convergence project 1

8/13/2019 Convergence Project 1

1/22

1

ACW 367: ACCOUNTING THEORY ISSUES

ASSIGNMENT: THE CONVERGENCE PROJECT

LECTURER: PROFESSOR DR. FAUZIAH MD. TAIB

GROUP MEMBERS:

NO. NAME MATRIC NO.

1. NURUL ATIQAH BINTI OMAR 108561

2. SALBIAH BINTI MOHAMMAD 108564

SUBMISSION DATE: 29thNOVEMBER 2013

CONTENTS

Plagiarism Declaration Form .......................................................................................................... 3


2/22

2

Abstract ........................................................................................................................................... 4Introduction ..................................................................................................................................... 5Background of the IFRS and U.S. GAAP ...................................................................................... 5Differences between IFRS and U.S. GAAP ................................................................................... 7The success of IFRS and U.S GAAP .............................................................................................. 9The Challenges of IFRS and U.S. GAAP ..................................................................................... 14The motivation to use one standard .............................................................................................. 15The way to speed up the whole process ........................................................................................ 17Conclusion .................................................................................................................................... 19Bibliography ................................................................................................................................. 20Agreement on the Percentage of Work ......................................................................................... 22


3/22

3

Plagiarism Declaration Form

We declare that this coursework is entirely our own work and does not include any plagiarised

material.

We declare that this assignment is our own, original work. Where someone elses work was used

(whether from a printed source, the internet or any other source) due acknowledgement wasgiven and reference was made according to departmental requirements.

We did not make use of another students previous work and submitted it as our own.

We did not allow and will not allow anyone to copy our work with the intention of presenting itas his or her own work.

Full Name: NURUL ATIQAH BINTI Full Name: SALBIAH BINTI MOHAMADOMAR

Signature: Signature:

Date : 29thNOVEMBER. 2013 Date : 29thNOVEMBER. 2013


4/22

4

Abstract

The ultimate goal of a convergence project between International Accounting Standard Board

(IASB) and Financial Accounting Standard Board (FASB) is to provide high-quality global

accounting standards and internationally comparable financial information that enable capital

providers to make decision in global capital market. In this report, we discuss major differences

between International Financial Reporting Standard (IFRS) and U.S Generally Accepted

Accounting Principle (GAAP), document the major success out of the two set of standards and

defines which standards are more successful. Through this report, we also tried to analyze the

reason of why many companies are using IFRS than US GAAP and what the major impediments

and factors leading to a successful convergence. This report concludes by opine how fast the

convergence can take place and suggested way to speed up the whole process, so convergence

can run on smoothly.


5/22

5

Introduction

The convergence project of International Accounting Standard Board (IASB) and Financial

Accounting Standard Board (FASB) has caught the attention of people, the users and the

preparers of accounting information and report universally. Convergence is a term that suggests

elimination or coming together of differences (Ernst & Young, 2007). The standard setters

around the world are struggling to combine the two biggest standards which are General

Accepted Accounting Principle (United States) (U.S. GAAP) circulated by FASB and

International Financial Reporting Standards (IFRS) circulated by IASB. However, off course it is

a difficult project because both standards have different concept which is U.S GAAP is more to

rule-based while IFRS is more to principle-based. Difference in background has led to two sets

of accounting sets of standards.

Background of the IFRS and U.S. GAAP

In history, congress passed two acts which are Securities Act 1933, the regulation of the issuing

of securities, and Securities Exchange Act 1934, the regulation of the trading of securities, to

counter stock market crash in 1929 (Carlson, 2006). Thus, these Acts was established to restore

public and investor confidence in the fairness of the securities markets. Securities and Exchange

Commission (SEC) was created under Securities Exchange Act 1934 to establish standards for

financial reporting of U.S. companies. The power to establish financial reporting standards then

removed to the American Institute of Certified Public Accountants (AICPA) because SEC

realized that this power should be better carry out by a private sector where professionals would

be able to provide input and direction. AICPA formed Committee on Accounting Procedure

(CAP) at 1936 in establishing accounting standards and replaced it with Accounting Principle


6/22


7/22


8/22

8

A principle-based system provides flexibility not only to regulators but as well to users. Shifted

from rules to principles-based extends to how companies should value their assets. Rush indicate

that one of the keys elements that really differentiates U.S GAAP and IFRS is that under

GAAP, historical cost is generally used as the basis of accounting. GAAP as a whole used

historical cost as a rules-based to determine the value. Historical cost is more reliable because of

its difficulty to argue about how much a company paid for those assets while fair value is more

susceptible to external forces. Its certainly more relevant, accurate, and volatile and depends on

a lot of things over which the company and the auditor have little control. Differences also arise

in how specific items are measured, recognized, presented on the financial statements and what

disclosures are needed. Updated list of the similarities and differences between IFRS and GAAP

are available from The Big Four audit firm1. Some examples include lease accounting, asset

impairments, revenue recognition, financial instruments, hedging activities and stock-based

compensation. One of the problems encountered between IFRS and GAAP is deals with last-in-

first-out (LIFO) accounting. According IFRS, companies are prohibited from using LIFO

whereas under U.S GAAP, U.S companies must use LIFO to obtain tax benefits. Detail

explanation refers to figure 1.

