u.s. gaap and ifrs: accounting standards and …
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U.S. GAAP AND IFRS: ACCOUNTING STANDARDS AND
CONVERGENCE
2016 Report
Prepared by Nicole Nevicosi Accounting Student at Bradley University
Prepared for
Accounting Students
Accounting Standards and Convergence
ii
ABSTRACT
The Financial Accounting Standards Board, FASB, is in charge of developing and publishing the
United States Generally Accepted Accounting Principles (U.S. GAAP). Accounting outside of
the US follows the International Financial Reporting Standards (IFRS) developed by the
International Accounting Standards Board, or IASB. There are a number of differences between
financial reporting according to U.S. GAAP and IFRS. Globalization is expanding, and many
large companies have locations outside of the United States. This raises the concern of how to
report financial information. Global stock traders often read financial statements when
determining the value of a company’s stock. Different financial standards across the world can
lead to difficulty evaluating a company’s stock and inaccurate comparisons of companies. In
order to match the accounting standards to the global economy, convergence projects began
between the U.S. and international accounting standards. Now, the outlined convergence projects
are ending, but significant differences remain between U.S. GAAP and IFRS. The future of the
accounting standards seems unclear, as the IASB is pushing for global standards and the FASB is
afraid of becoming irrelevant. This leaves accounting students navigating tricky waters of
constantly updating standards. By subscribing to accounting standard update email lists, students
can stay up to date on changing standards and learn more about accounting standards in the
United States and internationally.
Accounting Standards and Convergence
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TABLE OF CONTENTS
ABSTRACT ........................................................................................................ ii
PREFACE .......................................................................................................... iv
EXECUTIVE SUMMARY ................................................................................. v
INTRODUCTION ............................................................................................... 1
Description of U.S. GAAP ........................................................................... 1
Description of IFRS ..................................................................................... 2
CONVERGENCE BETWEEN U.S. GAAP AND IFRS ..................................... 4
Norwalk Agreement ..................................................................................... 4
The FASB Standard Development Process for U.S. GAAP.......................... 5
The IASB Standard Development Process for IFRS ..................................... 5
Convergence and Next Steps ........................................................................ 6
CONCLUSION AND RECOMMENDATIONS.................................................. 7
WORKS CITED .................................................................................................. 8
APPENDIX A: FASB ASC Standard .................................................................. 9
APPENDIX B: FASB Transition Guide...............................................................10
APPENDIX C: IFRS Example .............................................................................11
Accounting Standards and Convergence
iv
PREFACE
It is crucial for emerging accountants to have knowledge of the future of accounting standards.
My goal is to provide accounting students with a basic knowledge of the United States Generally
Accepted Accounting Principles (U.S. GAAP) and the International Financial Reporting
Standards (IFRS). This provides the groundwork for understanding how each set of standards is
developed, and what the future holds for these standards. My goal is also to inform accounting
students of the convergence projects between U.S. GAAP and IFRS. This has caused a number
of accounting standards updates, and could result in a total change in financial reporting
standards within the next 50 years.
As an accounting student, I am committed to furthering my education to prepare for an
accounting career. Even as a student, I am already affected by changing accounting standards. In
class, we have to skip some sections of the book because the FASB recently issued Accounting
Standards Updates. We have discussed briefly in class that these changes are working toward
converging U.S. GAAP with IFRS. There have already been a number of updates to work toward
this goal, but there is still a long way to go. The convergence projects and updates will directly
affect my accounting career, as the FASB will continue to issue updates. My fellow accounting
students and I will be responsible for implementing these changes throughout our careers.
Accounting Standards and Convergence
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EXECUTIVE SUMMARY
This report provides a brief background about United States and international accounting
standards. The Financial Accounting Standards Board (FASB) sets the United States Generally
Accepted Accounting Principles (U.S. GAAP), which companies incorporated in the United
States must follow. U.S. GAAP can be viewed online through the FASB Codification System
(FASB ASC). The U.S. GAAP is the authoritative guidance on financial reporting in the United
States.
The International Accounting Standards Board (IASB) sets the International Financial Reporting
Standards (IFRS), which 128 countries permit or require companies to follow. The IFRS
standards can be viewed on the EIFRS site. Of the 138 countries that have or follow accounting
regulations, 10 neither permit nor require companies to file according to IFRS. The goal of the
IFRS is for all countries to either permit or require companies to file according to IFRS
regulations. The United States is one of the 10 countries that do not follow IFRS.
