Abstract
The paper describes the meaning of IFRS, GAAP and convergence as well as the impacts of the convergence to the public companies, accounting firms, small and medium companies. It further addresses the significant differences and similarities of IFRS and GAAP and their impacts on the financial statements. Finally, the recommended ways through which the companies can prepare for the IRFS and GAAP convergence, and the evaluation of the potential risks of IFRS and GAAP convergence. At the end there is a clear picture of the consequences of the convergence of IFRS and GAAP.
Introduction
IFRS stands for International Financial Reporting Standards, which is as set of international accounting standards issued by the International Accounting Standards Board. These standards state how particular types of transactions and other events should be reported in financial statements. IFRS aims at making International comparisons as easy as possible by synchronizing the accounting standards across the globe. It comprises of the International Financial Reporting Standards (IFRS) issued after 2001, International Accounting Standards (IAS) issued before 2001, Standing Interpretations Committee (SIC) issued before 2001, and Conceptual Framework for the Preparation and Presentation of Financial Statements issued in 2010.
The Generally Accepted Accounting Principles (GAAP) is set of principles, standards, and procedures that companies use while compiling their financial statements. A board sets these standards so that they can be accepted for the purpose of recording accounting information for future reference. The main aim of imposing the GAAP on companies is to help investors have a minimum level of consistency in the financial statements used when analyzing companies’ for investment purposes. GAAP covers things such as balance sheet item classification, revenue allocation, and outstanding share measurements (Loren, Bazley & Jefferson, 2010).
Convergence by definition is the tendency of two or more things coming to a meeting point or coming together. With this view, the IRFS and GAAP convergence is the tendency of the two set of standards evolving towards performing the same task as well as being acceptable as one common set of standards globally. According to IRFS resources, in February 2006, the FASB and IASB issued a memorandum of Understanding (MOU) on the principles to be followed to ensure convergence. They recommended and agreed that to ensure convergence of accounting standards, high quality, common standards have to be developed overtime. The new common standard that improves the financial information to investors need to be developed and finally the Boards develop jointly improved new standards to replace the former standards. Therefore, convergence in this reference simply means having a common agreed set of standards to govern accounting globally.
Effects of convergence to public companies, accounting firms and small and medium companies
The adoption of IRFS standards will benefit the companies financially. Investors will be able to acquire financial statements with reduced costs, which will give them a chance to access more information of various companies thus having a variety of companies for investment. This will be of great help to companies that otherwise the investors could not have had the opportunity to access their financial statements if there were no converged standards. The convergence will help the companies reduce the risks, legal contingencies to fraud and make international business more efficient due to the ease in interpretation of the IRFS standards. Convergence creates room for flexibility and reduces the culture and business practices of each nation thus giving the companies the flexibility to international standards. In addition, it will ease the listing of companies in the international stock markets due to the application of common accounting language. On the other hand, the convergence will be a burden to various companies. The cost of implementation at the current economy is a large hurdle to most of the companies. The convergence will increase competitiveness, where the use of one standardized set of accounting rules and standards, as well as use of common financial language will enhance competition. Every company will be able to read and interpret the other companies financial report work towards improving the departments that they will find worth for improvement (Loren, Bazley & Jefferson, 2010).
Similarities and differences between IRFS and GAAP, and Impacts to financial statements
The convergence is aimed at harmonizing the two standards, which makes more focus to be on differences than similarities. The capital concepts and maintenance in IFRS are of three different types while in GAAP they are two different types when inflation is low or during deflation. The GAAP only recognizes physical capital maintenance and financial capital maintenance in nominal monitary units but fails to recognize financial capital maintenance in units of constant power, which is the IFRS third concept. The effect of this difference is on how the business treats the effects of changes in the prices of assets and liabilities of the entity. When selecting capital maintenance, it is important to consider the model to be used in preparing financial statements. The other difference is that GAAP recognizes some financial institutions as equity while IRFS recognizes them as debtors (Nach & Steven, 2009).
Ways in which companies can prepare for the convergence
Companies need to understand the changes in the development of the accounting standards. They therefore need to prepare for these changes through various ways in which they can prepare for adoption of these changes. The first one is assessment in order to understand the important components of the project through research. This also involves identification of contractors as well as consultants and ensuring that all the resources are available. This is followed by analyzing the differences in accounting and the required compensation according to the agreement with the debtors and contractors, who are related to the metrics of accounting. During stage one and two, there is evaluation of the valuable information to be gathered for analysis. The third stage is designing the change process where the company now understands the scope of the effort, its costs, and the benefits. The company therefore plans for the formal change of management process including timeline and training all the relevant segments of the company (Carl, Reeve & Duchac, 2009).
Potential risks of IFRS and GAAP
There are major risks facing the convergence of IRFS and GAAP. Critics from some of the National Standards Implementation bodies want the nations to continue with their own accounting standards. Another threat to the convergence is the current global economic status due to instability in the economy in most of the nations. This change in the economy mostly affects the business ventures or industry. The adoption of the new standards especially to the large companies, which had already established their national GAAP, will be costly, tedious as well as time consuming. This causes a lot of challenges to most companies that feel the convergence as a burden to them and therefore use their means to oppose to the convergence. Another risk is the differences between the two standards, where some countries feel the new standards would be inferior compared to their GAAP. This would cause such nations to oppose the convergence so that they can enjoy the standards they consider superior. In addition, some nations have the tendency to oppose changes especially those from the western. They view these changes as a process of neocolonialism and manipulation by the west or the developed nations for their own financial gains (Bidgoli, 2010).
Conclusion
The convergence of the IFRS and GAAP is a great development towards harmonizing the accounting standards especially owing the across the border operational of various multinational companies. However, the time span and the rate at which some countries are adopting the changes is very high, which may make some companies to be unstable financially.
References
Bidgoli, H. (2010). The handbook of technology management: Supply chain management, marketing, volume 2. New Jersey: John Wiley & Sons.
Carl, S., Reeve, J., & Duchac, J. (2009). Accounting. USA: South Western Cengage Learning.
Loren, A., Bazley, J., & Jefferson, P. (2010). Initermediate accounting. USA: Cengage Learning.
Nach, R., & Steven, M. (2009). Wiley GAAP 2010: Interpretation and application of generally accepted. New Jersey: John Wiley & Sons.