1See the summary of accounting differences between IFRS and U.S GAAP by Ernst & Young (2012) athttp://www.ey.com/Publication/vwLUAssets/US_GAAP_versus_IFRS:_The_basics_November_2012/$FILE/US_GAAP_v_IFRS_The_Basics_Nov2012.pdf
http://www.ey.com/Publication/vwLUAssets/US_GAAP_versus_IFRS:_The_basics_November_2012/$FILE/US_GAAP_v_IFRS_The_Basics_Nov2012.pdfhttp://www.ey.com/Publication/vwLUAssets/US_GAAP_versus_IFRS:_The_basics_November_2012/$FILE/US_GAAP_v_IFRS_The_Basics_Nov2012.pdfhttp://www.ey.com/Publication/vwLUAssets/US_GAAP_versus_IFRS:_The_basics_November_2012/$FILE/US_GAAP_v_IFRS_The_Basics_Nov2012.pdfhttp://www.ey.com/Publication/vwLUAssets/US_GAAP_versus_IFRS:_The_basics_November_2012/$FILE/US_GAAP_v_IFRS_The_Basics_Nov2012.pdfhttp://www.ey.com/Publication/vwLUAssets/US_GAAP_versus_IFRS:_The_basics_November_2012/$FILE/US_GAAP_v_IFRS_The_Basics_Nov2012.pdf


9/22

9

The success of IFRS and U.S GAAP

The major success of IASB is always related to the various entities such as national accounting

bodies, national standards setters, regulators, as well as the preparers and users of accounting

information. In the late 1990s, the European Union (EU) was determined on creating an internal

capital market and the European Commission was seeking an alternative to U.S. GAAP as the

source of required accounting standards for the EUs listed companies in that market (Zeff,

2012). One of the most controversial projects was share-based payment, because European

multinationals did not want to be placed at a competitive disadvantage to companies that did not

have to expense stock options under U.S. GAAP. Despite this controversy, the IASB succeeded

in issuing IFRS 2 in February 2004 which required that the expense appear in the income

statement, and it was closely patterned on the FASBs exposure draft issued in 1993 which the

FASB was unable to incorporate in SFAS 123 in 1995 because of intense political opposition.

Figure 1: Differences between US GAAP and IFRS in term of inventories


10/22

10

IASB was the only competent international accounting standard setter that available in that era.

IFRS 2 was one of the IASBs successes(Zeff, 2012). European Commissions proposal in 2000

to commit EU listed companies to adopt International Accounting Standards by 2005 caught the

worlds attention. Many countries began taking the IASC seriously as the worlds accounting

standard setter.

While in U.S. GAAP, one of the successes of APB is APB issued Opinion 11 in 1967 on

deferred tax accounting by the highest majority, which narrows the area of difference on this

argumentative subject. Industry opposes the pronouncement, and companies placed pressure on

their audit firms to vote against it (Zeff, 2004).

In 1990, FASB issued SFAS 106, accounting for post-retirement health care costs (Zeff, 2004).

This standard was strongly opposed by industry because normally companies tend to do not

show a liability for the contractual obligations they had given over the years to cover employee

health care during their retirement years (Zeff, 2004).However, many regard SFAS 106 as the

best standard FASB ever issued, as it forced companies to face up to the true cost of their

obligations for health care benefits they had approved to employees over many years. SFAS 106

was one of the boards successes(Zeff, 2004).

IFRS and US GAAP shared same general principles and conceptual framework but between

these two standard, IFRS is said more successful than US GAAP. In November 2008, The SEC

had issues a proposed roadmap to adoption of IFRS in the US and a proposed rule on optional

early use of IFRS. In the propose roadmad, SEC did mention that the increasingacceptance and

use of IFRS in major capital market throughout the world over the past several years, and its

anticipated use in other countries in the near future, indicate that IFRS has the potential to


11/22

11

become the set of accounting standards that best provide a common platform on which

companies can report and investor can compare financial information. Approximately 113

countries around the world currently require or permit IFRS reporting for domestic, listed

companies. This statement proved that IFRS is more sucessful than US GAAP. IFRS have a

potential to improve the function of capital market and facilitate economic progress . Besides

that, IFRS are attractive as the ultimate global standard because IFRS allowed issuer to reflect

more fully economic subtance of transaction that may be unique to their industry, compared with

a prescriptive, rules-based system such as GAAP.

