GAAP and IFRS Convergence
Generally accepted accounting standards (GAAP) is a set of strict accounting rules that are applied in financial reporting. These standards define specific concepts, making such processes more transparent and stable (“About GAAP,” n.d.). Another set of accounting regulations is the International Financial Reporting Standards (IFRS). These norms also regulate how different transactions have to be reported in financial statements. In the United States, there are still many arguments regarding either adoption of the IFRS or the convergence of the U.S. GAAP with international standards. The main goal of this paper is to analyze the main aspects of the convergence of the U.S. GAAP and IFRS.
The Necessity of the Improvement of IFRS
There is an opinion that the IFRS should be further developed before obligating the U.S. companies to report under them. In order to discuss this issue, it is necessary to carefully compare these two different sets of standards. The IFRS are the system of standards that are widely used in the world (“About us,” n.d.). Meanwhile, GAAP are applied only within the United States. There are several key differences between these two sets. First, as mentioned above, the IFRS are globally accepted standards, and they are used in more than a hundred countries. GAAP were designed specifically for American companies. Although Canada used these principles for a long time, they eventually were converged with the international standards.
Therefore, certain difficulties take place when American firms perform at an international level. Second, one of the main differences between two systems is that they use different methods to evaluate accounting processes (Choi & Meek, 2011). The GAAP require researching and have strict rules. On the other hand, the IFRS offer general patterns that are based on principles. Therefore, GAAP obligate companies to make all transactions under specific rules that give no room for exceptions. However, the IFRS allow interpreting similar situations differently (Choi & Meek, 2011). Third, these systems use dissimilar approaches not only to track inventory but also for a reversal of inventory. For example, the IFRS allow reversing the amount of the write-down if market assets increase in value. However, GAAP state that it cannot be done. Therefore, GAAP cannot respond to positive development in the marketplace.
These differences show that GAAP are a less effective system than the IFRS. The latter is more flexible thus might be applied to a wider range of business situations. Therefore, there is no need to wait for further development of the IFRS. It is a time-tested instrument that is successfully used by leading international companies.
Disadvantages of Convergence
Another important issue is the IFRS and GAAP convergence as this process might negatively affect the U.S. companies. It started in 2002 when the Norwalk Agreement was signed by the International Accounting Standards Board and the Financial Accounting Standards Board (“About the FASB,” n.d.). This step was made to improve the quality of accounting standards. Two main objectives were set: to make standards compatible and to maintain compatibility. Consequently, the Boards issued the Roadmap that described a convergence plan. Three main aspects formed the basis for it: high quality, common standards, and needs of investors.
It triggered a new international accounting trend. Many national bodies that set standards established policies of convergence with IFRS. For example, the UK Accounting Standards Board used the principles of international standards to design its own ones (“Convergence between IFRS and US GAAP,” 2016). Similar policies are applied by a number of different standard setters.
However, there are several disadvantages of the convergence. First, European countries do not favor GAAP, although it is undergoing modification. Second, the convergence will not result in substantial cost savings in the long run. On the other hand, the adoption of the IFRS will lead to an increase in foreign investments and greater capital flow. Therefore, the convergence of the U.S. GAAP and IFRS is not the adequate measure to address the existing problems in international accounting.
Protection of the U.S. Interests
The protection of the U.S. interests is another significant topic to discuss as foreign organizations are responsible for the development of new standards. This topic is one of the main concerns of American businesses. However, there are several important points that prove that international standards will not be harmful to local companies. Standard setters understand that firms are interested in doing business in foreign countries. That is why they develop different methods to facilitate such processes. Moreover, they pay particular attention to the protection of companies’ interests and market integrity. The main principle of the international system of regulation is to support informed investment operations by means of comprehensive and just disclosures (“What we do,” 2013). All the involved parties, such as investors and financial markets, rely on the accounting data of high quality. Such information is crucial for effective performance. Therefore, international standards aim at maintaining the confidence of investors in the reliability of provided data. Moreover, all securities regulation bodies cooperate closely, creating international regulations to improve the overall performance of capital markets.
The convergence of the U.S. GAAP and IFRS is a highly controversial topic. There are several most important aspects that require discussion: further development of the IFRS, compatibility of different standards, and protection of the interests of U.S. companies. Some specialists believe that advantages of the convergence outweigh its shortcomings. However, the analysis reveals that certain drawbacks to which this process will lead are too significant to neglect them. Therefore, it is necessary to change the existing strategy and focus on the adoption of the IFRS.
About GAAP. (n.d.). Web.
About the FASB. (n.d.). Web.
About us. (n.d.). Web.
Choi, F., & Meek, G. (2011). International accounting (7th ed.). Harlow, England: Pearson.
Convergence between IFRS and US GAAP. (2016). Web.
What we do. (2013). Web.