The proposed change or convergence between US GAAP and IFRS
The term US GAAP are initials representing the term United States Generally Accepted Accounting Principles. These are accounting principles or rules that are used in the preparation, reporting and presentation of financial statements. They are used over a wide variety of institutions that include any organization that maintains financial or accounting information and records. These include private companies, public companies, governments and non-profit making organizations just but to name a few. The reason as to the abbreviated as US GAAP is because the term is mostly confined to the United States. However, in the real sense, generally accepted accounting principles are used world over in the accounting industry. The IFRS is an abbreviation that stands for International Financial Reporting Standards. The standards were formulated by the International Accounting Standards Board (IASB). The standards were formally known as International Accounting Standards. The United States financial reporting industry shall undergo changes in the near future due to the requirement of US companies to apply convergence between the US GAAP and the IFRS and because of the conversion of the IFRS (Bonham 28).
The convergence between the US GAAP and the IFRS shall affect a few major accounting principles and standards since they shall have to be reviewed in order to piece them together. The IFRS’s impact on businesses is large and it is not only in America, but world over. The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are the two major bodies that are working to make the two sets of accounting and financial principles compatible. The IASB is the international body charged with the responsibility of setting International Accounting Standards and it named the new standards the IFRS. The FASB on the other hand, is the body in charge of establishing the generally accepted accounting principles to be used by all private, public and non-profit making entities.
Some of the effects of the IFRS to the US based companies have been mostly in their business interaction with non-American vendors and customers and the continued adoption of its standards by their foreign subsidiaries. The effect of the change is being heavily felt by the US companies as more and more aspects of the IFRS and US GAAP continue to converge. The SEC or the Securities and Exchange Commission supports the implementation of a uniform set of accounting standards and believes that the IFRS is in the best position to perform that job. The SEC is the federal body or agency charged with the responsibility of enforcing the laws of federal securities, the regulation of the securities industry, the country’s options and stocks exchanges and other securities markets in the country (Feldman and Arkady 6).
The SEC had in the year 2008 proposed a road map for convergence and required business entities and stakeholders to respond with any grievance that they had. The SEC then introduced a work plan that is aimed at considering these grievances and recommending them for use by the IFRS in their convergence exercise. The main aim of the plan is to be used by the SEC in the determination of how, whether and when the US GAAP can and should incorporate the IFRS in the activities of domestic users. Though it is still uncertain whether the IFRS shall fit in the US business platform, the ultimate goal of the SEC is to finally, fully implement it. The SEC suggested that the need for a common language in the international business community is to avoid cases like the financial crisis that faced the world capital markets and triggered the economic recession. The recent agreement by the Group of 20 Nations (G20) and the US government on the need to have a common business language and a set of high quality common accounting standards used globally is among the main efforts to converge the IFRS and the US GAAP and to make eventually make the IFRS globally accepted. The recent continuing efforts to globalize the capital markets and the SEC’s constant campaigns to converge the US GAAP and the IFRS also aim to the globalization of the IFRS.
The convergence shall involve the development of more than ten new accounting standards that shall aid the convergence of the US GAAP and the IFRS. The convergence shall also affect major topics in the US business environment like revenue, financial instruments, leasing and the general presentation of financial statements. The underlying fact is that regardless of the outcome of the SEC’s decisions, the convergence between the two systems shall have a major impact on the US business environment and the US companies. The convergence shall cause changes in the accounting platform that shall affect several sectors like tax policies, terms of contracts, communication with shareholders and credit agreements just but to name a few.
As discussed earlier convergence shall have major impacts on the accounting, financial and business sector at large. On a more specific level, the impact it shall have on financial reporting done in the US shall be broad. The FASB and the IASB formalized a memorandum of understanding that bound them to work together to formulate standards that shall not only converge but also improve the IFRS and the US GAAP. The two bodies divided the issues and listed each according to its priority. The issues given more priority were, in order, Financial Instruments, Revenue recognition, Leases, Statement of comprehensive income and Fair value measurement. Considering revenue recognition, the new draft is quite different from the draft that was being used (Epstein and Eva 3).
The new format may have the effect of increasing the separation and identification of performance obligations and increasing the use of estimates. This area is sensitive since the method used in the recognition of a company’s revenue affects many other key areas in the company’s operation like, cash management, sales strategies, sales contact terms and investor communication. Under lease arrangements and accounting for leases, the proposed model is set to change everything that existed before including how to account for leases and how to report them in the financial statements.
Regardless of when they shall be adopted, the IFRSs are already affecting the US business platform significantly, the impact is set to increase in the years to come as the convergence exercise, and adoption gathers momentum. Companies in the near future are going to be faced with the challenges of keeping up with the pace of the change in financial reporting since the standards shall continually be rolling out. Companies shall also have the challenge of management and monitoring of their branches and subsidiaries. The understanding of how to make deals and transactions with foreign companies and the updating of company policies shall also be challenges that US companies shall face (Pounder 45).
Companies should however focus and embrace the change and the challenge since regardless of which between the SEC’s convergence requirement and the IFRS adoption by the subsidiaries shall be more vigorous, the change is inevitable. Companies that want to succeed should also formulate strategies that shall assess the impact that the convergence and the full adoption of the IFRS shall have on their business operations and consider how it shall affect the different stakeholders in their company. This can be achieved by the use of creation of scenarios and strategizing how to incorporate the convergence by generating possible outcomes and planning. Companies should also conduct processes of overseeing the adoption of the IFRS on their subsidiaries both local and international. Companies should also identify the changes they can make in the current situation and implement them rather than wait and slowly implement the ones that shall take longer. The focus on the convergence and adoption of the IFRS shall make a company always ahead of the others in business operations (Walton 58).
Bonham, Mike. International GAAP 2008: generally accepted accounting practice under international financial reporting standards. New York, NY: Wiley, 2008. Print.
Epstein, Barry and Eva Jermakowicz. WILEY Interpretation and Application of International Financial Reporting Standards 2010.Hoboken, NJ: John Wiley and Sons, 2010. Print.
Feldman, Matan and Arkady Libman. Crash course in accounting and financial statement analysis. Hoboken, NJ: John Wiley and Sons, 2007. Print.
Pounder, Bruce. Convergence Guidebook for Corporate Financial Reporting. Hoboken, NJ: John Wiley and Sons, 2009. Print.
Walton, Peter. An Executive’s Guide for Moving from US GAAP to IFRS. Tampa, FL: Business Expert Press, 2009. Print.
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