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Accounting Harmonization by 2014?
The Harmonization in the Accounting world, specifically the transition to the International Financial Reporting Standards (IFRS) has been a major controversial topic talked about in the accounting world for the last few years. More recently it has been stressed on whether it can or will be occurring by the 2014 deadline. 113 countries around the world have already adopted IFRS. These countries either require IFRS or are beginning use and allow IFRS in their company. (Backgrounder) The United States is not yet in this group of countries. Although, there are actions being taken to have the United States using IFRS by the year 2014.
International Financial Reporting Standards is not going to be an easy task to accomplish by 2014. The American Institute of Certified Public Accountants (AICPA) has began to realize the amount of money and time that is actually going to have to go into changing the standards of how the entire United States companies are completing their financial statements. They believe that they can help make the transition smoother and easier on the United States companies. They claim they are going to further educate AICPA members, as well, as help accounting educators, textbook authors, related majors, colleges and universities on all aspects of IFRS. They also say they are going to make sure that the voice of United States Certified Public Accountants (CPA) are heard internationally and are not going to be overlooked. They also are going to start to include questions on the Uniform CPA Exam about IFRS. The AICPA are definitely going out of their way to try and help this transition go a lot more smooth and sufficient but at the same time realizing the cost. (Backgrounder)
This is just how one organization is going to help but there are many more costs coming out of this adoption from Generally Accepted Accounting Principals (GAAP) to IFRS. The hardest part is it is going to be the actual work of switching over the financial information to a completely different form. This is where a lot of the time and money from companies are going to go. The man-hours that it is going to take is a lot just in it self. This goes from small companies to large companies. That leads to the training and schooling to teach the workers, managers and anyone else that takes place in completing financial statements. These companies are going to have to learn how to adapt to these new standards. This takes a lot of time, both in training and then in applying that training. That means that there is going to have to be extra auditors and analysts around to check and make sure everything is being done correctly.
(Adopting)
This Adoption of IFRS or Harmonization of Accounting Standards does have its costs but what it will do to help the United States companies and investors makes this transition worth the work. With the completion of the adoption of IFRS, the global market, with the United States included, will have one standard for all companies around the world. This universal standard will help investors and companies compare the other companies' financial statements and understand them so they can invest or gain other knowledge for their own purpose. This also protects the investor so they know what they are looking into and can make more valuable decisions when doing business. This now goes to show how the market around the world is going global. Which this will help world resources be better managed by everyone because they will able to follow the same rules and regulations. (Harmonization) Investors from the United States will now have international investment opportunities and can benefit from comparing non-united States companies from United States companies with IFRS. When this global Accounting Standard develops and is in operation it will change the business-financial world, as we know it. (SEC)
2014 is coming quickly and seems that the United States has a lot to work on if IFRS and the harmonization of the Accounting world is going to be in affect by then. If they follow the SEC road map to IFRS I personally think that we have a decent shot at adopting the IFRS standards into United States business market. This is going to take a lot of organization and time from the government, organizations and companies if they want this goal to succeed. Also, the education on this topic is going to have to be introduced very soon to everyone it effects and the one's it will effect in the future. There is too much talking and speculating about this big transition to IFRS but not enough is actually being done to make sure that it is going to work.
IFRS sounds like it is going to help the Unites States in many great ways for the future of business but it's the Americans that I am not sure if they are willing or ready to take on such a task but hopefully the IASB, FASB and the SEC will continue to work towards coming up with a solution in eliminating the differences between U.S. GAAP and IFRS and the Harmonization of the Accounting world.
As the trend for globalization in business becomes increasingly important for economic success,
many issues arise through international business practices for corporations, governments, and
investors. Due to the many conflicting codes and practices that exist between various national
financial accounting standards throughout the world, international business becomes harder to analyze
as information is not easily comparable between competitive industries. (Diaconu 2007) Because
there is no standard international code for financial reporting around the world, many multi-national
corporations are forced to reconcile their financial information to conform to multiple financial
reporting standards. This process of reconciling financial information for conformity with different
accounting systems can be expensive, and also make information misleading. As a result of the
massive increase in international business and the difficulty of reporting accurate universal financial
information, initiative has been taken to create a harmonization of accounting standards between
nations. Harmonization of accounting standards between nations is a very important current issue
which has many possible benefits or consequences, as well as many obstacles to overcome for
success. This paper will examine potential advantages and disadvantages of a harmonized
international accounting standard; discuss various obstacles associated with the creation and
implementation of these standards, and provide possible solutions to overcome these obstacles.
