Fasb Executive Summary

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.

UK’s IFRSs are designed to make it easier to compare the performance of organizations in different countries, rather than each country maintaining its own GAAP, which makes such comparisons difficult. All listed EU companies have been required to use IFRSs since 2005. The adoption of IFRSs by the private sector is expected to have various benefits for both companies and investors; including (1) UK’s IFRSs will remove the need for companies with foreign subsidiaries to translate the accounts for consolidation with the parent company accounts. Also (2) it will be easier for investors to make informed decisions about the performance of companies in different countries because of the increased transparency and a better understanding of financial statements.

In 1973 the Financial Accounting Standards Board (FASB) was established to set the financial accounting standards in the United States of America for nongovernmental entities. These standards are collectively called U.S. Generally accepted Accounting Principles, or U.S. GAAP. The Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants acknowledge the authority of these standards (FASB, n.d). A “proven, independent due process” is used to collect the viewpoints of the financial statements prepares and users for the constant improvement of these standards. An Accounting Status Update(ASU) is not an authoritative source however documents the amendments to communicate the changes in the FASB Codification for a user to understand the reason and future of those changes (FASB, n.d).

SFAC No. 8 addresses the cost constraint on useful financial reporting, “Cost is a pervasive constraint that standard setters, as well as providers and users of financial information, should keep in mind when considering the benefits of a financial reporting requirement.” (SFAC No. 8 BC 3.47) However, the ability to place a dollar value and fully enumerate a cost or benefit is almost an impossible task for standard-setters. Additionally, there is no way to successfully identify and measure all of the economic consequences associated with a new standard. The FASB should be applauded though for advancing uniformity in accounting standards, however; uniform financial reporting suggests a one size fits all approach. “Smaller, non-publicly listed firms (and their auditors) argue that accounting standards are formulated mainly for larger, publicly traded firms” and that “compliance costs are disproportionately higher and the

Accounting information must have reliability. “Accounting information is reliable to the extent that it is verifiable, is a faithful representation, and is reasonably free of error and bias” (Kieso et al., 2007). Information should be comparable with a similar company and also consistent with the same company through different periods.

In 1973, the Financial Accounting Standards Board (FASB) was created and their mission is “to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information.” (FASB.org, 2009a). The FASB is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States. The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. Therefore, the FASB plays a vital and important role in protecting the financial well being and the overall stability of our

Investors also might have believed that application of a common set of standards would have convergence benefits, such as lowering the costs of comparing firms’ financial position and performance across countries, and that IFRS adoption would enable European capital markets to become more globally competitive, with consequent increases in liquidity for European firms. Alternatively, it is possible that investors in European firms would react negatively to movement toward IFRS adoption. This could be the case if investors believed that IFRS would result in lower quality financial reporting information. For example, IFRS might not adequately reflect regional differences in economies that led to differences in domestic accounting standards. Also, investors might have believed that potential variation in the implementation and enforcement of IFRS would lead to an increase in the exercise of opportunistic managerial discretion when applying IFRS. Finally, investors might have believed that the implementation and transition costs associated with IFRS would exceed any benefits. To gain insight into investors’ expectations regarding the net cost or benefit of IFRS adoption in Europe, we examine three-day market-adjusted returns for firms with equity traded in the

The field of accounting is constantly evolving. This is true not only for the theory of accounting itself but also the entities that govern its theory and practice. Presently, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are faced with some of the biggest challenges to date. To understand the significance of these two boards, it is necessary to understand their histories, relations between the boards, and the standards that they set. Also how the knowledge of these boards and the field they lead, gained through the masters of science in accountancy

With the growth of international business there is a need to standardize financial statements globally. Presently there are “approximately 120 foreign private issuers currently that report to the Commission using IFRS financial statements.” By standardizing accounting practices investors will be able to make informed decisions based on comparability and accuracy of financial statements. The SEC released this statement in 2008, “We believe that IFRS has the potential to best provide the common platform on which companies can report and investors can compare financial information.” The SEC has created a “Roadmap” or plan to convert US GAAP over to IFRS. According to The Committee of

Standardized reporting across firms from different countries would facilitate cross-border investment and the integration of capital markets (Hail, Luzi, et al). According to Beke (2011), Standardization implies the “elimination of alternatives in accounting for representing economic transactions and other events” (Angeloni). In essence, similar events and transactions would be reported in a similar manner, and vice versa. Having more comparable reports allows firms to make better-informed investment choices due to a better understanding of competing firms, which can lead to cost savings. Moreover, firms that have more comparable reports can better contract with suppliers and firms in other countries, and these contracts are more likely to be fully specified and enforceable. Studies also show that the adoption of IFRS reporting should be associated with an increase in market liquidity, as well as a decline in firms’ cost of capital (Hail, Luzi, et al.).

The FASB has the mission of create and improve the accounting standards and the financial reports by the nongovernmental organizations, offering useful information that allows investors and other users to make decisions. The implementation and improvement of the standards is made taking into consideration the opinion of all the parties interested and it is supervised by the Financial Accounting Foundation’s Board of Trustees. This process open to the public participation warranty the transparency into the standards-setting process. Therefore, the FASB issue a variety of reports requesting feedbacks on its standards setting activities. (FASB, Standard-setting process, n.d.)

On November 18, 2002 the FASB and IASB came together at a meeting in Norwalk, Connecticut to start the wheels in motion for the purpose of establishing a new set of financial standards. The FASB and IASB are committed to create financial standards that will be accepted both domestically and internationally that are of high quality and compatible for financial reporting. At present more than a 100 countries already use the International Financial Reporting Standards. The U.S. at present has not accepted a changed in accounting procedures; therefore, this is going to be a major task for both the FASB and IASB to complete successfully this union. I do believe that the partnership between the FASB and IASB will achieve the goals of creating a common financial reporting set of standards that will be accepted by all.

businesses remains bleak. Unfortunately, a single set of standards is desired by many groups across the globe, and it could be the best way to compare GAAPs across the globe. In an April 2015 study published by Tel Aviv University, researchers compared underpricing of IPO firms in countries that use IFRS to IPO firms that used domestic GAAP. This study found that “IFRS adoption can generate a positive externality by enhancing comparability, but only when coupled with high-quality enforcement or strong firm-level reporting incentives.” This indicates that while some countries would not experience improved comparability from IFRS adoption as a result of systemic corruption, the United States still has potential to reap the benefits from adoption, in spite of concerns from private

International comparability of financial statements attracts capital from foreign investors and reduces the barriers to cross-border capital flows. When international accounting standard replace domestic accounting standard, corporate discourse is reduced. This enables investors to monitor managerial performance better because information asymmetry is reduced. IFRS adoption made it easier for companies in U.K to access the capital markets (Lee, 2008).

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.