Question

Assume you are a recently hired accountant working for growing bigger, Inc. a national business consulting firm with the ambition to expand into an international market. The President of Growing, Elizabeth Golightly, calls you into her office with a request. She has been asked to participate in a seminar on international accounting standards and wants to update her knowledge of the topic. She asks you to research the topic, with emphasis on the position taken recently by U.S agencies and other authorities. She would like to know what the arguments are in favor of international accounting standards, as well as the disadvantages, especially to businesses based in the United States. She is not asking you to take a position on whether the United States should endorse international accounting standards, but she does want a balanced report on the topic. Ms. Golightly has asked you to research the topic and prepare a report for her, which will use to help her prepare for her seminar participation. She also asks to include title, table of contents and executive summary to your report.

Answer 1

Analyzing the impact of Convergence of US GAAP and International Standards

Table of Contents

1. Convergence Pros and Cons

2. Stance taken by stakeholders (SEC, CPA, CFO)

3. Impact on US based entities

4. FASB 3

1. Convergence Pros and Cons
Arguments for the convergence are:

(a) renewed clarity
(b) possible simplification
(c) transparency
(d) comparability between different countries on accounting and financial reporting

This will result in an increase in capital flow and international investments, which will further reduce interest rates and lead to economic growth for a specific nation and the firms with which the country conducts business. Timeliness and the availability of uniform information to all concerned stakeholders will also conceptually make for a smoother and more efficient process. Additionally, new safeguards will be in place to prevent another national or international economic and financial meltdown.

Arguments against accounting standards convergence are (a) 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 (b) the time it will take to implement a new system of accounting rules and standards across the board.

2. Stance taken by stakeholders (SEC, CPA, CFO)

The Securities and Exchange Commission's goals and efforts both domestically and internationally have been to consistently pursue the achievement of fair, liquid, and efficient capital markets, thus providing investors with information that is accurate, timely, comparable, and reliable. One of the ways the SEC has pursued these goals is by upholding the domestic quality of financial reporting as well as encouraging the convergence of the U.S. and IFRS standards.

There is some opposition to the convergence from all stakeholders involved, including accounting professionals (CPAs, auditors, etc.) and corporations' top management (CFOs, CEOs). There are various reasons for such resistance to change, and some are pertinent to the accounting profession, some to corporate management and some are shared by both. The new set of standards that will be adapted will need to provide transparency and full disclosure similar to the U.S. standards, and it should also ensure broad acceptance.

3. Impact on US based entities

It's anyone's guess how this convergence will evolve and impact the corporate financial accounting in the U.S. From a legal perspective, 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.

Maybe the answer lies in the need to consider a more in-depth study and an examination of the factors influencing the molding or development of a country's accounting system. But company boards, in an effort to best serve their investors' needs, should contribute to the convergence process by replacing old standards with the new jointly developed ones.

4. FASB 3

FASB 3 states that the Sarbanes Oxley Act's requirement of the SEC to investigate the feasibility of implementing a more principles-based approach to accounting means that the U.S. needs to continue its compliance with the SOX as part of the process of the convergence of the GAAP and IFRS standards. Both FASB and IFRS have identified short- and long-term convergence projects, including 20 reporting areas where differences have been resolved and completed. Further, the FASB provides clarification on the GAAP by categorizing in descending order of authority as shown in FASB No 5.

The appeal of convergence is based is on the following beliefs: (a) the convergence of accounting standards can best be achieved over time through the development of high-quality, common standards and (b) eliminating standards on either side is counterproductive, and, instead, new common standards that improve the financial information reported to stakeholders should be developed.

Despite the research-indicated evidence of a higher accounting quality being experienced by firms that either apply the IFRS standards or have switched to them from the GAAP, the convergence process has not proven to be an easy task, mostly because of the differences in approach between the two accounting bodies.

Executive Summary

Globalization, the Sarbanes-Oxley Act (SOX), the Securities and Exchange Commission's (SEC) adoption of international standards and the economic and financial meltdown of the Great Recession in recent years have been exerting pressure on a number of countries, including the United States, to eliminate the gap between the International Financial Reporting Standards (IFRS) and the U.S. generally accepted accounting principles (GAAP).

Such initiatives have consequences on the world of accounting diversity, and the standards convergence of GAAP along with the IFRS largely impacts corporate management, investors, stock markets, accounting professionals, and accounting standards setters. Additionally, the convergence of accounting standards is changing the attitudes of CPAs and CFOs toward the harmonization of international accounting, affecting the quality of the international accounting standards and the efforts made toward the goal of convergence of GAAP and IFRS standards.