In order to develop global accounting standards to match a global economy, IFRS and FASB
began a convergence project in 2002. The detailed convergence timeline is complete; however,
there are still many differences between the standards. FASB is demonstrating resistance, and
fears extinction if IFRS becomes the global accounting standard. The future of accounting
standards is unclear, which can leave accounting students struggling to prepare for their
accounting careers.
To stay informed about convergence projects and standard updates, accountants and accounting
students should sign up for email subscription lists. This will enable them to prepare for future
changes in financial reporting.
Accounting Standards and Convergence
1
INTRODUCTION
Accounting plays a crucial role in the evaluation of companies. Boards develop standards to
ensure that all accounting is uniform and financial statements are prepared the same. Financial
statements are released primarily for outside users. For example, investors analyze financial
statements to determine if they should invest in a certain company. In this process, investors
often compare two companies side by side. If these financial statements are not prepared in the
same way, it is difficult to make an accurate comparison between the two. For this reason,
financial statements must be prepared based on uniform standards.
An added complexity occurs when there are more than one set of accounting standards
worldwide. In the global economy that exists today, it is common for companies to operate in
more than one country. Additionally, people invest in foreign companies’ securities. The world
of business surpasses country borders, and financial information passes from one country to the
other quickly. The accounting standards do not currently reflect the fluidity of the business
world, as different standards apply to different countries. The United States follows U.S.
Generally Accepted Accounting Principles (U.S. GAAP). The leading international accounting
standards are the International Financial Reporting Standards (IFRS).
Description of U.S. GAAP
The United States Generally Accepted Accounting Principles (U.S. GAAP) are the required
standards that companies based in the United States must follow. The Financial Accounting
Standards Board (FASB) develops the U.S. GAAP. If the FASB decides to update a current
standard, they prepare and release the U.S. GAAP Accounting Standard Update. Since the
standard update will have a widespread effect on U.S. based companies, FASB gives the public
the option to provide their feedback on the proposed accounting standard before they officially
issue it. The thorough feedback process allows the FASB to consider many of the possible
impacts of the Accounting Standard Update.
All U.S. GAAP is documented within the FASB Accounting Standards Codification system
(FASB ASC). The main categories of U.S. GAAP within the codification system are as follows
(FASB ASC):
General Principles
Presentation
Assets
Liabilities
Equity
Revenue
Expenses
Broad Transactions
Industry
Master Glossary
For an example of an accounting standard within the FASB Accounting Codification System,
view Appendix A: FASB ASC Standard. The FASB is constantly re-evaluating the standards to
determine if adjustments are necessary. When a standard update is released, the FASB
announces the Accounting Standard Update along with an adoption schedule. The adoption
Accounting Standards and Convergence
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schedule ensures that companies know by what date they must adjust their accounting to match
the new standard. For an example of an Accounting Standard Update Transition Guide, see
Appendix B: FASB Transition Guide.
Description of IFRS
The leading international accounting standards are prepared by the International Accounting
Standards Board (IASB), and are called the International Financial Reporting Standards (IFRS).
According to the IFRS 2015 Pocket Guide, “IFRS is a globally recognised set of Standards for
the preparation of financial statements by business entities.” IFRS can be accessed on the EIFRS
site. To view a portion of an IFRS, see Appendix C: IFRS Example.
In addition to a conceptual framework, there are 15 categories for International Financial
Reporting Standards (IFRS Pocket Guide):
First-Time Adoption of IFRS
Share-Based Payment
Business Combinations
Insurance Contracts
Non-Current Assets Held for Sale
and Discontinued Operations
Revenue from Contracts with
Customers
Financial Instruments: Disclosures
Operating Segments
Financial Instruments
Consolidated Financial Statements
Joint Arrangements
Disclosure of Interests in Other Entities
Fair Value Measurement
Regulatory Deferral Accounts
Exploration for and Evaluation of
Mineral Resources
As of 2015, 138 countries follow IFRS. 114 countries require that companies follow IFRS, and
14 countries allow or require only some companies to use IFRS (IFRS Pocket Guide). Figure 1
provides additional detail regarding IFRS jurisdictions by continent.
Figure 1: IFRS Jurisdictions (IFRS Pocket Guide)
Accounting Standards and Convergence
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Figure 1 shows the prevalence of IFRS. It is important to note that in the European region, all but
one country require accounting according to IFRS. That one country permits or requires IFRS for
at least some public companies (IFRS Pocket Guide). Europe is home to many advanced
economies, and the separate standards used by the United States make it difficult to prepare and
compare financial statements.