Morever, adoption of IFRS will improves financial reporting to outside investor because IFRS

are more capital-market oriented, so it is more comprehensive as well as more relevance,

especially with respect to disclosure, than most local GAAP. Due to capital-market effects, it

allowed IFRS reporting less costly for investor to compare firms across countries and market.

Even if the quality of corporate reporting does not improve, greater comparability can make

financial report more useful to stakeholders and other investors. At the same time, greater

comparabilty will improves outsiders ability to detect earning management and accounting

manipulations, as it limits the set of permissible accounting treatment which in turn should

improve firms reporting incentive (Hail, Leuz, & Wysocki, 2009). Hence, we can conclude

that IFRS is more successful in order to improve comparability of firms report, improve market

liquidity and reduce the cost capital. In addition, eventual acceptance of IFRS for U.S based

companies quite probable according to the survey of perspectives about IFRS, which said that

top corporate accounting officers are highly favorable to acceptance of IFRS for financial

reporting by all companies in all countries, including the U.S (Elena, Catalina, Stefana,

Niculina, 2009). IFRS standard is claimed more successful, followed by the evidence that most


12/22

12

of countries such as the Canada, Australia, European Union, New Zealand, and Israel have

accepted IFRS as a standard for publicly held companies. Details explanations refer to figure 2.


13/22

13

Figure 2: Adoption of IFRS by Selected Country


14/22

14

The Challenges of IFRS and U.S. GAAP

U.S. GAAP and IFRS have a lot of differences. U.S. GAAP is more to rules-based while IFRS is

more to principles-based. The IASB has generally avoided issuing interpretations of its own

standard, preferring to instead leave execution of the principles embodied in its standards to

preparers and auditors, and its official interpretive body, the International Financial Reporting

Interpretations Committee (IFRIC) (McNichol, 2012).While U.S. standards contain underlying

principles as well, the strong regulatory and legal environment in U.S markets has resulted in

more prescriptive approach with more comprehensive implementation guidance and industry

interpretations (Elena et al, 2009).

Besides that, the convergence project also faced with problem of the willingness of industry

groups to cooperate and to avoid issuing local interpretation of IFRS and guidance that provides

exceptions to IFRS principles. Most people within the U.S. feel that the detailed rules of GAAP

are necessary, but some may cited to be the cause of frustration as these rules can become

cumbersome and confusing. Moreover, not all company may benefit from the convergence at all.

Some company may feel or does not foresee any future benefits arising from the convergence.

Thus, conversion standard may cause cost more than benefit received by the company.

The factor that lead to the successful of the convergence project is the strong belief of how

worthy the goal. The convergence project may a long project and costly, but it will benefit the

preparers as well as the users in the future for a longer term. Besides that, the support from the

SEC also led to the successful of the convergence project. The SEC realized that the uniformity

of accounting on an international basis becomes important because the business and relationship

are in phase of globalization. They believe that the combination between U.S. GAAP and IFRS


15/22

15

will lead to the benefit of world capital markets in general and U.S. shareholders in particular

without jeopardizing the authority of either body (Zeff, 2012).

The motivation to use one standard

Figure 2 showed many companies using IFRS than US GAAP. Moving to IFRS presents a

tremendous opportunity, which is helping companies to reduce compliance cost and streamline

reporting processes. Both the European Union (EU) and Canada have gained significant

experience and insight in the migration from GAAP to IFRS.2According to SEC, voluntary use

of IFRS by the largest U.S multinational firm may occur in 2010, with potential mandatory

adoption by other large public companies following suit in 2014 and by all remaining public

companies in 2016. However, advantages of adoption IFRS standard lead many companies

voluntarily move to IFRS. One of the advantages by practicing IFRS standard can be clearly seen

on economic consequences when IFRS adoptions generally analyze direct market-capital effects,

such as cost of capital or liquidity, or the effects on various market participants, such as impact

on analyst forecast properties or on the holdings of institutional investors3. Ashbaugh and Pincus

(2001) show that analyst forecast errors are positively related to differences in accounting

standards between IFRS and various local GAAP, and that the accuracy of these forecasts

improves after firms adopt IFRS. Covrig et al. (2007) document that foreign mutual fund

ownership is significantly higher for IFRS adopters compared to local GAAP firms and that the

difference in mutual fund holdings increases for firms in poor information environments and

with low visibility, suggesting that IFRS reporting can help firms attract foreign institutional

2Based on article Migrating from US GAAP to IFRS: Lesson from the EU and Canadian experience (2008) 3Based on report Global Accounting Convergence and the Potential Adoption of IFRS by the United States (2009)


16/22

16

investment. Overall analysis showed that companies that adopt IFRS experienced positive

capital-market effects; hence many companies are using IFRS than GAAP.

