Convergence of Accounting Standards Internationally

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Convergence is the goal of reaching the point where there is one single set of high quality, international accounting standards that would be used for both domestic and cross-border financial reporting that would be used by companies worldwide.  The pace for this evolution is accelerating and the need for a single set of global accounting standards is evident as global markets converge on a day-to-day basis.

             The fundamental goal of this convergence is to create a “single set of high-quality, international accounting standards that companies worldwide would use for both domestic and cross-border financial reporting” (Financial, 3).  There are several main differences between the United States GAAP (generally accepted accounting principles) and the IFRS (international reporting standards).  To put it simply, GAAP is ruled by historical cost and conservatism, whereas IFRS is controlled by a value-based or fair value approach.  In order to meet the goal of the convergence, FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board) need to work together in order to eliminate these differences.

            Since 2002, IASB and FASB have been working together regarding the convergence.  The main way the two Boards are collaborating is by developing common standards.  The IASB issues the standards as IFRS and the FASB issues them as GAAP.  The main focus is that over time the two sets of boards will become the same and both improve in overall quality.

            As of now, numerous small projects have been completed on behalf of the convergence.  The topics of these projects include:  share-based payments, segment reporting, inventory accounting, accounting changes, fair value option, borrowing costs, research costs, non-controlling interests, business combinations, derecognition, and there are a number of other projects still in process or in the final stages of development.  With the completion of these numerous projects, the FASB and the IASB are coming closer and closer to global accounting standards.

            So why do we need converged standards anyway?  For one thing, it will create a level playing field throughout the whole world.  Moving towards the IFRS has a number of other benefits as well.  After the convergence, accounting protocols will be simpler; IFRS is not as detailed as the U.S GAAP.  Because of this, we see that IFRS is easier to use and therefore will result in better reporting.  Another added bonus of IFRS is that investors prefer these standards over GAAP.   The most important benefit is that IFRS approaches accounting globally.  Financial statements will be able to be compared to other countries that have also adopted IFRS.

            Everything that has a benefit also has a cost.  IFRS is not as detailed as the U.S. GAAP; this is also listed as a benefit of the convergence but it is also a definite con as well.  As accountants, we want to understand every transaction that takes place under a company.  With less detailed information, it can be hard to get a clear picture of what is going on.  Some other cons of the convergence include: transaction periods will create some disconcerting results, IFRS fails the cost-benefit analysis, and theoretically the U.S. GAAP is superior to IFRS.

            Convergence between U.S. accounting standards and international accounting standards is coming fast.  As global economies come together in business, the need for international standards is unmistakably clear.  Accounting standards are quickly evolving worldwide as the global economy keeps expanding.  To keep up with this pace, convergence to IFRS is crucial.   In order for this project to succeed, the FASB and the IASB will need to continue to work closely together to minimize their differences.  Gradual and slow changes to each set of standards will result in the ultimate goal of a uniform set of global accounting standards. When the whole converging process is over, companies all over the world will be able to come together and easily to conduct business with each other every day.  Users of accounting information need to prepare themselves for this shift to a new way of accounting.

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