The USA practices a typically rule-based accounting standard known as Generally Accepted Accounting Principles (GAAP) whereas more than 110 countries around the world follows the accounting system known as International Financial Reporting Standards (IFRS). Although there are some differences within the two standards, but have significant similarities as well.
Since its formation in 2001, the International Accounting Standard Board (IASB) has made great steps towards achieving global accounting convergence, with the result that the global acceptance of IFRS is rapidly becoming a reality. All listed EU (European Union) companies are required to prepare their consolidated financial statements as per guidelines provided in the IFRS’s. Somewhere else, many non-European Union countries have either accepted or are in the process of accepting or make even their national standards with IFRS. The term “convergence” is also used to refer to the efforts, since 2002, of the International Accounting Standard Board (IASB) Financial Accounting Stand Board (FASB) to work to improve IFRS and USA GAAP, respectively, and to achieve their convergence.
In addition, the US Securities and Exchange Commission (SEC) have taken some steps towards the acceptance of IFRS in the US. In 2007 The SEC began permitting foreign private issuers to file IFRS financial statements without reconciliation to US GAAP. In 2008, the SEC set out a planned road map outlining the milestones and conditions that, if met, could lead to the use of IFRS in the USA by domestic registrants. In 2011, the SEC staff issued a work-plan to explore the incorporation of IFRS into the USA financial reporting system.
In 2013, the convergence process between the IASB and the FASB largely came to an end. Other of the messages the IASB staff received from respondents to the 2011 agenda consultation was for the IASB to consider whether convergence should continue to be priority. Ultimately, developing a one set of high quality, understandable, enforceable and globally accepted financial reporting standards has largely superseded convergence as a significant driver of the IASB’s agenda setting process. Practically, the handbook, which was revised in 2013, removed convergence from the list of factors that are influential in setting the agenda.
Progress was made during the decade or so of focused convergence activities, however, during which differences in accounting were minimized in many areas, notably share-based payments, segment reporting, business combinations, consolidated financial statements and investment entities.
In a communication in March 2014 dealing with IASB’s response to the global financial crisis IASB Chair Hans Hoogervorst, said as: This inability to deliver compatible outcomes with the FASB clearly demonstrates the inherent instability of convergence as a means to achieve a single set of global accounting standards. For this reason, our Trustees wisely concluded that convergence can never be a substitute for adoption of IFRS.
Though the GAAP has some benefits over IFRS like the application of LIFO and separate financial statement for business and nonbusiness entities, the framework of IFRS provides a higher extent to connect all businesses on a worldwide level. With the groundwork the SEC has provided alongside the bulk of the countries use one single set of accounting principles; the United States could shortly be using the IFRS system of accounting.
Consequently, this transformation won’t be ready to happen immediately. If the United States switched from GAAP to IFRS, it’d take a while to integrate the new system into our current market, businesses, curriculums, and lots of different factors. The advantages of a convergence to a universal system can outweigh the drawbacks. In any case, the aim of financial reporting is to supply financial data that’s helpful to giver potential investors, lenders, and creditors (Kieso). The simplest approach for businesses and firms all across the globe to express financially is to implement one set of accounting principles/rules.