There are many potential advantages associated with harmonization of accounting
standards. The world economy could benefit through increasingly educated investment decisions
which would lead to overall global economic growth. Accounting information can be interpreted by
experts to reduce the risk of investment. One of the main tools used in financial analysis is the
comparability of financial information for similar businesses in competition. Internationally adopted
accounting standards would increase this ability to compare similar industries and make investment
decisions less risky through greater intelligence. A standardization of international accounting
information would facilitate easier interpretation for financial experts all around the world seeking to
invest internationally. This increased ability to interpret information could potentially result in an
overall increase in educated global investment. Another potential benefit from the harmonization of
international accounting standards would be the reduced costs associated with multi-national
corporations who must reconcile their accounting information for multiple accounting standards.
(Diaconu 2007) Countries with scarce resources could also take advantage of international accounting
standards, because they would not have to invest resources creating and regulating national
accounting standard-setting agencies. In order to be listed on credible stock exchanges, businesses
must abide by the financial reporting requirements of the stock exchange it wishes to sell securities
through. Stock exchanges around the world could profit from a harmonization of accounting
standards, as more companies begin to adopt the international standard, they will become eligible for
listing. As the amount of listings grows on the stock exchanges so will the volume of securities
transactions. (Marion and Cengage 2001)
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Although there are many promising advantages of harmonization, there are also many
potential disadvantages. One possible disadvantage of harmonization can be seen through the role
culture plays in developing national accounting standards. Countries may view compliance with
international accounting standards as a threat to their nationalism and view compliance as submission
to the will of other countries. A major condemnation of harmonization comes from underdeveloped
countries who view harmonization as an obligation placed on them by countries with superior
economies. Another disadvantage of harmonization is the vast amount of disparity that exists
between different countries accounting practices. The abundant differences in accounting practices
world-wide would surely lead to substantial changes for any country who adopted the international
standard. These substantial changes would lead to many expenses for businesses in countries
conforming to a new international standard. Another common criticism of harmonization is the
argument that an international accounting standard will not be flexible enough to deal with all the
dilemmas faced by nations with differing problems and circumstances. National accounting standards
can be modified as situations change, and policies can be implemented without consent of all the
nations involved in an international accounting system. (Diaconu 2007)
I have outlined some of the advantages and disadvantages that could possibly arise from
implementing a harmonized international accounting standard. Now I will examine some of the
barriers that prevent harmonization from proceeding. Many countries have different accounting
methods which are regulated in different degrees by their government. Some countries use
professional organizations to set accounting standards, whereas others are regulated strictly by the
government, and some countries such as the U.S. use both professional organizations and the
government to set accounting standards. The differences seen in the accounting standard-setting
bodies of the world give rise to the question: Who will write and regulate the international standard of
accounting? The U.S. is the largest economy in the world and could be an easy answer to this
question, but there are many critics of the FASB standards used in the U.S. Many believe that U.S.
accounting standards are overly complicated. Another barrier of harmonization is the argument that
capital markets have already adjusted to international business without a set standard. Many believe
harmonization is not necessary and present systems are working well enough. (Diaconu 2007)
There are many potential advantages and disadvantages of international harmonization of accounting
standards, as well as many obstacles restricting implementation. Many companies in the European
Union submit to International Accounting Standards, and many other corporations reconcile financial
information to provide IFRS financial statements as well as U.S. GAAP. Because the U.S. is the largest
economy in the world many international companies adopt U.S. GAAP financial statement to increase
ability to trade with the U.S. Companies in the U.S. must always conform to U.S. GAAP and reconcile
any other financial statements to meet the GAAP requirements. One possible solution to the problem
of setting international accounting standards would be to provide a choice between the two most
popular systems: the American GAAP or the European IAS/IFRS. As more companies favor one method
over the other that method will eventually become the international standard. (Diaconu 2007) There
are many possible solutions to implement harmonization, but in the end, complete harmonization of
accounting principles will probably never be realized. There are too many variables to account for and
too many groups of people in political power with too much to lose. (Weber 1992)
International Accounting Standards
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Comparable, transparent, and reliable financial information is fundamental for the smooth functioning of capital markets. In the global arena, the need for comparable standards of financial reporting has become paramount because of the dramatic growth in the number, reach, and size of multinational corporations, foreign direct investments, cross-border purchases and sales of securities, as well as the number of foreign securities listings on the stock exchanges. However, because of the social, economic, legal, and cultural differences among countries, the accounting standards and practices in different countries vary widely. The credibility of financial reports becomes questionable if similar transactions are accounted for differently in different countries.
