Convergence And Comparability Of Financial Reporting

Globalization has been changing the world. It has interconnected people, nations, and even businesses. Today´s business can share information to investors around the world thanks to the intelligent software of the actual society. Being more specific, the way in which investors and users evaluate businesses performance is through the information contemplated in their financial statements. These financial statements illustrate the current assets, liabilities, and stockholder equity a company has in order to help users take economic decisions. However, not all the companies are regulated to provide the same structuralized information around the world. Each country possesses its own accounting standard that regulates the preparation of financial statements of a company. In that way, companies’ information might differ between countries making the comparability between financial statements difficult to be implemented by users in order to assess the performance of foreign businesses. In view of the need of a globally accepted accounting standard that promotes uniform standards for worldwide financial reporting, the International Accounting Standards Committee (IASC), which then becomes replaced by the International Accounting Standard Board in 2001, was created (Cathey and Schroeder 130). The IASB issues International Financial Reporting Standards (IFRS) that stands as the set of accounting standards that prepare and present the financial

Despite those enormous advantages, it has been argued that IFRSS adoption lead to significant costs. The main argument is that IFRSs do not consider local needs and priorities as every country has their own ‘business environment, legal systems, cultures, language and political environment’ (Henderson and Peirson, 2000 cited from Malthus, S., 2004). However, to overcome this problem, IASB can accommodate flexible reporting standards that enable companies to choose alternatives that are more suitable for their external condition. It is opinion of some opponents of IFRS adoption that IAS is ‘insufficiently detailed’ (Uddin,M.S., 2005, p.4) that require accountants’ and auditor’ professional judgment. However, overly detail might be contra productive and not flexible in anticipating every changes and differences.

As the responsibilities of the global harmonization of accounting standards IFRS and GAAP transfer to IASB, FASB’s influence is waning. Advantages of the convergence include high quality financial reporting, which lowers cost of capital for investors and the cost of borrowing for companies. However, there are disadvantages to be noted, such as the costs of introducing IFRS to current and potential accountants and the risk of reducing the uniformity of financial reports due to the lax rulings of IFRS, which promotes earnings management amongst companies. Although arguments regarding the convergence remain prevalent, the completion of IFRS and GAAP is inevitable. Come year 2015, accountants, investors, and companies alike will discover whether or not the pros outweighed the cons; or vice versa.

The five research articles I have chosen to further my research on the convergence between U.S. GAAP and IFRS are The Implication of US GAAP and IFRS Convergence on American Business by Austin Willmore (2015), IFRS adoption by country by PWC (2015), International Financial Reporting Standards and American Generally Accepted Accounting Principles: the Convergence Lessons by Kuzina (2015), The economic impact of IFRS - a financial analysis perspective by Seay (2014), and Accounting for Leases The New Standard by CPA Journal (2016). These articles are related to my topic, where these researchers researched and analyzed the financial statement reporting on convergence of the U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), and certain accounts when adopting IFRS present a different result in the financial reporting for U.S. reporting companies when U.S. GAAP standards combined with IFRS. Also, these research articles discuss the existence of two systems of standards, U.S. GAAP and IFRS; and the issue and difficulty of the process to fully converge.

Fosbre, A. B., Kraft, E. M., & Fosbre, P. B. (2009). THE GLOBALIZATION OF ACCOUNTING STANDARDS: IFRS VERSUS US GAAP. Global Journal Of Business Research (GJBR

Since 2002, Financial Accounting Standards Board (FASB) and International Accounting Standards Board’s (IASB) have been working toward “convergence” of US General Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). They have made significant progress in efforts to converge critical accounting standards such as those dealing with revenue recognition, financial instruments and leases. Once these projects are complete, the "era" of convergence will be at an end. Nevertheless, the benefits for investors of eventually getting to consistently applied, high-quality, globally accepted accounting

The purpose of this paper is to describe what accounting convergence means and assess the likelihood of the convergence being completed and implemented in the next five (5) years. IFRS is the principle based set of standards that establish standards and dictate specific treatments. IFRS has become a global standard for companies when preparing financial statements. IFRS consist of multiple reports stated on the Wikipedia website. The two reports that will be discussed in the paper are IFRS and GAAP. GAAP is an Accounting Standard that provides guidance for financial

The convergence of two accounting systems, the US GAAP and International Financial Reporting Standards, is not a new concept. For many years, the primordial idea of convergence started in the late 1950’s in response to post World War II economic integration and related increases in cross-border capital flows. Initially, the term used was “Harmonization until the early 1990’s the politically correct term is “Convergence”.

As the complexity of our financial economy develops it is important that our accounting standards progress in accordance. Accounting is very important to the development of the global and local economies. Accounting is basically the gathering, summarizing and presenting of financial information of an entity to interested internal, external and possible investors. This information should be presented in a non-bias way so that other people are able understand.

Why do we study comparative accounting? Countries around the world have different aspects such as taxation, legal systems, culture and colonial influence that differ the way accounting is reported. Ultimately the need for fair presentation is the final objective to comparative accounting. Thousands of years ago when accounting was first practiced, each country practiced financial reporting according to the power and strengths in their country, regardless of how accounting was reported in neighboring countries. Nowadays, because the world is becoming more globalized and harmonized, standard-setters feel the need to report their accounting in a uniform way. The International Accounting Standards Board [IASB] was formed as a non-for-profit

For nearly half a century, a movement has been underway to establish a high-quality, comprehensive set of international accounting standards, with the goal of facilitating international trade and investment. In the global capital market, differences in the rules of accounting for the purposes of recognition, measurement, and reporting of financial results have impaired the smooth transfer of information across borders. Given that it accounts for nearly a third of the global market, there is considerable pressure for the United States to conform to the International Financial Reporting Standards (IFRS), as promulgated by the International Accounting Standards Board (IASB). While moving to a single set of accounting standards could create

A set of internationally recognized accounting standards facilitates capital flows across borders. Globally accepted standards make financial information readily comparable for its users. Foreign investors are more inclined to put money into a U.S. company if they are familiar with the company’s financial reporting. Conversely, U.S. investors will find it easier and less risky to invest in foreign companies when they know the local accounting standards (Epstein 2009). This will make U.S. companies and capital markets more competitive, since it saves costly reconcilition of different standards. Preparers, investors, auditors, and others will benefit from these cost effieciencies, since a Results of an IFAC Survey among accounting leaders around the world with respect to the importance of convergence to International Financial Reporting Standards for economic growth in their countries:

Analysing the comparability of national accounting also auditing standards with national standards. Beside it, determine the degree with which applicable auditing and accounting standards are fulfilled, also examine strengths and weaknesses of the institutional framework in order to maintaining high quality financial reporting.

Another challenge convergence faces is the fact that under IFRS, there are little industry-specific standards, which has led many commentators to voice “concerns about how IFRS would impact their particular industry” (AICPA, 2009). Other critics have voiced concerns regarding the uncertainty surrounding funding for the IASB as it’s “largely funded through voluntary contributions from a wide variety of participants across the world’s capital markets. The concern with that model is that it leaves the IASB open to the perception that organizations that provide funding could try to influence the accounting standards” (SIAC, 2012). This observation questions whether there is true independence of the IASB and the integrity of its standard-setting process.

With complete notion and awareness of how each country has their set of rules, “the goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements” (Rouse, 2011). This view is meant to provide general guidelines, as well as international comparisons through conventional and edifying means. To bring broader and vivid objectives, IFRS replaced IAS, the older standards, in order to bring a more comprehensive and simplified accounting procedures.