Saturday, January 26, 2013

IFRS and GAAP Convergence

Over the period, the global environment has experienced tremendous development characterized by the emergence of businesses. On the wake, of these developments, profitability of businesses has been enormously enhanced. Consumer theories articulate that consumers are people preferring to have more of the commodities to themselves. This theory is beneficial in explaining the reason for the emergence of many businesses. Many businesses have emerged because of increased profitability, and the majority of the individuals wish to take advantage of this fact. Today, most businesses have established themselves, and they operate across borders and in their local countries. Therefore, the growth of businesses has resulted in the cooperation of different nations. The broadening of the business market has resulted in the emergence of innovation, invention and competition. At the end of the trading period, all business ventures and companies are required to prepare financial statements. These statements highlight the profitability and losses. Furthermore, the statements reveal the assets and liabilities of the organization (Donald E. Kieso, 2011). All these attributes are crucial for the performance of the business venture because invention and innovation ensures the enhancement of quality while competition stimulates the realization of competitive advantage. The emergence of competition and globalization of businesses has resulted in the need to establish standard accounting and financial principles to form a uniform platform for making comparisons (Shamrock, 2012). The emergence of these accounting standards and principles has stimulated by globalization and the need to enhance equity when venturing in comparison. Consequently, there is a need to establish standard accounting platform for businesses to ensure informed decision making for the investors, businesses owners and managers. The United States of America has established its standards that are followed by all the companies. The generally accepted accounting principles guidelines stipulate the obligations of financial records in the US. However, on the international scene, international financial reporting standards are observed. Therefore, the role of accounting convergence is to ensure the establishment of common set rules that consider both GAAP and IFRS (Ernst & Young, 2012).

In reality, the establishment of GAAP in the United States was widely welcomed and many businesses incorporated the rules in the preparation of their financial statements. The analysis reveals there was a need to establish uniformity of businesses to enable the investors, managers and stake holders to ascertain the financial position of the business. These rules and regulations stipulate the guidelines of preparing financial statements at the end of the trading period. These financial statements prepared by the accountants included balance sheet, cash flow statement, trading, profit and loss account (Zack, 2009). Also, include is the preparation of ledgers and journals. Because of the emergence of the global business environment and the convergence of internal nations, international financial reporting standard was enacted to govern the reporting of financial records at the end of the trading period. Even, though, both IFRS and GAAP campaigns for the enhancement of uniformity in global financial reporting, there are some variations between the two sets of rules. The significant difference between IFRS and GAAP lies in the basis of their foundation. The establishment of IFRS was based on finical principles while the establishment of US GAAP was based on rules (United Nations Conference on Trade and Development, 2007). First, the treatment of intangible assets and inventory is remarkably different. IFRS states that intangible assets are reflected on the basis of their future economic value while GAAP states that their values must be reflected. Notably, IFRS does not attest to the use of LIFO in the recording of inventory. On the same note, GAAP guidelines stipulate the use of LIFO in the recording of inventory. Another major difference between the two standardized bodies of accounting is the treatment of inventory write downs. IFRS guidelines articulate that the inventory write downs can be revised in the future while GAAP rules prohibit future revision of write downs (Shamrock, 2012).

Over the period, technological development has led to the enhancement of business performance. All these factors have resulted in globalization which entails the coming together of different nations of the world. In this regard, standardized accounting principles were developed by the developed nations to enhance uniformity of developing nations. The major contributors of the standardization policies were the European Union and the United States. This happened in the form of IFRS from the EU and GAAP for the US. Because of the tremendous contribution made by these two organizations, there are conflicts arising because of the convergence of the two bodies. There is a rising need for the standardization of the global accounting principles because of increasing globalization. Nevertheless, despite the attempts made by financial analysts to balance the rules from the standardizations bodies, there are still some obstacles preventing the standardization of accounting rules, regulations and standards. The enhancement of convergence of accounting standards has been hindered because of cultural and political differences (Shamrock, 2012). The differences in the culture and politics in different nations is a significant obstacle towards the implementation of accounting standardization. Because of the establishment of cultural and political interference, the implementation of other standardizations formalities may be hindered.

The rules and regulations of businesses require that financial statements be prepared at the end of accounting periods. There are varying methods of preparing methods of preparing financial statements at the end of the trading period. In the presentation of financial statements, the accounting period must be disclosed in respect to previous trading period under IFRS. In both cases, there is no prescribed lay out of the balance sheet. However, IFRS stipulates the items that must be listed in the balance sheet. On the other hand, GAAP has standard for the public companies but does not stipulate strict rules on the other performing business ventures. The preparation of income statement also has significant variations in its standardization. GAAP stipulate
s that expenses must be based on function. On the other hand, IFSR identifies expenses based on the nature and function (United Nations Conference on Trade and Development, 2007). In this regard, the amount of expenses listed in both instances is bound to be different because both columns contain a different set of commodities. The preparation of income statement of extra ordinary assets is prohibited under IFSR standards, but the standards states that the income statement must be restricted to items that are infrequent and unusual. Finally, the accounting standards under the umbrella of IFSR require the preparation of the third balance sheet for the business. This balance sheet is prepared for comparative purpose to ascertain the significance of the policies enacted into the business (Donald E. Kieso, 2011). On the contrary, generally accepted accounting policies of the United States do not advocate for the preparation of third balance sheet.

Over the period, the desire to converge accounting principles has been on the rise of the increased participation in the global market. The analysis conducted on the global market has revealed that the global market is largely influenced by the activities of the developed nations. In this regard, the developed nations consisting of the EU and USA have both presented their accounting standards. The developed nation of the US has continued to use their GAAP while the developed nations of the EU have continued to use IFRS. In order to attain unity in the world, there is the need for both bodies to unite and form a single pillar. The establishment of accounting principles has always stated that the business and its owners are different entities. This policy is echoed by both accounting standards as valid concern. This information is extremely beneficial to investors and stake holders because the valuation of the business can be done without the consent of the owner. This convergence policy also stipulates that the owner of the business cannot place his/her personal assets on the books of the business. Furthermore, any personal expenditure is charged to the account and does not influence the operation of the business. Concerns have been raised form investors, businesses and audit farms about the implementation of international financial reporting standards. In effect, this standard has been adopted by more than 100 companies (Zack, 2009). The global market has experienced significant change in the accounting principles because the company's operation in the United States has adopted the use of IFRS. This adoption has led to the enhancement of significant changes in the Americans market because it has resulted in changes in foreign exchange. The nation of US has experienced a change in accounting principle because of the adoption of IFSR neglecting of GAAP policies.

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