To improve the comparability of financial statements, harmonization of accounting standards is advocated. Harmonization strives to increase comparability between accounting principles by setting limits on the alternatives allowed for similar transactions. Harmonization differs from standardization in that the latter allows no room for alternatives even in cases where economic realities differ.
The international accounting standards resulting from harmonization efforts create important benefits. Investors and analysts benefit from enhanced comparability of financial statements. Multinational corporations benefit from not having to prepare different reports for different countries in which they operate. Stock exchanges benefit from the growth in the listings and volume of securities transactions. The international standards also benefit developing or other countries that do not have a national standard-setting body or do not want to spend scarce resources to undertake the full process of preparing accounting standards.
The most important driving force in the development of international accounting standards is the International Accounting Standards Committee (IASC), an independent private-sector body formed in 1973. The broad objective of the IASC is to further harmonization of accounting
practices through the formulation of accounting standards and to promote their worldwide acceptance.
One hundred and forty-three professional accounting organizations in one hundred and four countries are IASC members. The IASC Board, presently consisting of sixteen member organizations, is responsible for establishing accounting and disclosure standards. The board follows due process in setting accounting standards, thus allowing for a great deal of consultation and discussion and ensuring that all interested parties can express their views at several points in the standard-setting process. The final standard requires approval by at least twelve member organizations.
On May 24, 2000, a new structure for IASC was approved unanimously by its membership. Under the new structure, IASC will be established as an independent organization that will have two main bodies, the Trustees and the Board. The Trustees will appoint the board members, exercise oversight and raise the funds needed, whereas the board will have sole responsibility for setting accounting standards. It is expected that the new structure would come into effect on January 1, 2001.
The IASC has issued forty International Accounting Standards (IASs) to date covering a range of topics, such as inventories, depreciation, research and development costs, income taxes, segment reporting, leases, business combinations, investments, earnings per share, interim financial reporting, intangible assets, employee benefits, impairment of assets, and financial instruments. It has also issued a Framework for the Preparation and Presentation of Financial Statements that sets forth the concepts underlying the preparation and presentation of financial statements for external users.
International Accounting Standards initially tended to be too broad, allowing many alternative accounting treatments to accommodate country differences. This was a serious weakness in achieving the objective of comparability. To gain acceptability of its standards, in 1989 the IASC undertook a project (called the Comparability Project) aimed at enhancing comparability of financial statements by reducing the alternative treatments. An important part of this effort was its work plan to produce a comprehensive core set of high-quality Standards (Core Standards project). The IASC has completed its Core Standards project, and the revised standards are a significant improvement over the earlier ones.
IASC standards are not mandatory. However, the acceptability of IASs has been on the rise, with an increasing number of companies stating that they prepare financial reports in accordance with IASs. Many countries endorse IASs as their own standards with or without modifications, and many stock exchanges accept IASs for cross-border listing purposes. For example, the Arab Society of Certified Accountants, comprising twenty-two Arab nations, has signed a declaration supporting IASs as the national accounting standards in all its member countries. Some European countries are developing legislation to allow not only foreign but also domestic companies to use IASs in their consolidated financial statements.
In the United States as of mid-2000, IASs are not an acceptable basis for financial statements filed with the Securities and Exchange Commission (SEC). Although the SEC has expressed
support for the IASC's objective of developing accounting standards for financial statements used in cross-border offering, it has also stated that such standards must be comprehensive, possess high quality, and be subject to rigorous interpretation and application. The SEC is under increasing pressure to make U.S. capital markets more accessible to non-U.S. issuers.
Internationally, the International Organization of Securities Commissions (IOSCO), an organization comprised of securities regulators from more than eighty countries, as of mid-2000 is considering the endorsement of IASs for cross-border capital raising and listing purposes in all global markets.
