Convergence Programme of Accounting Standards - Coursework Example

The IASB/FASB Convergence Programme of accounting standards will never be successful because it will be unable to reconcile significant differences in the business, economic and political environment.’ Required: Discuss, with the aid of relevant examples, to what extent you agree with the above statement. Table of Contents Table of Contents 2 Introduction 3 Background Information 4 Arguments for and against Convergence Programme 6 IASB/FASB Convergence Programme vs. Significant Differences in Political Environment 7 IASB/FASB Convergence Programme vs. Significant Differences in Business Environment 11 IASB/FASB Convergence Programme vs. Significant Differences in Economic Environment 12 Implications of the Significant Differences in Political, Business, and Economic Environment 14 Conclusion 16 Introduction Since 1973, the Financial Accounting Standards Board (FASB) continues to be the designated institution or organization within the private sector for the establishment of standards of financial accounting, as well as reporting. The Securities and Exchange Commission and the American Institute of Certified Public Accountants tend to recognise officially the standards governing the preparation of financial reports. These standards are critical for the realization of effectiveness and efficiency in functioning of the economy because creditors, auditors, and other stakeholders depend on credible, transparent, and comparable financial information (Bonaci et al, 2012). On the other hand, the International Accounting Standards Board IASB came into existence in 2001 as the standard-setting body of the International Financial Reporting Standards (IFRS). It is an independent, private sector, and non-profit organisation committed to the development of a single set of high quality global accounting standards in the public interest. The institution concentrates on provision of high quality, as well as transparent and comparable information in general purpose financial statements. The organisation (IASB) focuses on the development and execution of extensive public consultations while seeking the co-operation of international and national bodies across the world with the intention of achieving its objectives and targets within the accounting industry. In the current state, IASB has 16 full-time members from 11 nations and diverse professional backgrounds. The board members are appointed by, and are accountable to the Trustees of the IFRS Foundation with the obligation of selecting the best available combination of technical expertise, as well as diversity of international business and market experience. Trustees tend to be accountable to the Monitoring Board of the public authorities, hence the substantial need to express and demonstrate efficiency in execution of duties and obligations to the organisation in accordance with the public interest (Bonaci et al, 2012). In this study, the focus will be on illustration of the failure of FASB/IASB to reconcile significant differences in the business, economic, and political environment, and consequently, the limitations of the convergence program in achievement of its goal and targets. Background Information For close to four decades, the International Accounting Standards Board (IASB) and its predecessor, the International Accounting Standards Committee (IASC) have been on the forefront focusing on the development of a set of high quality, enforceable, and understandable International Financial Reporting Standards. The objective of the organisation has been to offer quality services with the intention of serving the interests of equity investors, lenders, creditors, and relevant globalised capital markets (Schmidt 274). Prior to the takeover of the IASC by the IASB in 2001, few nations had adopted the International Accounting Standards for activities such as the cross-border public sales of securities and transactions of business activities among domestic public entities. There was a massive transformation of the issue following the occurrence of two critical events. In the first instance, the International Organisation of Securities Commissions (IOSCO) focused on endorsing IFRS for cross-border securities offerings within the world’s capital markets in 2000 (Dick & Walton 12). Secondly, in 2002, the European Union made a substantial and bold decision to demand IFRS for all business entities and companies appearing on a regulated European stock exchange by 2005. From the outset, the critical goal of the IASB and the IFRS Foundation, guiding the operations of the IASB, has been to integrate the United States into the accounting reporting and financial standards. In 2002, the IASB and FASB focused on signing a memorandum of understanding in the form of the ‘Norwalk Agreement’. The IASB and FASB pledge on the usage of their best efforts with the intention of making their existing financial reporting standards ‘fully compatible as soon as is practicable’. In addition, the two organisations sought to coordinate their future work programs with the intention of maintaining the compatibility of the diverse financial reporting standards (Bohusova, 2014). According to these pledges, ‘fully compatible’ relates to compliance with the United States’ GAAP, as well as adherence to the IFRS (Sacho et al., 2008). This indicates aligning of the standards rather than generation