Accounting Standards and Convergence
4
CONVERGENCE BETWEEN U.S. GAAP AND IFRS
Pricewaterhouse Coopers (PwC), one of the Big Four accounting firms, highlights a few reasons
why convergence is so important. As the global economy is expanding, many companies are
increasing their international presence by opening facilities, raising capital, and merging with
companies in other countries (PwC IFRS and U.S. GAAP). These processes are complicated,
because the accounting in many countries must be completed according to IFRS (PwC IFRS and
U.S. GAAP). U.S. based companies are then required to file financial statements according to
U.S. GAAP, which sometimes requires adjustments to transactions originally accounted for
according to IFRS. Additionally, non-U.S. investors and stakeholders in U.S. companies are
interested in the financial statements. If the financial statements were prepared according to
IFRS, investors would not have to understand two sets of reporting standards.
Further complicating the matter, foreign subsidiaries of U.S. companies are often required to
follow IFRS. The accounting must be converted to follow U.S. GAAP when the parent company
files their financial statements (PwC IFRS and U.S. GAAP). PwC stressed the importance of
being “financially bilingual” in the United States. It is important to understand how IFRS
impacts companies based in the United States. U.S. investors are also increasingly turning
toward foreign investments (PwC IFRS and U.S. GAAP). According to PwC, over $6 trillion is
invested in foreign securities (PwC IFRS and U.S. GAAP). U.S. investors need to understand
IFRS in order to interpret financial statements.
Norwalk Agreement
According to the FASB, convergence efforts with the IASB began in October 2002 with the
Norwalk Agreement. Both the FASB and IASB met in Norwalk, Connecticut on September 28,
2002 to discuss their commitment to high-quality accounting standards (FASB Convergence).
Both organizations understand that compatible standards would ease both domestic and foreign
accounting. At the meeting, both organizations agreed to work towards developing compatible
accounting standards. The FASB and IASB agreed to place a high priority on four tasks (FASB
Convergence):
Begin a short-term project to eliminate small differences between the U.S. GAAP and
IFRS
Begin to remove other accounting standard differences through joint projects, beginning
in 2005
Continue to partake in current joint projects
Encourage coordination with other organizations involved in the accounting standards
process
To accomplish these tasks and continue working toward convergence, a full-time IASB liaison
member is in the FASB office. This ensures communication and cooperation between the two
organizations. The FASB also has the opportunity to monitor the project that the IASB is
Accounting Standards and Convergence
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working on. Convergence between the United States and international standards boards will
reduce the differences between U.S. GAAP and IFRS.
The FASB Standard Development Process for U.S. GAAP
The FASB is responsible for developing the U.S. GAAP standards. They use a thorough process
to ensure that all stakeholders are considered (FASB Standards-setting process). They use the
process to consider all the benefits and costs. Figure 2 displays the steps in the FASB standards-
setting process. The steps vary somewhat based on the standard that the FASB is considering.
Figure 2: The FASB standard-setting process (FASB Standards Setting Process)
First, the board identifies a reporting issue, and then they determine if they should add the project
to the meeting agenda. The FASB then holds a couple of public meetings to discuss the standard
with stakeholders involved (FASB Standards Setting Process). The FASB uses this to gain an
accurate understanding of the benefits and concerns surrounding the proposed standard. After the
meetings, the FASB releases a draft to get additional input from stakeholders that were unable to
attend the public meetings (FASB Standards Setting Process). After gaining feedback on the
draft, the FASB might hold another meeting to discuss the draft and feedback. After considering
all feedback, the Board releases an Accounting Standard Update (FASB Standards Setting
Process).
The IASB Standard Development Process for IFRS
The International Accounting Standards Board develops the IFRS through an international due
process. Since the IFRS are used around the world, the standard-setting process requires
worldwide feedback. Figure 3 provides a broad idea of the IFRS standard setting process.
Accounting Standards and Convergence
6
Figure 3: Development process of IFRS (IFRS How We Develop Standards)
The IASB begins the standard process by setting an agenda and developing the project (IFRS
How We Develop Standards). Next, the IASB publishes a discussion paper, then an exposure
draft, which includes public commentary. Following the discussion, the standard is published
and procedures are issued (IFRS How We Develop Standards).
Convergence and Next Steps
Both the IASB and FASB standards setting processes are very thorough, which means it takes a
while to issue the standards. This plays a role in the convergence timeline and the amount of
effort required for convergence. It is also important to note that convergence is far from
accepting the IFRS in the United States. The process of convergence is solely the FASB
adjusting accounting standards to be closer to matching the IFRS. This does not mean that the
FASB will allow U.S. companies to follow the IFRS. Although one set of global accounting
standards is the goal of the IASB (IFRS Pocket Guide), it will most likely not happen in the near
future.