Many other organizations also play an important role in the march toward international accounting standards. Among the more important are those discussed below.
IFAC. The International Federation of Accountants is a worldwide association formed in 1977 to develop the accounting profession, harmonize its auditing practices, and reduce differences in the requirements to qualify as a professional accountant in its member countries. It currently has a membership of one hundred and forty-three national professional organizations in one hundred and four countries representing more than 2 million accountants. The IFAC issues International Standards on Auditing (ISA) aimed at harmonizing auditing practices globally. The IFAC Council also appoints country representatives on the IASC Board (thirteen in total).
UN. Several organizations within the United Nations have been involved in international accounting standards. Its Group of Experts prepared a four-part report in 1976, "International Standards of Accounting and Reporting for Transnational Corporations." The report listed financial and nonfinancial items that should be disclosed by multinational corporations to host governments. More recently, it has worked to promote the harmonization of accounting standards by discussing and supporting best practices in a variety of areas, including environmental disclosures.
OECD. The Organization for Economic Cooperation and Development formed in 1960 currently has twenty-nine of the world's developed, industrialized countries as its members. A valuable contribution of the OECD is its surveys of accounting practices in member countries and its assessment of the diversity or conformity of such practices. Its Working Group on Accounting Standards supports efforts by regional, national, and international bodies promoting accounting harmonization. In 1998, the OECD issued "Principles of Corporate Governance" that support the development of high-quality, internationally recognized standards that can serve to improve the comparability of information between countries.
EU. The European Union, the powerful regional alliance of fifteen nations, aims to bring about a common market that allows free mobility of people, capital, and goods among member countries. To promote the cross-country economic integration, the EU has made significant progress in the harmonization of laws and regulations. Its Commission (European Commission) establishes standardization and harmonization of corporate and accounting rules through the issuance of Directives. Directives incorporate uniform rules (to be implemented exactly in all member states), minimum rules (which may be strengthened by individual governments), and alternative rules (which members can choose from). Directives are mandatory in that each member country
has the obligation to incorporate them into its respective national law. However, each country is free to choose the form and method of implementation and also to add or delete options.
The Fourth and Seventh Directives deal exclusively with accounting issues. The Fourth Directive, adopted in 1978, covers financial statements, their contents, method of presentation, valuation methods, and disclosure of information. The Seventh Directive, adopted in 1983, requires worldwide consolidated financial statements regardless of the location of the parent company. Given the large variety of alternatives for consolidation permitted in member countries prior to its issuance, the Seventh Directive is regarded as a major development toward harmonization. The European Commission announced in 1995 its decision to rely heavily on IASC to produce results that meet the needs of capital markets. It is also investigating the possibility of requiring all member states to require listed companies to report under IASs.
NAFTA. The North American Free Trade Agreement was formed in 1993 among Canada, Mexico, and the United States to create a common market. It will phase out duties on most goods and services and promote free movement of professionals, including accountants, among the three countries. There are projects under way to analyze the similarities and differences between financial reporting and accounting standards of the member countries of NAFTA.
Other organizations. Some regional organizationsuch as the Association of Southeast Asian Nations (ASEAN), Community of Sovereign States, Economic Cooperation Organization (ECO), Baltic Council, Asia Pacific Economic Cooperation (APEC), Confederation of Asian and Pacific Accountants (CAPA), and Nordic Federation of Accountants (NFA)ave made efforts toward harmonizing accounting and disclosure standards. G4 group of standard-setting bodies in Australia, Canada, the United Kingdom, and the United States, has also started playing an important role in the harmonization of international accounting standards.
The process of harmonizing international accounting standards has come a long way on a path that has been far from smooth. While some critics still doubt the need and feasibility of such standards, it is becoming increasingly clear that the question is not whether but when the Inter national Accounting Standards will be required and followed by business and other entities worldwide. The likely endorsement by the IOSCO and SEC will make that time sooner rather than later.