of identical standards for financial reporting and accounting. In the course of the agreement, the boards focused on development and execution of short-term and longer-term convergence projects with the objective of reducing or eliminating diversities in the two sets of standards. From this perspective, the board would adopt any standard in which either IFRS or United States’ GAAP would demonstrate a clear preference standard. In the case of an improvement on both boards’ standards, the convergence programme would focus on utilisation of joint effort towards a realisation of the goals and targets, while adhering to the relevant resources and information (Bohusova, 2014). In 2007, the IASB/FASB achieved one of the significant milestones under the influence of IFRS in the United States through the action by the Securities and Exchange Commission (SEC) to eliminate the requirement of foreign issuers using IFRS to present a reconciliation of IFRS measures of profit or loss. In addition, there was an obligation for the presentation of the owner’s equity to amounts, which would undergo reporting in accordance with the United States’ GAAP. The IASB/FASB convergence programme has been on operation for more than 12 years. During this time, the convergence programme has been able to project diverse outcomes in solving diverse issues affecting financial standards and reporting across the world. It is essential to note that the convergence programme has been able to complete diverse projects successfully while completing other programmes on a partial platform (Veron, 2007). In spite of these developments, there are diverse differences or shortcomings of the convergence in relation to the achievement of its objectives while adhering to the interests of the public in the course of guiding financial reporting under the influence of quality and efficient standards. This generates the focus of research with reference to examination of the influence of the IASB/FASB convergence programme on overcoming significant challenges on business, economic, and political environment. Arguments for and against Convergence Programme According to diverse accounting practitioners, convergence by IASB and FASB is vital in the achievement of renewed clarity in relation to financial standards and reporting. In addition, the approach is vital in the achievement of possible simplification, as well as transparency in the reporting of financial statements across the world (Stevenson, 2007). There is also increased comparability between different nations in relation to accounting and financial reporting. The convergence is critical in increasing capital flow and international investments, which are essential in the subsequent reduction of interest rates, thus enhancing the economic growth of specific nations and firms (McCreevy, 2006). The convergence program is also ideal in the generation of new safeguards with the intention of preventing potential national or international economic, as well as financial meltdown. This is evident in the integration of diverse safeguards to the economy of the United States with the intention of preventing the occurrence of a financial meltdown in the near future. On the other hand, there are diverse arguments in relation to the convergence programme between FASB and IASB. One of the arguments relates to the unwillingness of the diverse nations involved in the process to work collectively in accordance with different culture, ethics, beliefs, types of economies, political systems, and preconceived notions or prejudice for specific counties, systems, and religions (McCreevy, 2006). Some of these diversities include incorporation of the Islamic law, as well as paying Zakat. In addition, the programme might suffer from a shortcoming relating to the time it will take to implement a new system of accounting rules and standards across the globe. IASB/FASB Convergence Programme vs. Significant Differences in Political Environment Globalisation and the adoption of international standards have been some of the critical issues exerting pressure on numerous nations, including the United States, to eliminate the gap between the International Financial Reporting Standards (IFRS) and the United States’ Generally Accepted Accounting Principles (GAAP). It is essential to note that such initiatives tend to generate diverse consequences in the world of accounting diversity (Bonaci et al., 2012; Holban and Laura, 2011). In addition, the standards convergence of the United States’ GAAP and IFRS has great implications on corporate management, investors, stock markets, accounting practitioners, and policymakers or standard setters. Similarly, the convergence of the diverse accounting standards is transforming attitudes of Certified Public Accountants (CPAs) and Chief Financial Officers (CFOs) concerning harmonisation of international accounting, thus massive effects on the quality of International Accounting Standards (Street, 2011). These elements also affect different efforts made toward the objective or goal of convergence of GAAP and IFRS standards. FASB focuses on promulgating financial standards with reference to the FASB Accounting Standards Codifications. It is essential to note that these codifications are part of the United States’ GAAP (Carbone and Judson, 2011). There are substantial differences in how the FASB and IASB interact within their political and business environments