Introduction
Convergence of Accounting Standards is the prospective goal of the two accounting standard boards, FASB and IASB, to produce a single set of accounting standards that can be used globally. Important to note, at present, the world of accounting is divided in two parts, one part of the accounting world use the US GAAP standards set by FASB; while the other part use the IFRS accounting standards set by IASB. However, each of the accounting standards(GAAP and IFRS) has their own rules and provision, hence, it becomes difficult and time consuming to compare the financial statements prepared under different accounting standards. Over time, with the increasing amount of financial transactions and with corporations stepping into global arena, the need for convergence of accounting standards is growing. Thus, in this paper, we will discuss the ongoing process of convergence of accounting standards, advantages it will offer, and obstacles in the path of convergence.
Steps towards convergence
IASB and FASB has been working together collectively and producing common set of high quality accounting standards is still on their high priority. The need for convergence of accounting standards was felt decades before, however, the process of convergence started after FASB gave its nod to the process in 1999, and also laid the goal of improvement of US GAAP standards to minimize the difference with IFRS accounting standards. Finally, in the year 2002, FASB and IASB officially announced that they have agreed to work together towards the convergence process, and have also consulted other national and regional bodies to remove the difference between IFRS and GAAP standards. The decision was rather documented in a Memorandum of Understanding (MoU), and was named as Norwalk Agreement. The boards' commitment was further strengthened in 2006 when the IASB and FASB set specific milestones to be reached by 2008 and also issued a blueprint document named, ‘’A roadmap for convergence 2006 - 2008’’
Later in 2007, Security and Exchange Commission(SEC) in a milestone step towards convergence, removed the requirement for non-US companies registered in the United States to reconcile their financial reports with US GAAP if their accounts complied with IFRS rules as issued by the IASB. In addition to that, SEC also published a proposed roadmap of its plan on agreement for adoption of IFRS standards by US companies. During 2008 and 2010, the MoU signed by FASB and IASB was updated and both the accounting boards have completed conversions on combinations, non-controlling interests, and fair value measurements. More recently, in 2013, IASB founded Accounting Standards Advisory Forum (ASAF) to broaden the convergence efforts and FASB is one of the members of the 12 member team of ASAF.
Thus, with consistent efforts of FASB and IASB over providing common set of accounting standards, we believe that few years down the line, we will witness common set of accounting rules for revenue recognition, financial instruments, leases and insurances, and the time is near when there will be one set of converged accounting standards and the comparability of the financial statements will not be of a concern anymore in the accounting world.
Advantages of one set of global accounting standards:
i) Comparability
As already discussed briefly in the introductory section, the biggest advantage of introducing one common set of global accounting standard is the enhancement it will promote while comparing the financial statements of two companies established in different countries. For Instance, for a company established in United States and following US GAAP Standards, many aspects of the financial statements of this company, will differ from the one which prepares its financial statements according to IFRS. Hence, it becomes very difficult for an analyst to first point out the difference, reconcile them, and then proceed with the financial comparison between both the companies.
Hence, the introduction of one global accounting standard will put the comparison of the financial statements on equal footing; thus making it easy for the analyst to provide a more comprehensive financial analysis for the companies he is interested in. Moreover, if financial statements turn comparable, it will be a boon for many small-business owners, who, at present, do not have the resources to effectively compare international and domestic investment options.
ii) International Expansion
Adoption of a single set of global financial standards will also assist many small and mid-cap companies to expand in off-shore countries. At present, if any company has a strategy to expand its operations globally, apart from factors like capital investments and government regulation, it also need to consider international cost of compliance, which could mean adopting a completely new set of accounting records to meet statutory requirements in the new country. In some cases, this would nearly double the company's accounting costs. For many small businesses, even the large rewards of moving overseas are dwarfed by these expansion costs.
Obstacles to Convergence of Accounting Standards
Despite of numerous advantages a globally accounting standard will provide, accounting boards are still facing many obstacles in the path of convergence, and the same are discussed below
i) Political pressure
FASB and IASB has been reportedly facing political pressures over the issue of convergence of accounting standards. Moreover, many influential business groups are also against the agreement over the convergence of the accounting standards, and most of all these are American companies that have a completely different accounting environment than the developing nations. Important to note, all the public trading companies follow Generally Accepted Accounting Principles (GAAP) which are set forth by FASB. , hence, any decision to converge the accounting standards implies that FASB and SEC, will lose their influence in setting up of accounting standards, which can possibly harm many high-notch US companies.
ii) Taxation System in United States
Although FASB and SEC are taking steps towards the convergence of accounting standards, but, full convergence of the accounting standards will introduce complexity in the US tax system. Important to note, since US companies follow GAAP standards, they use straight-line depreciation method. On other hand, IFRS propose the use of Modified Accelerated Cost Recovery System for depreciating assets. Thus, convergence of US GAAP with IFRS standards will force the federal government to modify the tax accounting system, which we think is a tough thing to agree on.
References
Convergence between IFRS and US GAAP. (n.d.). Retrieved April 14, 2015, from http://www.ifrs.org/Use-around-the-world/Global-convergence/Convergence-with-US-GAAP/Pages/Convergence-with-US-GAAP.aspx
Freedman, J. (n.d.). The Advantages of Single Set of Global Accounting Standards. Retrieved April 14, 2015, from http://smallbusiness.chron.com/advantages-single-set-global-accounting-standards-67829.html
Robinson, T. (2011). Financial Reporing Standards. In C. Institute, Financial Reporting and Analysis (pp. 28-46). Boston: Custom.
