Question & Answer: To understand how the article relating to the convergence of International Financial Reporting Standards (IFRS), it helps to under…..

There has been a concerted convergence effort between the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) in order to avoid conflict and confusion, promote simplicity, streamlining, consistency and transparency, and avoid any future financial crises or meltdowns.

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.

General Convergence Efforts:-
One of the main concerns in the United States business world is how the convergence process and its results will impact the future evolution of the accounting profession. This specific concern, simply stated, is about uniformity over transparency, and it has a serious impact on the standards development process. Could the goals of uniformity and transparency be achieved? Are they incompatible or mutually exclusive?

This incompatibility – real or perceived – is grounded in the conflicts existing among the constructs of rules-based and principle-based shareholder and stakeholder primacy theories, which are recognized by the Financial Accounting Standards Board (FASB), the International Accounting Standards Board (IASB) and the European and Asian Accounting Standards Boards, and which have an impact on the standards development methodology. Transparency has a direct impact on the areas of business combinations (Phase I and II), revenue recognition and financial performance of business enterprises reporting.

Convergence Efforts Made Toward the GAAP and IFRS Standards Convergence Goal on the Business Combinations Phases I and II Project:-
The objective of this two-phased collaborative project between the U.S. FASB and the IFRS was to develop a single high-quality standard of accounting for business combinations that would ensure uniformity, yet promote transparency in merger and acquisitions (M&A) activities in the world’s major capital markets. Phase I of the Business Combinations Project eliminated the pooling of interest with the FASB 14. Issues excluded from Phase I were business combinations involving two or more mutual entities and business combinations where separate entities were brought together as a reporting entity without claiming an ownership interest.

Phase II of the project focused on revising IFRS 3 (Business Combinations); amended a version of International Accounting Standard 27 (IAS 27 – Consolidated and Separate Financial Statements); clarified and changed wording, aligning the GAAP with IFRS; and revised the FASB issuance of SFAS 141(R) regarding Business Combinations, and SFAS 160 regarding Non-controlling Interests in Consolidated Financial Statements. Statement of Financial Accounting Standards 141 R (SFAS 141 R) reduced the complexity of the GAAP, improved and created a greater consistency in accounting and financial reporting of business combinations, which benefited investors and other users of financial statements by providing them with more complete, comparable and relevant information.

Convergence Efforts Made Toward the GAAP and IFRS Standards Convergence Goal on the Financial Performance by Business Enterprises:-
The FASB has taken steps to: consider promptly any significant areas of deficiency in financial reporting that might be addressed through the standard-setting process; promote the international convergence of accounting standards concurrent with improving the quality of financial reporting; and improve the common understanding of the nature and purposes of information contained in financial reports.

Addressing the objectives of financial reposting by business enterprises, the SFAS CON 1 states that financial reporting should provide information that is useful to current and potential investors and creditors, or any other users, in their decision-making processes regarding investments and credit, including assessing the amounts, the timing and uncertainty of prospective cash receipts or cash inflows from dividends or interest earned, the proceeds from a sale, or redemption or maturity of loans or securities. Reports should include information about a company’s economic resources, claims on those resources and the effects of those transactions, events, and circumstances that impact the resources and any claims upon them, and should be comprehensible to anyone who has a reasonable understanding of business and economic activities and who needs to examine or study the information with reasonable diligence.
Convergence Efforts Made Toward the GAAP and IFRS Standards Convergence Goal on the Revenue Recognition Area:-
Accounting standards designed for public capital markets are burdensome, not only due to their complex nature, but also due to their adoption of the IFRS standards. This is especially apparent when applied to small and medium-sized companies, since they follow simple accounting principles that are not designed for the complexity of transactions that some small companies enter into, such as derivatives, hedging, foreign operations, business combinations, pension obligations or revenue transactions with multiple deliverables. This has forced IASB – which develops the International Financial Reporting Standards – to work on a separate standard for private entities titled, IFRS for Small and Medium-Sized Entities. The new standard will consist of a set of simplified and self-contained accounting principles that will address the needs of smaller, non-listed companies in public capital markets.

Both FASB and IASB, having acknowledged the complexity and pervasiveness of the revenue recognition area in financial reposting, are collaborating on developing a new single-revenue recognition standard for both the U.S. GAAP and the IFRS, which will streamline accounting for revenue across industries and correct any current existing inconsistencies in standards and practices. The new standard will also require businesses to disclose more information about revenue and proposes guidance to clarify accounting for contract costs.