with the intention of affecting the due process for standard setting. FASB tends to operate in an environment under the influence of diverse pressures from the SEC, Congress, and the business community (McGregor and Donna, 2007; Biondi et al., 2011). For instance, SEC recognises FASB as the source of authoritative accounting standards for its registrants. In spite of FASB being the private sector body issuing accounting standards, the SEC is the governmental agency with the statutory authority to issue accounting standards for publicly held business entities or companies in accordance with the Securities Exchange Act of 1934. There are numerous political issues which will hinder the realisation of the goals and targets of the FASB/IASB convergence programs (Schipper, 2005). In this context, political influence relates to purposeful intervention in the standard-setting process by economic entities with the objective of affecting the outcome of the process to increase the value or wealth as well as self-gain, inconsistent with the FASB mission (Tokar, 2005). From this perspective, the objective of political influence is to shift the standard-setters’ position away from what it sees as the ‘right answer’. The FASB/IASB convergence project focuses on the utilisation of the existing standards for accounting and reporting with the objective of handling the demands and expectations of entities in different nations. Nevertheless, these nations tend to have diverse political systems, environments, and cultures (Carmona and Marco, 2010; Stevenson, 2010). The convergence programme fails to incorporate quality or appropriate conditions towards the achievement of the goals and targets. IASB/FASB does not have substantial techniques to aid the elimination or reduction of the significant political differences in the environment of transactions (Tokar, 2005). Members of the boards tend to adopt and implement diverse political ideologies and systems, as well as cultures in accordance to their demands and expectations of the relevant entities and citizens within the specific nations (Gwillian et al., 2008). From this perspective, the organisation should focus on the adoption and implementation of quality techniques with the intention of harmonising the political environment while utilising international standards and reporting mechanisms. The success of the IASB/FASB convergence programme will depend on the willingness of the world political leaders to intervene while pushing convergence through, considering it the only way of eliminating the lack of trust across world investors and overcoming the difficult contingency. From this perspective, there is a need for descending of the regional and national specific demands for the achievement of the global higher interest, hence the perfect platform for the success of IASB/FASB convergence programme for international accounting standards (Hansen, 2004; Tarca, 2005). Nations tend to be political in nature. In this context, certain nations concentrate on the adoption and implementation of FASB principles or guidelines. On the other hand, certain nations tend to incorporate or adhere to the IASB principles and guidelines in reporting and illustrating accounting, as well as financial statements. The diversity of political environments tends to affect aligning of the IASB/FASB guidelines and principles, thus hindering the role and efforts by the convergence programme to enhance effectiveness and efficiency in the development and provision of quality international standards. It is also critical to note that political situations, unrests, and stability have a massive role to play in relation to the achievement of goals and targets by the convergence programme. It is critical for the IASB and FASB to harmonise the political situation or environment, which associates with diverse perceptions and system. The approach will be ideal in enhancing the chances of success of the convergence program, thus overcoming internal and external political influences in pursuit of individualistic goals and targets at the end of the financial period. Different influential factors tend to affect accounting system of each nation. As there is a very small possibility that influential factors of two nations will be equal, they can also be considered as generators of national specificities (Bertoni and Bruno, 2005). In addition, the level of differences of each influential factor between nations implicates the intensity of accounting differences at the international or global level. The actuality of international accounting harmonisation issues imposes the need for consideration and detailed examination of factors, which influence the development, as well as the accounting system in one nation. From this perspective, it is essential to note that accounting and financial standards depend on the political environment in which they operate (Whittington, 2008). It is highly unlikely for two nations in the global context to have similar political aspects or facets in relation to the adoption and utilisation of diverse financial standards and accounting reporting. Similarly, nations have different histories, political, and legal order, as well as value systems. In this context, these entities will have the opportunity to adopt and integrate diverse development and operating models with the intention of overcoming or bridging the gap concerning political diversity. The