There is evidence of resistance to the convergence process. According to the FASB convergence
page, “because of the volume of differences and the complex nature of some issues, the FASB
anticipates that many differences between U.S. and international standards will persist well
beyond 2005” (FASB Convergence). It is slightly alarming that the FASB has not updated this
page since 2005. The timeline listed within the Norwalk Agreement does not go past 2005. As it
is 2016, we are left wondering where we are at in the convergence project. Based on the lack of
updates, it is not a far stretch to guess that the convergence may have some resistance.
According to PwC, the period of the convergence process is ending (PwC). However, there are
still differences between U.S. GAAP and IFRS. The FASB might continue to change U.S.
standards to more closely resemble IFRS. The FASB could also decide not to converge toward
IFRS for some standards. The convergence process and agreement was not specific as to what
extent standards would converge, so there is a possibility that total convergence will not be
completed.
The goal for IFRS is to achieve one set of global accounting standards and have IFRS accepted
internationally as the authoritative standards (IFRS Pocket Guide). The convergence project is
one step in that process, but is not the final answer. The FASB still has total control on what
areas to converge. Clearly, the FASB wants to avoid extinction and avoid further convergence
between U.S. GAAP and IFRS.
Accounting Standards and Convergence
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CONCLUSION AND RECOMMENDATIONS
While there has been some convergence between U.S. GAAP and IFRS, I have reached the
conclusion that the convergence process is slowing down. The FASB does not want to be
eliminated, so we could see more resistance from them in the future. This could lead to future
tension between the FASB and the IASB. The goal of the IASB is for IFRS to become the one
global accounting set of standards. However, the United States will most likely not permit or
require IFRS anytime soon.
Accounting standards, both U.S. GAAP and IFRS, are constantly changing. It is crucial that
accounting students stay up-to-date on the changes. I recommend signing up for the following
email subscriptions that will inform you of upcoming updates and convergence projects:
FASB eNewsletter Subscription: Check the interests that apply, including FASB
Codification Updates and the FASB projects, to learn about upcoming changes. Available
at:http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectio
nPage&cid=1176164527267
IFRS Foundation email subscription: By signing up, you will receive email alerts, can
submit comment letters about current projects, and can view the unaccompanied
standards. Available at: http://eifrs.ifrs.org/eifrs/Register
Accounting Standards and Convergence
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WORK CITED
FASB. Accounting Standards Codification. March 21, 2016. Available at: https://asc.fasb.org/.
FASB. Convergence with the International Accounting Standards Board. March 27, 2016.
Available at: http://www.fasb.org/intl/convergence_iasb.shtml.
FASB. Facts about FASB. March 20, 2016. Available at:
http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=117615452 6495.
FASB. Memorandum of Understanding. March 20, 2016. Available at:
http://www.fasb.org/news/memorandum.pdf.
FASB. Standard Setting Process. March 21, 2016. Available at:
http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1351027215692.
IFRS. 2013. Convergence between IFRSs and US GAAP. March 20, 2016. Available at:
http://www.ifrs.org/use-around-the-world/global-convergence/convergence-with-us-
gaap/Pages/convergence-with-us-gaap.aspx.
IFRS. EIFRS. March 26, 2016. Available at: eifrs.ifrs.org
IFRS. How We Develop Standards. March 21, 2016. Available at: http://www.ifrs.org/How-we-
develop-standards/Pages/How-we-develop-standards.aspx.
IFRS Foundation: Paul Pacter. 2015. IFRS as Global Standards: a pocket guide. March 23, 2016.
Available at: http://www.ifrs.org/Use-around-the-world/Documents/IFRS-as-global-
standards-Pocket-Guide-April-2015.PDF.
IFRS. 2015. Who We Are. March 22, 2016. Available at: http://www.ifrs.org/The-
organisation/Documents/2015/WhoWeAre_ENGLISH_July%202015.pdf
PwC. 2014. IFRS and US GAAP: similarities and differences. March 20, 2016. Available at:
https://www.pwc.com/us/en/issues/ifrs-reporting/publications/assets/ifrs-and-us-gaap-
similarities-and-differences-2014.pdf.
PwC. 2015. IFRS by Country. March 25, 2016. Available at:
http://www.pwc.com/us/en/cfodirect/assets/pdf/pwc-ifrs-by-country-2015.pdf.
Accounting Standards and Convergence
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APPENDIX A: FASB ASC Standard
FASB ASC 205-10-45-1 and FASB ASC 205-10-45-1A
Accounting Standards and Convergence
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APPENDIX B: FASB Transition Guide
FASB ASC 606-10-65-1
Accounting Standards and Convergence
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APPENDIX C: IFRS Example
EIFRS Fair Value Measurement
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