Question

‘The IASB and the US Financial Accounting Standards Board (FASB) have been working together since 2002 to achieve convergence of IFRSs and US generally accepted accounting principles (GAAP).’ The convergence project had not been completed until recently.
Explain why the development process of international accounting harmonization is difficult and complex. You may refer to the following website for further information.

https://www.iasplus.com/en/projects/completed/other/iasb-fasbconvergence

Answer 1

In order to eliminate the gap of global differences accounting system and enhance the consistency of accounting standards, the IASB and FASB have been working together to achieve convergence of IFRSs and GAAP standards. However, IASB and FASB have to face many difficulties and different oppositions to the convergence from different parties, such as account professionals (CPAs, auditors etc.) and corporations’ top management (CFOs, CEOs).

Even though harmonization of accounting standards seems hot topic and inevitable, based on different cultures, ethics, standards, beliefs, economic types, political systems, and religions, there are some countries are unwilling to be involved in the process of collaborate with different accounting value dimensions such as:

1. Professionalism versus statutory control

2. Uniformity versus conformity

3. Conservatism versus optimism

4. Secrecy versus transparency

Another reason is difference accounting standards and practices between the GAAP and the IFRS. In general, GAAP accounting standards are described as rule-based standards with detailed guidance and complicated, and IASB’s standards tend to be closer to principles-based standards with a conceptual basis and principles. Therefore, countries with rule-based standards are expected to face considerable difficulties in harmonizing their standards with IFRS.

In U.S. seems to adopt the standards of the International Accounting Standards Board (IASC) unwillingly as many technical issues. IFRS tends to a control model, while US GAAP tends to risk-and-return models. Under IFRS standard, extraordinary items should be computed together in the income, but US GAAP counts as net income. IFRS does not allow LIFO to perform inventory valuations, while US GAAP provides LIFO, average cost or FIFO options. Regarding development costs, IFRS capitalizes them under certain standards and requirements and US GAAP considers as expenses.

If IASC could not get the fully support from the FASB and U.S. companies as the largest market in the world, the process of the convergence project   would become more difficult and undermine its potential effectiveness and efficiency.

The corporation top management (e.g. CFOs and CEOs) is not embracing this change due to the cost involved. In particular, there are two areas of direct impact: the company's financial reporting and its internal control system. Another cost involved in IFRS transitions and changes is those companies need to input huge resources to re-educate as well as take time to familiar the new accounting system and standards.

Last, the quality of financial reporting depends on the quality of accounting standards and the effectiveness of the implementing process. In order to ensure proper implementation of the standards, sufficient regulatory and other supports are required. Hence, there will be no guarantee that they will be implemented with the same vitality in every jurisdiction.