Implications and Assessment of the Convergence Project


In the context of contemporary business environment, the importance of uniform accounting standards has been enhanced on significant manner to manage the globalised business trends. In this regard, the development along with the global expansion of International Financial Reporting Standards (IFRS) have played a critical role in the harmonization of financial reporting practices in all over the world. However, U.S. Generally Accepted Accounting Principles (GAAP) are having a significant global impact and also playing a crucial role in establishing a single set of global financial reporting standards as a result of the global importance of the U.S. equity market along with the high quality of U.S (Guillaume and Pierre, 2016). GAAP itself. Apart from that, companies are facing several issues in managing various domestic and international business operations. Therefore, the convergence project was being initiated in 2002 to eliminate a variety of difference between International Financial Reporting Standards and US GAAP. This essay is going to carry out a detailed assessment of key differences between the US GAAP vs IFRS. It covers the potential implications of convergence project on the investor, stock market and corporate management, and others (L Murphy Smith DBA, 2012). This assessment also carries out a detailed assessment of different factors that are aligned with convergence project.

Background of Convergence

In the context of contemporary business environment, the main goal of convergence project was to remove the differences and variation between the IFRS and US GAAP. This is because US GAAP have found very efficient to manage financial reporting and it is similar to IFRS in some extent and it is not essential for US companies to consider the IFRS. However, this project was being initiated with reference to decision made by the Securities and Exchange Commission for the usage of IFRS. Furthermore, the group statement issued by the leaders of G20 in 2009 encouraged the requirements of convergence within the member nations by 2011 (Hughes and Xiques, 2017). Moreover, the increase in global trade plays a critical role in influencing the requirements of uniform accounting standards in worldwide because it would enhance efficiency and reliability of accounting data. The convergence along with the application of the subsequent change of accounting and reporting standards at the international level leaves the significant implications on the number of constituents. In this regard, the International Accounting Standards Board (IASB) is looking to assess the appropriate solution to reduce the existing criticalness, difference of interest, and confusion aligned with the inconsistencies along with the lack of reliable accounting standards in the context of business reporting. In the context of IFRS and US GAAP, there have been several similarities identified in different reporting standards (Hlaciuc and Maciuca, 2014). Therefore, convergence would not be focused to abandonment of one standard in favor of the other. This is because each set of regulations has its own strengths and weaknesses. Furthermore, adoption seems as an unattractive approach because the cost is more significant as compared to convergence and the adoption would not provide any significant benefits.


Difference IFRS vs US GAAP

The main difference between the IFRS and US GAAP is that IFRS is principled based and the GAAP is perceived as the rule-based methodology. The underlying issue is that these two accounting standards would account for two similar transactions in different manner. It is difficult to compare the two elements. The International Accounting Standards Board (IASB) is focused to assess the appropriate measure to manage inconsistencies in traditional accounting practices. IFRS and US GAAP have substantially closure over the time (Burke, 2019). IFRS has been accepted in all over the world but the global economic position of US economy has influenced the local agencies to align the US GAAP with the international standards.

Major difference in the financial statements

The revenue recognition is being termed as the element of financial statement. In the context of IFRS, two primary standard and four general interpretations are being used in which the recognized contract revenue is based on the value of contract. It supports in estimation of total cost and percentage of contract (Barniv and Myring, 2015). Furthermore, the recognized revenue seems recoverable with reference to cost incurred over the particular reported period. On the other hand, the US GAAP contains the highly specified rules and regulations specified with reference to distinct business situations. For example, construction company can defer revenue recognition until the completion of contract. Under the new standard for revenue recognition, an organisation has to follow a 5 step process than an entity must complete recording revenue that could be considered as important implications of convergence. Once the company has completed its obligation, then it could be recorded in the revenue regardless of whether or not the customer has paid. Furthermore, the convergence process could decrease the employee efficiency in creation of significant understanding of correctly record revenue (Bellandi, 2012). In the context of several issues identified between U.S. GAAP and IFRS, revenue recognition has been emerged as the major contrast in approaches to financial reporting. This is because the U.S. GAAP applies the rules-based accounting and it is mainly influenced by more industry specific guidance that covers a detailed assessment of the when and how much revenue should be recognized with reference to distinct accounting period. However, the IFRS is termed as the principles-based accounting method that relies on judgment or industry specific transactions. Gray, Spencer and Pumphrey (2015) stated that the U.S. GAAP and IFRS approach are following to different ways of the accrual accounting. For example, U.S. GAAP applies the approach of ‘matching rule with the measurement of items’ within the income statement while performing the financial reporting. Thus, revenue would be addressed in the period when it incurred. However, IFRS pays extra attention on the measurement of a firm’s assets along with the liabilities with reference to the balance’s sheet at the fair value. Consequently, changes in revenues along with the business expenditures are being reflected within the income statement. It stands to reason that there is a significant difference identified when and how much income should be recognized that may have ultimate impact on the financial statements (Sanko and Koldovskyi, 2017). The different in accounting operations may have direct impact on the efficiency of business working in the US. In this regard, management would also have some issues for the implementing new procedures. Moreover, extra time would need to allocated the accounting staff so as they can be trained in the new procedures. Investors and creditors will find a easy approach to compare the financials between companies with consideration of IFRS.