Why International Accounting Standards Should Be Harmonized
Posted: Apr 07, 2010 |Comments: 0 | Views: 1,508 |
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The world economy and international accounting would greatly benefit from having harmonized
accounting standards that can be used by all countries. Historically there have been four main
accounting standards models in the industrialized world. They are the United States, The United
Kingdom, Continental Europe, and Latin American standards. The International Accounting Standards
Committee (IASC) started to achieve convergence in 1973 with the United States, Canada, and the
United Kingdom. Recently, the International Accounting Standards Board (IASB) has taken strides in
achieving even more harmonization and convergence of accounting standards. All E.U companies
have been required to base their financial reports according to the International Financial Reporting
Standards (IFRS). Many other countries not in the E.U such as New Zealand, Hong Kong, Australia, and
Israel have also taken steps to start harmonizing their accounting standards to that of the IRFS.
By harmonizing accounting standards it will help facilitate international transactions and minimize
exchange costs; standardize information to world-wide economic policy-makers; improve financial
markets information; and help to improve government accountability. By having harmonized
standards it makes international investment decisions less risky, as well as for managers making
international based financial decisions. It can be very tricky when non-domestic companies are listed
in U.S stock exchanges because they are not using the same practices as the United States is most of
the time. If all countries followed the same accounting policies it would create a global "fairness".
Auditors and regulators would be receiving and looking at the same information when evaluating
companies. It is hard to compare the financial information of companies from different countries if
they are not required to follow the same set of standards and rules in their accounting practices. In
some cases companies are required to prepare financial statements under several different accounting
practices; this takes up both time and financial resources of the company. Between countries where
free trade is not present harmonized standards will allow nation's tariffs and quotas to be more
accurate as well as less risky for those involved in the trading.
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Harmonization must first start out with standardizing the reporting requirements for financial
statements by national securities regulators. The International Organization of Securities Commissions
(IOSCO), which the United States' SEC is a member of, is leading the development of an accounting
policy for securities regulator's reporting requirements. IOSCO has built in a policy which limits the
amount of reporting alternatives a company can use when reporting its results of operating expenses
and net worth. In 2002 the Norwalk Agreement formalized the IASB and FASB's commitment to start
converging accounting standards. Significant steps have been taken since the agreement; FASB and
IASB meet on a regular basis. They are working jointly on trying to develop common standards in
areas of business such as applying the acquisition method, revenue recognition, liability
extinguishment, and leasing. A long term project has also been put in place to make conceptual
framework for accounting standards with significant improvements in it. Under the framework there
are two underlying assumptions, they are accrual basis accounting and the "going concern" principle.
Governments' accounting financial reporting standards also need to be harmonized throughout the
world to assist with harmonizing all companies.
Lesser developed countries are also trying to promote accounting standards harmonization by
establishing regional accounting associations as well as teaching accounting education programs. The
International Monetary Fund has assisted in this effort by giving aid to governments. By having
developing countries adopt international accounting standards as well it will help reduce the expense
of creating domestic accounting standards. By harmonizing standards with the rest of the world
developing countries with high inflation rates may be able to cut down on poor accounting practices.
For the entire world to have harmonized accounting standards the U.S must recognize international
standards and start to abide by them. The U.S model is not the ideal model and it has been argued
that the Internal Revenue Service's standards are very complicated. Many authors argue that the U.S
does not have a strong enough standards system to attract foreign firms and countries to its
framework without adopting some international standards first
International Convergence of Accounting Standards
Posted: Nov 16, 2011 |Comments: 0 |
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International Convergence of Accounting Standards
The concept of convergence first surfaced in the late 1950s in response to World War II
economic integration showing that the idea of International Convergence of Accounting Standards is
not new. At first, the convergence focused on the principles used in major capital markets around the
world. By the 1990s, the idea of harmonization was replaced by the notion of convergence and the
International Accounting Standards Committee was formed in 1973, which was the first international
standards-setting body.
The FASB and the IASB have been working together toward convergence since 2002. The
Financial Accounting Standards Board believes that the ultimate goal of convergence is a single set of
high-quality, international accounting standards that companies would use for financial reporting.
Currently, the collaborative efforts of the FASB and IASB is used to both improve U.S. GAAP and IFRS to
eliminate the differences between the two.
