Question

The convergence of accounting standards refers to the goal of establishing a single set of quality accounting standards that will be used internationally. The convergence of accounting standards is changing the attitudes of CPAs and CFOs toward harmonization of international accounting. However, issues remain and hinder countries around the world from having a single set of quality accounting standards.

Required:

Discuss with FOUR (4) points on why the convergence of accounting standards is a concern to countries worldwide.

Answer 1

INTRODUCTION

The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally ,with an aim to reduce the differences between accounting standards.

  

                                        The standards convergence of GAAP along with the IFRS largely impacts corporate management, investors, stock markets, accounting professionals, and accounting standards setters.

Things to Consider (remember) in this situation

· A Major difference between GAAP and IFRS is their methodology, with GAAP being rules-based and the IFRS is principles-based.

· This methodology difference has posed a challenge while consolidation, the income statement preparation, inventory ascertainment, the earnings-per-share (EPS) calculation etc.

· IFRS favors a control model whereas the U.S. GAAP prefers a risk-and-reward model.

· GAAP has been used for so long by accounting professionals, it could be difficult to try another format,as the change could require learning a whole new system of financial accounting.

Let’s Discuss the 4-Points on why the Convergence of Accounting standards is a concern for countries worldwide

1. Effect on Various Constituents due to New Accounting Standards

              The convergence and change of accounting and reporting standards at the international level impact a number of constituents.

Effect on Investors

                         Equipping themselves in reading and understanding accounting reports and financial statements following the new internationally accepted standards through the process of learning. This is helpful as it will ensure more credible information.Further, the new standards will increase the international flow of capital as well.

Effect on Stock Markets

It will allow all foreign exchanges and markets to take advantage of cost reductions and to compete internationally for global investment opportunities,if they adhere to same rules/standards.

Effect on Corporate Management

Simpler, streamlined standards, rules and practices provides huge benefits to Corporate Managers worldwide in all countries.It enables corporate management the opportunity to raise capital via lower interest rates while lowering risk.

Effect on Accounting Professionals

                                   The shift and convergence of the current standards to internationally accepted ones will force accounting professionals to learn the new standard and will lead to consistency in accounting practices.

2. Financial Standards-It's Domestic Quality

Providing investors with information that is accurate, timely, comparable, and reliable has been the main goal of The Securities and Exchange Commission's. It's mainly achieved by upholding the domestic quality of financial reporting as well as encouraging the convergence of the U.S.(GAAP) and IFRS standards.

Firms adhering to the IFRS has generally exhibited higher accounting quality than when they previously followed the GAAP.Testament to this is the high change in cash flows,lower negative correlation between accruals & cash flows,higher variance of net income changes,higher frequency of large negative income etc.Also IFRS following firms revealed fewer earnings management,more timely loss recognition etc when compared to domestic firms following GAAP.

                          There is some opposition to the convergence from all stakeholders.There are various reasons for such resistance to change, and some are pertinent to the accounting profession and some to corporate management.The new set of standards that will be adapted will need to provide transparency and full disclosure similar to the U.S. standards and also ensure broad acceptance.

3. (Variations and Inconsistencies) Financial Reporting

                                  Financial reporting standards and requirements is different in each country, which creates inconsistencies.It creates headaches for investors who are considering funding capital-seeking companies that follow the accounting standards and financial reporting of the country in which they are doing business.As we know,the main difference between the GAAP and the IFRS is its methodology. The GAAP is rule-based while the IFRS is a principles-based methodology. The GAAP consists of a complex set of guidelines attempting to establish rules and criteria for any contingency, while the IFRS begins with the objectives of good reporting and then provides guidance on how the specific objective relates to a given situation/circumstance..

4. Viewpoint of CPA and CFO

CPA Stand

U.S. firms are already familiar with the existing standards but they struggle with the inability or low ability to culturally relate to other countries' accounting systems and also a lack of good understanding of the international principles is a big barrier for the firms to adopt new standards.Cultural differences have a strong impact on the accounting standards of another nation, thus complicating the standards convergence. Another rationale behind  resistance to the convergence of the GAAP with the IFRS is the opinion that the principles-based IFRS fails to offer guidance compared to the rules-based GAAP standards.Therefore, the U.S. accounting professionals and corporate management perceive the IFRS to be of lower-quality.

CFO Stand

The Convergence impacts a company's financial reporting and its internal control systems.CFO's main concern is the costs involved in the process.An Extra cost involved in the transition and change to the IFRS is the public's perception of the integrity of the new converged set of standards. IFRS does not segregate extraordinary items in the income statement, but GAAP shows them as net income.IFRS does not allow LIFO for inventory valuation whereas the U.S. GAAP provides the option of either LIFO, average cost, or FIFO. Under the IFRS the EPS calculation does not average the individual interim period calculations, but the U.S. GAAP does.

Reasons against the Convergence(Disagreements)

                                    Arguments against accounting standards convergence are (1) the unwillingness of the different nations involved in the process to collaborate based on different cultures, ethics, standards, beliefs, types of economies, political systems, and preconceived notions for specific countries, systems, and religions; and (2) the time it will take to implement a new system of accounting rules and standards across the board.

Issues and Concerns with GAAP and IFRS

The IFRS is more dynamic and is continuously being revised in response to an ever-changing financial environment.Despite documented research indicating a higher accounting quality experienced by firms that either follow the IFRS or switched to the IFRS from the GAAP, there is a doubt and concern from the FASB regarding the application and implementation of principle-based standards in the U.S. A solution may be that the IFRS should accept some FASB standards to accommodate the needs of the U.S. constituents and stakeholders.

Conclusion

Legally companies will be required to disclose qualitative and quantitative information about contracts with customers, including a maturity analysis for contracts extending beyond a year, as well as the inclusion of any significant judgments and changes in judgments made in applying the proposed standard to those contracts.