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Benefits of Convergence between IFS and GAAP

Updated on November 6, 2016

Currently, the United States operates under Generally Accepted Accounting Principles, GAAP, but are pressured to join the many other countries throughout the world under the International Financial Standards Board, IFRS. IFRS is defined as a set of rules that would apply equally to public companies worldwide regarding financial reporting (Taylor & Francis Group) According to IFRS, IASB and FASB have been trying to achieve convergence since 2002. They have posted progress reports both in April of 2012 and February of 2013 updating the changes as well as the status of convergence. (IFRS Foundation) Many question whether the convergence of GAAP and IFRS would be a good thing for American people as well as the economy. The questions most important regarding the decision to join IFRS are what benefits could come from universally shared standards, the implications for U.S. businesses, how different are the standards?

The huge benefits of convergence between IFRS Standards and U.S. GAAP go hand in hand with world-wide financial reporting. Along with the fact that convergence in the futures is inevitable with the increase in worldwide integration of markets and politics, it would also put the U.S. on a level playing field with the many other countries adopting IFRS. More specifically, Charles Landelius, at FTI Consulting, discussed the benefits of shared standards as making it easier for companies to raise foreign capital, to consolidate with foreign subsidiaries and to make cross-border acquisitions. (Financier Worldwide) The Majority of benefits that would come from convergence deal with investors. It would lead to more accurate, comprehensive, and timely financial information relative to national standards as well as reduce the costs to investors to process international financial information which would lead to increased efficiency with which stock market incorporate prices. (Taylor & Francis Group)

Many financial professionals have discussed both positive and negative implications to U.S. business regarding the convergence of standards. Some of the positive implications are that it would only require a one-time cost of implementing the new system and that it would diminish the accounting risk that comes along with cross-border investing. (Financier Worldwide) This could drastically increase cross-border investing possibly increasing many countries’ economies. A few of the negative implications are that the full convergence would take an extremely long time as well as the need for learning which comes along with new standards. Companies would have to put a large focus on training for the near future which can be both time extremely time consuming as well as expensive. (Taylor & Francis Group) It is also likely, that even with proper training, mistakes are bound to be made by professionals who have been following GAAP for years. Convergence also means that investors and creditors would have to change the ways they decide whether to divest or lend because of the difference in reporting. (Financier Worldwide)

Scott A. Ehrlich, at Mind the GAAP, when discussing the differences between IFRS and GAAP, described how there are little differences between their essential principles but thousands of application level differences. Barry Jay Epstein, at Rusell Novak & Company, described a few of the application level differences that will influence U.S. financial reporting as well as U.S. businesses. These differences include, but are not limited to, IFRS ban of LIFO method and the differences in reporting extraordinary items classifications, re-evaluations of long-lived tangible and intangible assets and others. He also discussed how the detailed guidance under IFRS is much lower than the guidance given under GAAP. This could be considered a good thing by many financial reporters but is sure to prove extremely challenging to U.S. preparers and auditors. (Taylor & Francis Group)

IFRS mission statement is “to develop IFRS standards that bring transparency, accountability and efficiency to financial markets around the world.” (IFRS Foundation) The convergence of IFRS and GAAP would, ultimately, be a good thing for both the U.S. as a whole as well as its businesses and investors. Although convergence will not be for many years, the benefits and implications of using international standards for financial reporting are continually growing as the union continues to form. With the combined efforts of the IASB, FASB and SEC, the future regarding international principles and guidelines is seemingly a bright one.

References

Financier Worldwide. (2011). Accounting standards in the US – convergence with IFRS. Retrieved from: < http://www.financierworldwide.com/accounting-standards-in-the-us-convergence-with-ifrs/#.WBOYg_krJPY>

IFRS Foundation. (2016). Convergence between IFRS Standards and US GAAP. IFRS.org. Retrieved from: <http://www.ifrs.org/use-around-the-world/global-convergence/convergence-with-us-gaap/Pages/convergence-with-us-gaap.aspx>

Taylor & Francis Group, International Financial Reporting Standards (IFRS): pros and cons for investors. (2006). Accounting and Business Research, 36(sup1), 6-10. Retrieved from: https://doi.org/10.1080/00014788.2006.9730040

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