In November 2009, a joint statement showed the IASB and the FASB reaffirmed a commitment
to improving IFRS and US GAAP in achieving convergence. The plan gave priority to the major
Memorandum of Understanding projects for which they believe the need for improvement of IFRS and
GAAP is most urgent. The projects include joint projects on financial instruments, revenue recognition,
fair value measurement, and the consolidation of investment companies. After their meeting in April
2011, the boards are providing this report on the progress of their joint convergence work. The IASB
and FASB have taken the following actions since their report last November. They have completed the
five projects, which reflected the completion of MoU projects, publication of standards that are
converged or substantially converged on fair value measurement, joint arrangements, and
consolidated financial statements. Most of the short-term projects have been completed such as share-
based payments, non-monetary assets, inventory accounting, accounting changes, and fair value
option. The FASB is developing proposals to align US GAAP with IFRS and that project is still in process.
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As far as the Revenue recognition goes, the principle of the IASB and FASB published a joint
discussion paper that proposed a single revenue recognition model that was built on the notion that an
entity should recognize revenue. The US GAAP has a wide range of requirements while the IASB has
very general requirements, which causes them to rely on US GAAP for specific guidance.
On June 4, 2004, The FAF met with the members of the International Accounting Standards
Committee Foundation for the first time in New York City. The meeting began with the FASB chairman,
Bob Herz, on the convergence efforts of the two-standard-setting bodies. The chairman explained the
goal of their convergence efforts and the progress made to date. FASB and IASB have a number of
common projects and have agreed to a plan for future alignment of their technical agendas. The article
from the FASB report explains how their respective strategies for reaching their common convergence
goal and the obstacles they face together in meeting that goal.
GAAP vs IFRS
Posted: Nov 17, 2010 |Comments: 0 |
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Today we live in a world in which business and trade are crossing oceans and continents. We can now
conduct business with companies all over the world without having to leave the office. Globalization of
businesses has greatly expanded the grasp of capabilities companies can now work within. However,
within this new sphere of activity we now face some major business related issues. One of the biggest
issues facing business and the accounting world today is the issue of standards and the difference in
standards among trading countries. In the United States, accountants follow the standard known as
Generally Accepted Accounting principals (GAAP). Other countries follow their own standards as well.
Many accountants hope that all companies around the world including the US switch over to the
International Financial Reporting Standards (IFRS). There are many differences among the alternatives
but in the end harmonizing all standards around the world would make business run smoothly and
beneficial to all.
It is key that financial reporting includes many items. There are three key players in the making of the
US standards of GAAP. First there is the Securities and Exchange Commission (SEC), which was
established by the government. Their main goal is to develop and standardize financial information
presented to stockholders (Kieso, Weygandt, Warfield 7). At the time of the creation of the SEC there
had been no prior group issuing standards. The SEC does not work alone; it looks toward the Financial
Accounting Standards Board and American Institute of Certified Public Accountants (AICPA) as well.
GAAP has been along way in the making as it includes countless of documents that have been being
developed for decades (Kieso, Weygandt, Warfield 13). Although adopted and used by companies in
the United Sates it is not without its own problems. Some believe that GAAP was developed in such a
way that those who created it would benefit most from its rules. While GAAP is widely used with in the
United States it is certainly not the case beyond its borders.
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The International Accounting Standards Board (IASB) formulated the International Financial Reporting
Standards (IFRS), which is prepping to become the global standards in financial reporting. Worldwide
there are approximately 120 nations following these standards according to the website IFRS.com.
Many countries are supposed to jump on the bandwagon in the next couple of years. Some countries
like Canada and Korea aim to switch over to IFRS no later than next year. The IFRS website claims the
SEC has made reports that it will require all publicly traded US companies to switch over to IFRS by the
year 2015. There are still some companies voluntarily switching over especially those who have times
overseas. The change over has been slow due to the major differences found between GAAP and IFRS.
There are many key distinctions in all aspects of financial reporting using one standard over the other
as stated in a report issued by the company Ernst and Young. A key statement in financial reporting is
the income statement, and this is certainly a place where differences among the standards can be
found. GAAP will report expenses bases on function while IFRS reports expenses by nature. Also GAAP
includes extraordinary items on their income statement while doing so in IFRS is prohibited. Other
places variation may be found are within inventory reporting. GAAP reports inventory using the LIFO
(Last in first out) method while IFRS again prohibits such reporting. Differences can also be found in
reporting on intangible assets to the way foreign currency maters are handled. With disparity between
the two standards some may wonder why switching over to IFRS or any one single standard will be
more advantageous.