success of the IASB/FASB convergence programme will depend on the ability and potentiality of the boards to integrate appropriate mechanisms to overcome or limit the significant differences in the political environment in which they operate. IASB/FASB Convergence Programme vs. Significant Differences in Business Environment The ultimate goal of the IASB is to set one common standard applicable to all multinational business entities. There are substantial benefits in relation to adoption of this approach. In the first instance, the principle-based approach to setting standards by numerous practitioners proves to be much simpler, thus enabling accountants to exploit a greater degree of judgment in certain situations (Whittington, 2008). Secondly, financial statement comparisons across national and regional borders would be much simpler in comparison to the adoption and utilisation of diverse standards in accordance with the demands and expectations of the regional leaders. Thirdly, multinational firms will have the perfect platform to simplify the presentation of financial statements under the influence of one or a common accounting language. The IASB/FASB convergence programme is also critical towards the realisation of one common set of accounting standards with the ability to improve the quality and reliability of audits, as well as other regulatory procedures. In spite of these developments and benefits, the IASB/FASB convergence programme might not achieve its goals and targets because of its failure to reconcile significant differences within the business environment. It is essential to note that the principles-based approach applicable in the IFRS might be a challenge or obstacle to numerous accountants in the context of the United States (Jiashu, 2009). This is because such accountants tend to use rules-based approach with reference to the case of the United States’ GAAP. Moreover, such accountants might express fear in relation to lack of specific guidance, which might open the door for aspects or facets of variation and subjectivity. Similarly, an increase in the subjective accounting judgement will contribute to increased harm to comparability in relation to diversities within the business environment. Furthermore, subjective accounting judgement might leave reporting entities and accountants to express vulnerability to litigation, which is more of an issue in the litigious United States. It is also critical to note that the adoption of IFRS will contribute to forfeiting of the oversight authority of SEC over FASB with the ability to promulgate GAAP. In this context, SEC has no oversight authority over IASB, which promulgates IFRS. From this perspective, it is essential to note that financial reporting issues unique to the United States might never be addressed by the IASB if the issues are not problems for the rest of the globe. SEC has the mission or obligation of protecting investors within the United States (Barth 11). This implies that abandoning all oversight authority over financial reporting standards for public companies might not relate to the best interest of the investors in the United States. The business environment in the United States is not similar to business environments in diverse sections or regions across the world. For instance, it is essential to note that China does not use or permit IFRS. China tends to incorporate the Chinese Accounting Standards (CAS) with IFRS, but differences remain. This case is also applicable in the course of integrating IASB and FASB, thus the need for the business practitioners and accountants to focus on the elimination of the significant differences within the business environment. IASB/FASB Convergence Programme vs. Significant Differences in Economic Environment The success of IASB/FASB must relate to the ability of the boards to reconcile the significant differences in the economic environment. It is critical to note that the board’s focus on the adoption and implementation of different economic platforms or environments presents the opportunity to adhere to the economic environment of the nation of engagement. FASB focuses on the improvement of financial reporting for the benefit of investors, as well as other users of financial information within the United States’ capital markets. In order to achieve this goal, FASB concentrates on setting the highest-quality standards in the form of GAAP, thus providing clear, useful, and relevant financial statements to the users and investor (Murphy, 2013). FASB believes in the integration of more comparable global accounting standards, thus improving the quality of accounting standards applicable across the world while contributing to a massive reduction in the differences among the boards. This minimization of the differences must relate to and be consistent with the core mission of IASB/FASB for the achievement of the goals and targets at the end of the fiscal period. US GAAP and IFRS tend to operate on diverse economic guidelines and environments. For instance, the organisations need to harmonise income statement classification of expenses. In the case of US GAAP, there is no general or economic requirement to classify income statement items through function or nature. Nevertheless, SEC registrants have the obligation of presenting expenses based on diverse functions such as administrative and cost of sales (Wagenlofer, 2009). On the other