a parallel road map for the adoption of the IFRSs for domestic US companies. Thus in response, the FASB and IASB jointly issued an updated memorandum of understanding, causing them to identify a series of priorities and milestones, as they highlighted the goal of joint projects to produce principle-based standards for common use of countries covered. This must be taken as proof that US has good trust in having its rule-based standard reconciled with the principle-based standards (IFRS, 2012). 2.2 Advantages and Problems or Disadvantages of the convergence programme The convergence is designed to promote reduction of cost of capital for investors across borders (Banerjee, 1987, p. 955). This convergence would therefore essentially develop capital markets as companies would be able secure financing from stocks with their financial and accounting information made known to public investors. This financial accounting information from the converged standards will have renewed clarity, better transparency, comparability between and among countries in financial reporting, and the simplification of reports for better and consistent interpretation. Investors want to reduce risk and with better information the uncertainty is reduced and this makes them to decide better (Banks, 2006, p. 54 ). The expected result of course is increased in capital flow across countries and better international investments. Lowest cost of capital for corporations is the ultimate goal of finance as it has the same meaning as wealth maximization (Brigham and Houston, 2009, p.14) – which is the universal need for investors if they have to put their money in business. Wealth maximization is the prize of taking risk by investors (Brigham and Ehrhardt, 2010, p. 530) and governments of the world through the G20 just help these investors around the world by levelling the playing field through convergence of two major group of standards in the world—the US GAAP and IFRS. To converge the standards require effort and use of resources. As people resist change generally, the same is true with the effect of convergence of the standards. A standard reporting of each country is the result cumulative result of its experiences and adaptation from the practices of other countries in the past and to change to new standards again is not easy. To compel one or more countries to adapt to what is not in accordance with their culture (Needles and Powers, 2010, p. 4), standards of behaviour, ethics, types of economies, preconceived notions, and systems of religion would be like putting a square into a hole. This reality is basically the cause of the delay in the convergence of the standards especially with the United States having the biggest economy of world for many years. Convergence to the US would be adjusting to the essentially European style of financial reporting. Imagine the pride and ego that goes with adjustment and it would be easier to understand. Of course it is anticipated that once standards are changed from the convergence, the same should result to new accounting rules across the board. This would be retraining the people who prepare the accounting information under the new rules. There is a big cost for all of the expected changes. Who would want to go into areas without expected benefit of such change in horizon as perceived by those who directly managed people? In other words, the benefits of convergence may just be clearly convincing at the academic or theoretical level but the deeper realities are sometimes on the practicability. Such problems on practicability definitely influence behaviour of managers, which is of course again part of culture that is difficult to change. 2.3 Urgency of convergence Convergence is demanded by the international community particularly the G20. It is therefore safe to say that the need to have the convergence soon is compelling if global economy is to grow as way of attaining economic progress by many of the countries in the world. In embracing globalization as part of their business strategy, these countries need the convergence of the standards. The standards setting bodies are almost pressured to hasten the convergence. Before 2010, the Group 20 Leaders (G20) had called for the standard-setters to re-double their efforts to complete convergence in global accounting standards (US Congress, 2010, p. 27). This caused the FASB and IASB to publish a progress report recounting the intensification of their work programme. Said programme provided for the regular or periodic hosting of their joint board meetings on monthly basis and the publication of quarterly updates about their progress report on convergence projects. This pressure was also echoed by the European Union (EU) when it set conditions of the budget of IASB (PWC, 2014). As a way of exerting its political pressure, EU tightened conditions in its funding to IASB to show its frustration on policy makers in the speeding up of reform that is taking place in Europe after the financial crisis (PWC, 2014). The urgency of the need to complete convergence of the standards matches with the advantages. There are good proofs that improvement in the financial reporting regulation by the adoption of the appropriate standards will cause many good benefits to investors and to the countries where investments are made in general. Urgency is paramount as this would mean better economic climate for investors. The fact that countries are agreeing to adopt measures to help their economies is proof that the need must be satisfied at the most earliest time. Research indicates that companies using the IFRS by adopting the same have experienced significant changes in income as shown by higher variance (Barth , 2006). There is also evidence of a higher change in cash flows which corroborates the higher variance in income. This is further corroborated by the lower negative correlation between accruals and cash flows. The above findings do confirm that proper accounting standards would benefit the decision makers (Barth, 2006). With less earning management also found in IFRS compared with US GAAP, other countries could not wait to complete the convergence of the standards for too long. With high quality of accounting information comes better quality of decision as there would be reduced information asymmetry (Brigham and Houston, 2009, p 439). 3. Conclusion There is much pressure by the members of G20 to have the convergence for the purpose attaining economic objectives. Said objectives necessarily include lowering cost of capital for conducting business all over the world. This has the effect of promoting efficiency in the capital markets all over the world. This will advance globalization efforts towards a higher level. FASB and IASB did make efforts in continuing with the convergence as evidenced by the result of completion of certain outputs like publication of joints standards. Proofs of benefits, according to research from efforts of the two standard setting bodies in completing parts of converged accounting standards were found. Deeper realities however reveal that there are good reasons for the delay - particularly the need for other stakeholders of be heard as they participate in finally crafting the final provisions of standards to be used by companies. Additional cost and differences in culture are other reasons for delay but same may finally give in higher economic goals References: Banerjee, B (1987). Financial Policy and Management Accounting. PHI Learning Pvt. Ltd., p. 955 Banks, E. (2006). Finance: The Basics. Routledge, p. 54 Brigham, E. and Houston, J. (2009). Fundamentals of Financial Management, London: Thomson South-Western, pp. 14-439 Brigham, E. & M. Ehrhardt (2010). Financial Management: Theory and Practice. Cengage Learning, p. 530 Clarke, T. and Chanlat, J. (2009).European Corporate Governance: Readings and Perspectives. Routledge, p. 264 IFRS (2012). Joint Update Note from the IASB and FASB on Accounting Convergence. Retrieved 14 February 2014 from < http://www.ifrs.org/Use-around-the-world/Global-convergence/Convergence-with-US-GAAP/Documents/r_120420d.pdf> KMPG (2013). IFRS compared to US GAAP: An Overview, Retrieved 14 February 2014 from < http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/IFRS-compared-to-US-GAAP-An-overview-O-201311.pdf > Needles, B and Powers, M. (2010). International Financial Reporting Standards: An Introduction. Cengage Learning, p. 4 PWC (2014). EU set up to put conditions on IASB funding. Retrieved 14 February 2014 from < http://www.pwc.com/gx/en/audit-services/corporate-reporting/publications/world-watch/articles/eu-conditions-iasb-funding.jhtml > PWC (2014b). US GAAP Convergence and IFRS: What you need to know about the IASB and FASBs joint projects. Retrieved 14 February 2014 from < http://www.pwc.com/us/en/cfodirect/issues/accounting-reporting/us-gaap-convergence-and-ifrs-what-you-need-to-know-about-the-fasb-and-iasbs-joint-projects.jhtml > US Congress (2010). International Cooperation to Modernize Financial Regulation: Hearing Before the Subcommittee on Security and International Trade and Finance of the Committee on Banking, Housing, and Urban Affairs, United States Senate, One Hundred Eleventh Congress, First Session ... September 30, 2009. U.S. Government Printing Office, p. 27 Barth, M. (2006). International Accounting Standards and Accounting Quality. Retrieved 14 February 2014 from Read More