The chairman of IASB David Tweedie states, " The move to global accounting standards is a key
element of the global financial reform agenda and long term benefits of a single set of high-quality
accounting standards far outweigh the short-time difficulties of transition." With globalization in full
effect in makes the most sense to standardize business reporting's. The International Financial
Reporting standards website lists a clear advantage of companies worldwide switching over to this
standard. It is advantageous of all companies because they will be presenting financial states that are
done on the same basis as their competitors. It will make comparing books and running business
transaction a lot easier. Once the United States finally conforms and the SEC adopts IFRS all
companies in the US will have to switch over. Once this happens any countries that have yet to do the
same with most likely follow suit making IFRS truly an international standard. Although a seemingly
daunting task the end results with be worth the pain.
e Slow Roll to Global Convergence of IFRS
Posted: Nov 15, 2011 |Comments: 0 |
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The globalization of accounting standards is without a doubt going to be a reality eventually. Exactly
when these standards will finally be enacted might still be a few years, but with the knowledge of its
approach; some companies have already begun the transition to International Financial Reporting
Standards. While many of the larger corporations based in the US will begin to voluntarily adopt the
changes that IFRS brings, a majority of the smaller US companies will continue business as usual until
forced to comply with convergence.
The idea of convergence to a single set of high-quality global accounting standards stems back
to November 2008 when the Securities Exchange Commission announced a "Roadmap" for a possible
transition to the adoption of International Financial Reporting Standards. That "Roadmap" triggered
the slow roll and long process that ironically wasn't heard of again for two years. Not until February
2010 did the SEC follow up on their proposed "Roadmap," with a statement that detailed all the issues
that need to be further analyzed before 2011, when the SEC expected to make a decision whether or
not to go forward with the convergence. That two year gap that it took for the SEC to declare that
there are a lot of issues and lumps that need to be worked out is a perfect foreshadowing of the whole
convergence process and of what's to come.
Well over 100 countries have already or are in the process of converging their national
accounting standards with IFRS. Currently the SEC is expected to make a final decision by the end of
the year. That being said, according the Financial Times website,
(http://www.ft.com/cms/s/0/4b2b59dc-0fac-11e1-a36b-00144feabdc0.html#axzz1dp4H6ZeV) the
Financial Accounting Foundation took the initiative to begin planning the incorporation of IFRS even
before the SEC has agreed to definitely make the switch. Part of their claim for doing this was to
influence the FASB to immediately incorporate the IFRS standards that would improve the quality and
comparability of financial reporting in the US. However, even with the FAF already incorporating IFRS,
it is unlikely that the SEC will choose to switch completely to IFRS by the end of the year. They will
extend the convergence period once again and keep the US GAAP as the financial basis for now until
they can more clearly identify and implement the key changes that would result of IFRS convergence.
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One of the biggest changes to account for in the switch to IFRS is the readiness of human
capital in the United States. Many large internationally driven companies have taken the plunge and
begun training and educating employees and investors on the changes IFRS would bring. This keeps
them ahead of the convergence process and allows them to better communicate and understand the
needs of their foreign customers and investors. On the other hand, for smaller companies, the thought
of re-training and time lost to education of current employees can have a large sum of money attached
to it. Any lost work time in a downturned economy is a huge blow for these smaller companies,
making the switch to IFRS much less attractive.
Looking at the IFRS and US GAAP from a broader perspective, a switch that will not be easy as
well as take a very long time does not sound appealing at all. Along with that, smaller domestic
corporations have to add in the biggest cost of teaching, explaining, and getting employees as well as
clients to understand the affects and changes that are to come. According to an article found in the
Global Journal of Business Research, US GAAP makes up 35 percent of the world market of accounting
standards. Whereas 55 percent of the world market are either already using IFRS or plan to use IFRS,
with the United States not being a part of that group (Fosbre, Vol 3, pg 64). Nevertheless there is
without a doubt a world wide movement towards global convergence of accounting standards and any
company that voluntarily begins that process is a step ahead of the competition.