In the Roadmap, 2007 Concept Release, the SEC reiterated its long-expressed support for a

single set of high-quality global accounting standards 4that enhances the ability of U.S investor

to compare financial information of U.S companies with that non U.S companies. Main

motivation for companies to use one standard over another is driven by desire for high quality,

internationally comparable financial information that useful for capital providers in decision

making in global capital market. Recently global financial crisis revealed the weakness in an

international system composed of multiple sets of accounting standards. Therefore, IASB and

FASB continued their convergence project to encourage that many countries worldwide see the

benefits of common financial reporting language. Investors would be better served if all U.S.

companies used accounting standards promulgated by a single global standard setter as the basis

for preparing their financial reports and recommended moving U.S. public companies to an

improved version of IFRS.5

4High-quality global accounting means improving the quality and comparability of financial reportinginternationally

5According to the expressed view in response letter to the SECs 2007 Concept Release


17/22

17

The way to speed up the whole process

Based on figure 3, describes that IFRS is too fast for them, the encouraging more deliberate pace

in assessing impact and applying IFRS because they coupled with the high cost of converting to

IFRS adoption. The SEC is committed to a 2011 decision as to whether it will require IFRS

implementation but the decision was delay and Jim Kroeker, the SECs Chief Accountant

remarked that SEC need a few additional months to complete the final reports on the IFRS

Work Plan for U.S markets. In his statement Given the number of things on our agenda, I

cannot give you a precise schedule. I can tell you that we will do so carefully and thoughtfully,

being guided by an ideal that produces the maximum benefit for the investing public and the

capital markets. Hence, in my opinion, requiring adoption by 2016 is reasonable. It allows timefor reporting standards to converge and for necessary education and training. The board will use

the time to consult those affected by the proposed changes and work through concerns and issues

being raised by stakeholders. For examples, upholds the quality of existing U.S standards,

assures IFRS standards are suitable for U.S market, minimize the cost to U.S companies and

Figure 3: AICPAs IFRS Readiness Survey (October 2010)


18/22

18

investor, provides time to understand complex facts and circumstances and support review of

potential impact on laws, reporting and corporate governance.

Unidentified what future changes will be mandated and when the full implementation will takes

places, although SEC looking at 2015 as a potential implementation mainframe. Until ruling is

issued, forward-thinking companies should taking an action now to increase preparedness for the

ruling later this year.

First, actions that can be taking by the companies are assessing IFRS impact set objectives and

prepare for transition. The companies should identify what potential impact of conversion in the

following areas included personnel, global, customer and supplier, application and system,

controls, processes and procedures, reporting content and format requirement, exposure factor,

and tax liabilities and contracts.

Second, the companies should identify what if scenarios that addresses potential convergence

outcomes so companies will be better prepared to implement changes when the direction and

timing become clear. Example of what if scenarios are; the SEC will affirm the primacy of U.S

GAAP and support continuing convergence, the SEC will mandate adoption IFRS for U.S

companies, and countries in which companies have subsidiaries will soon adopt IFRS

Lastly, the major factor that have to be before the convergence can run smoothly is complete the

harmonization between GAAP and IFRS before converging to a single standard and selecting a

single adoption date for all firms. This factor could reduce confusion and complexity and at the

same time provide enough time for investor and stakeholders to move smoothly to a single

standard.


19/22

19

Conclusion

In conclusion, the convergence project may a very hard and difficult and needs the cooperation

from various parties such as national accounting bodies, national standards setters, regulators,

and the preparers and users of financial information. The development of standards involves a

number of boards and entities that make the process longer, more time consuming and frustrating

for all parties involved. However, once standards have converged, the actual process of

developing and implementing new international standards will be simpler and many parties will

receive it benefit.


20/22


21/22

21

McNichol, K. (2012, April 10).Accounting: Articlesbase. Retrieved November 22, 2013, from

Articlesbase: http://www.articlesbase.com/accounting-articles/us-gaap-vs-ifrs-5815043.html

Richard Howard, A. (2013). Retrieved November 25, 2013, from Deloitte Website:

http://www.deloitte.com/assets/Dcom-

Ireland/Local%20Assets/Documents/ie_AccountancyIreland_RevenueRecognition_0609.

pdf

Zeff, S. A. (2004). Evolution of U.S. Generally Accepted Accounting Principles (GAAP).

Zeff, S. A. (2012). The Evolution of the IASC into the IASB and the Challenges it Faces. The

Accounting Review, 807-837.


22/22

22

Agreement on the Percentage of Work

We agree that this work project has been allocated and contributed as below:

No. Name Percentage

1. Nurul Atiqah Binti Omar 50%

2. Salbiah Binti Mohamad 50%

Full Name : NURUL ATIQAH BINTIOMAR

Full Name : SALBIAH BINTIMOHAMAD

Matrix Number : 108561 Matrix Number : 108564

Signature : Signature :

Date : 29t November 2013 Date : 29t November 2013