hand, IFRS provides the opportunity for the business entities to present their expenses in relation to function or nature, thus allowing exploitation of depreciation or salaries in the presentation of expenses. In addition, IFRS prohibits the integration of extraordinary items criteria while GAAP incorporates restrictions to the items, which are unusual and infrequent. There are also significant differences in relation to disclosure of performance measures. For instance, there is no general requirement within the United States’ GAAP on addressing the presentation of specific or particular performance measures (Eaton, 2005). It is the obligation of SEC to adopt different regulations, which define certain critical measures and require the presentation of certain headings and subtotals. Similarly, public companies experience prohibition from disclosing non-GAAP measures within the financial statements, as well as accompanying notes. Alternatively, the IFRS fails to define certain traditional concepts such as operating profit. This is essential in the demonstration of diversity in practice existing in relation to line items, headings, and subtotals evident in the income statement. There are also significant differences in relation to the treatment of certain costs in interim periods. In the case of The United States’ GAAP, each interim period comes out as an integral part of an annual period. This contributes to more benefits from certain costs in comparison to one interim periods allocated among the periods generating deferral and accrual of certain costs (Pacter, 2005). On the other hand, IFRS views each interim period as a discrete reporting period. IFRS also fails to defer a cost which does not meet the definition of an asset at the end of the interim period. The success of the IASB/FASB will depend on the ability of the boards to harmonise differences within the economic environment, which provides the platform for financial statements and reporting. Implications of the Significant Differences in Political, Business, and Economic Environment There are numerous issues which might arise in relation to the differences in economic, political, and business environments with reference to the adoption and implementation of international financial reporting and accounting standards. In the first instance, there is massive cost concerning the preparation of financial statements under different standards. For instance, IASB and FASB operate on diverse standards. This makes it expensive or costly to prepare financial statements under diverse or different standards. Secondly, there are negative implications concerning accessibility to foreign capital markets (Bertoni and Bruno, 2005). These diversities contribute to impairment of the opportunities to access foreign capital markets, thus hindering the achievement of the goals and targets at the end of the fiscal period. In addition, the differences in political, economic, and business environments are critical in limiting or hindering international comparability. This makes it critical for the political, economic, and business practitioners to focus on the adoption and integration of appropriate mechanisms to bridge the gap concerning operations of IASB and FASB. It is essential to note that people tend to have a home country’s perspective regardless of reconciling and translating of the financial and accounting statements. Similarly, there is a substantial lack of high quality information, which will impede acquisitions or investments in the diverse economic, business, and political environments. The IASB/FASB convergence programme for international financial standards should focus on the elimination or minimisation of such differences in the political, business, and economic environment to enhance the chances of achievement or realisation of success (Whittington, 2008). Lack of appropriate techniques and mechanisms to handle the significant differences in economic, business, and political environment under the influence of globalisation will be the downfall for IASB/FASB in its aim to offer quality standards while adhering to the demands and expectations of the public. Conclusion The convergense of IASB and FASB is vital in the achievement of renewed clarity in relation to financial standards and reporting. In addition, the approach is vital in the achievement of possible simplification, as well as transparency, in the reporting of financial statements across the world. One of the counter-arguments relates to unwillingness of the diverse nations involved in the process to work collectively in accordance with different cultures, ethics, beliefs, types of economies, political systems, and preconceived notions or prejudice for specific counties, systems, and religions. Globalisation and the adoption of international standards have been some of the critical issues exerting pressure on numerous nations inclusive of the United States to eliminate the gap between the International Financial Reporting Standards (IFRS) and the United States’ Generally Accepted Accounting Principles (GAAP). In spite of these developments, there are diverse differences or shortcomings of the convergence in relation to the achievement of its objectives while adhering to the interests of the public in the course of guiding financial reporting under the influence of quality and efficient standards. 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