The Inventory Valuation is being considered as the most critical aspect in the convergence process. In this context of US GAAP, the valuation of inventory is being carried out with consideration of ASC 330 in which the last-in-last-out (LIFO) is permitted and it do not require similar costing formula for all inventories that are having similar nature. In this context, the reversals of writedowns are being prohibited (Ortega, 2017). On the contrary, the IFRS contains the IAS 2 for the inventory valuation in which the usage of LIFO is being prohibited. It determines the requirements of uniform costing formulate that could be applied for the all types of inventories that are having a similar nature. In addition to that, the reversals of writedowns are being required. Therefore, the management of inventory valuation of process could be considered as the most critical aspect of convergence process. However, it is termed as the asset that is held for sales within the ordinary business operations in the both context. Furthermore, Additional, selling, storage, and other administrative costs are also not included in the inventory costs that would be recorded as direct and indirect overheads. Lin, Riccardi and Wang (2013) stated that the application of LIFO is disallowed as a result of distinct tax loopholes that are created under this method. Moreover, many companies have refused to switch over since they would be forced to forgo a sizeable tax break. Apart from that, FIFO creates a more accurate value of inventory.

Impact of Convergence

Implications on the Top Management

The top management in different companies will find simple, modernized accouting standards along with the different uniform rules and practices that are followed in worldwide. The change will provide an opportunity to management for raising capital in lower interest rates that would reduce the business risk and financing cost (Guillaume and Pierre, 2016).

Implications on Investors

Investors should have to assess some additional education themselves for creating an appropriate understanding about the new rules that are followed in the formulation of accounting reports and financial statements that are aligned with the internationally accepted standards. In addition to that, new process will offer the more credible or reliable information and new processes will simplify without implement or conversion in accounting operation in relation to the standards of the country (L Murphy Smith DBA, 2012). Further, the new standards would influence the overseas flow of capital between different countries.

Implications on Stock Markets

Stock markets would find a significant decrease in the different expenditures while entering in the overseas market because the all markets are following the similar accounting norms and other standards that will further allow markets for competing to assess a variety of the international investment options.

Implications on the Accounting Professionals

The transformation current standards or US GAAP to IFRS or internationally accepted standard will influence the accounting and finance professionals for learning about the new procedures and accounting regulations for attaining the appropriate consistencies in accounting operations (Hughes and Xiques, 2017).

Implications on different Accounting Authorities

The development or transformation of new standards is mainly carried out by different types of accounting authorities and boards that would enhance the process size and it would be termed as a time consuming approach. These delays would create several issues for all parties. Once standards have converged, different regulatory bodies will find the reduction in dependence over the other agencies.

Perspectives of the convergence between IFRS and U.S. GAAP

The process of convergence between the IFRS and US GAAP has found a very complex approach and contains various obstacles and challenges. It includes variation in styles of financial reporting, political pressures of different agencies, potential tendency to maintain existing standards within country and properties of two boards. Moreover, the similarities between US GAAP and IFRS are also influencing problems in convergence process (Hlaciuc and Maciuca, 2014). Moreover, there has some proposal identified for the immediate termination of the convergence, because its further continuing is not the most efficient and effective way for achieving a single set of global standards in which the adoption of IFRS in the United States would be emerged as essential element (Burke, 2019). For managing different doubts, the SEC plays a critical role that considers the views of international companies about the application of new set of standards. The SEC focuses on the three critical factors such as comprehensiveness of IFRS, auditability and enforceability of IFRS and comparability of IFRS while managing the convergence project. The SEC addressed that the comprehensiveness of IFRS has been significantly improved but it contains some areas where the IASB along with the the FASB should have to perform joint effort for achieving the high-quality solutions (Barniv and Myring, 2015). In addition, the SEC has addressed that IFRS would be able to deal with problems specific to certain industries.

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The above assessment concludes that both US GAAP and IFRS are having similar fundamental principles but there are several differences identified. The main points of convergence contains development of systematic combinations for revenue recognition and inventory management. However, different complexities have created some problems in achieving the convergence deadlines within accounting standards. Moreover, the disagreements among companies and committees may leave adverse impact on the convergence project.


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