In a world shrunk by technology, globalization and international business transactions are
becoming evermore popular and demanding. The global economy would not look too pretty if each
country had a different way of recognizing and reporting their financials. That is why the International
Financial Reporting Standards are undoubtedly going to become the global standard for international
accounting. Even if the SEC hasn't officially declared to convergence with IFRS many large multi-
national companies have implemented plans that stretch five to seven years to accommodate the
switch to IFRS. These companies will be a step ahead of the curve in figuring out the smaller
implementation issues where as the smaller companies that are waiting will have to deal with changes
in a much shorter period of time. The major factor that every company should take out of the
convergence process is that it won't be easy but it will certainly be worth it in the long run.
GAAP Transition to IFRS
Posted: Nov 16, 2011 |Comments: 0 |
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With today's fiscal and cultural market becoming more diverse and transcontinental; the separation of
standards, laws, and cultures is beginning to cause some turbulence. Industry is constantly looking to
expand, but without consistency between countries it becomes much more complicated. In today's
world, it's not even uncommon to find corporations who singlehandedly span intercontinental territory
let alone corporations dealing with other corporations across national borders. The concept that hopes
to ease the aggravation of international dealings is harmonization. Through harmonization, global
markets hope to compromise and develop synonymous laws, standards, and practices. One of the first
and most vital topics that need alignment across international borders between the United States and
the rest of the world is accounting standards.
The differences between the United States' Generally Accepted Accounting Principles, or GAAP, and
the rest of the world's International Financial Reporting Standards, or IFRS, have been a hot topic of
conversation for many years now because of the implications of multiple companies completing
business deals across the borders between the two accounting standards, as well as the implications
of a single company recording financial reports which span the globe, therefore being subject to both
GAAP and IFRS. Consistency is a luxury that many people have not had the privilege of working with in
the accounting field, but may soon get. Although the Securities and Exchange Commission, or the SEC,
has been intently discussing ways to make the transition to a common accounting standard across
international lines, thus far there still has not been a concrete change from either IFRS to GAAP or
conversely from GAAP to IFRS. Of course because the majority of the world has adopted the
International Financial Reporting Standards of accounting, most of the practical solutions for the
disconnect ultimately end with the United States converting from GAAP to IFRS. There have been no
sudden changes thus far intentionally so that the course of action doesn't see to great or complex, but
still over the last couple years there have been subtle changes to try to bridge the gap on many of the
more important issues. Many people within the United States Economy still argue fiercely as to the
benefits of convergence across the board, and to what degree will certain United States companies
suffer because of the convergence.
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A large debate within the United States stems from the size of the company involved. Larger
companies see the adoption of IFRS as a positive action moving forward because it will help to
harmonize not only business dealings that may take place overseas in the future, but it may also help
to harmonize its own internal financial clarity if the company spans the globe and falls subject to
multiple accounting standards. The smaller firms within the United States argue that they have no
need, or benefit from this change and shouldn't be forced to spend the massive amounts of money and
time it will take to transition smoothly. This change will undoubtedly be complex and time consuming,
but a more alarming realization for smaller companies is the cost, which many of them don't have the
capital reserves to make the transition without having it affect the business as a whole.
Another growing concern is the quality that the International Financial Reporting Standards offer. As
Canada makes its gradual adaption to IFRS from Canadian GAAP, some of the opponents in Canada
believe that IFRS allows more of an opportunity for corporate management to make unethical
decisions discretely. Many of the differences of IFRS lay in the ability of management to make
individual decisions rather than having them follow stringent rules that specify when, where, and how
everything must be declared and presented. Many of the proponents of IFRS argue that no matter how
strict the standards or regulations are, executives who wish to partake in unethical activities will find a
way to do so, making the aforementioned point moot.
No matter which side of the argument you currently preside, I think that the adaptation to IFRS in
some way or another is inevitable. If the dream of a truly global economy will ever be realized a
universal set of standards will have to exist in order to help with compatibility and an eventual
reduction in costs. Of course the conversion now will be a costly one to all involved during the process,
but it provides an incredible opportunity to save money in the future. A full convergence to IFRS for the
United States is still undecided and won't be for many years anyway, but as the debates continue the
Unites States will continue to absorb certain IFRS rules into GAAP to help align the two systems while
keeping costs and complications down. A truly global market should innovate how companies grow
and compete as well as how investors are able to obtain information and invest; but the absence of the
Unites States makes the idea of a single global market impossible.