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The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally, and in particular the effort to reduce the differences between the US Generally Accepted Accounting Principles (US GAAP), and the International Financial Reporting Standards (IFRS).[1] Convergence in some form has been taking place for several decades,[2] and efforts today include projects that aim to reduce the differences between accounting standards.[3]

Convergence is driven by several factors, including the belief that having a single set of accounting requirements would increase the comparability of different entities' accounting numbers, which will contribute to the flow of international investment and benefit a variety of stakeholders.[4][1] Criticisms of convergence include its cost and pace,[5] and the idea that the link between convergence and comparability may not be strong.[6]

Overview

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The international convergence of accounting standards refers to the goal of establishing a single set of high-quality accounting standards to be used internationally, and the efforts of standard-setters, particularly the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), towards achieving that goal.[1]

The IASB and FASB are currently working towards completing the convergence programme laid out by a 2006 memorandum of understanding, which was updated in 2008.[7] Efforts include projects that aim to improve the respective accounting standards, and those that aim to reduce the differences between them.[3]

Current projects: IASB and FASB

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In a joint report published in 2012, the IASB and FASB stated that most of the short-term projects outlined in the memorandum of understanding had been completed, and that greater priority was now being placed on long-term projects.[7]

Short term projects involve the amendment of one of the boards' standards to better align them with the other board's, jointly issuing new standards. Some short-term projects and corresponding action taken are listed below.

  1. Segment reporting (completed): a new standard, IFRS 8 Segment Reporting, was issued in 2006.
  2. Fair value option (completed): US GAAP was amended to include the fair value option in 2007.
  3. Joint ventures (completed): IFRS 11 Joint Arrangements was issued in 2011.
  4. Income tax (priority lowered): A joint exposure draft was published in 2009.[7]

An update to the memorandum of understanding in 2008 introduced long-term convergence projects, including the following.

  1. Derecognition (completed): both boards issued amendments.
  2. Fair value measurement (completed): FASB Statement No. 257 and IFRS 13 were issued in 2011.
  3. Financial instruments with the characteristics of equity (priority lowered): a joint discussion paper was released.
  4. Revenue recognition (in progress): the boards issued joint proposals in 2010.[7]

Other accounting systems

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Convergence is also taking place in other countries, with "all major economies" planning to either adopt the IFRS or converge towards it, "in the near future". For example, Canada required all listed entities to use the IFRS from January 1, 2012, and Japan permitted the use of IFRS for certain multinational companies from 2010 and is expected to make a decision on mandatory adoption in "around 2012".[8]

Motivation

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Motivations for convergence include the belief that it will result in increased comparability between financial statements, which will benefit a variety of stakeholders. For example, the FASB believes that "investors, companies, auditors, and other participants in the U.S. financial reporting system" will benefit from converged standards because it will results in increased comparability between the financial statements of different firms.[1]

A 2008 report by PricewaterhouseCoopers (PwC) stated that convergence of accounting standards would contribute to the flow of international investment and benefit "all capital markets stakeholders" because it

  1. renders international investments more comparable to investors;
  2. reduces the cost of complying with accounting requirements for global businesses;
  3. potentially establishes a more transparent accounting system with greater accountability;
  4. reduces "operational challenges" for accounting firms; and
  5. gives standard-setters the opportunity to "improve the reporting model".[4]

Additionally, a survey conducted by the International Federation of Accountants found that 89% of accounting profession leaders who responded expressed that convergence was either very important or important for economic growth for their respective countries.[3]

Criticisms

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The goal of and various proposed steps to achieve convergence of accounting standards has been criticised by various individuals and organizations. For example, in 2006 senior partners at PricewaterhouseCoopers (PwC) called for convergence to be "shelved indefinitely" in a draft paper, calling for the IASB to focus instead on improving its own set of standards.[9]

In particular, Shyam Sunder of the Yale School of Management has called the link between convergence and comparability "overblown",[6] while the cost and pace of adoption have been cited as the most common criticism of the SEC's 2008 convergence roadmap,[5] which set milestones that potentially lead to mandatory adoption of IFRS in 2014.[10]

Nature of standards

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Other criticisms center around the nature of the converged standards. For example, Some critics are concerned that convergence will increase the use of fair value accounting.[9]

Other critics have also respectively cited shortcomings with rules-based and principles-based standards as reasons. Principles-based standards allow for "different interpretations for similar transactions",[11] and have also been described as "less precise",[12] while rules-based standards contain more exceptions[11] and use bright-line rules and specific details to deal with "as many potential contingencies as possible".[13] The above-mentioned PwC senior partners expressed that convergence will lead to an accounting system that is too rules-based for non-US listed companies,[9] while other critics conversely criticize the principles-based nature of the IFRS as making it difficult for preparers of financial statements to defend against litigation.[14]

History

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1950s to 1960s

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The idea of convergence has roots in the 1950s, and was a response to greater economic integration and international capital flows after the second world war. Before the 1990s, convergence took the form of harmonization, the reduction of differences between the various accounting standards used internationally.[2]

At the 8th International Congress of Accountants hosted by the American Institute of Certified Public Accountants in 1962, many participants expressed the need for the development of accounting standards on an international basis; in the same year the AICPA reactivated the Committee on International Relations, that aimed to improve cooperation among accountants globally.[2]

1970s to 1990s

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The International Accounting Standards Committee (IASC), the predecessor to the International Accounting Standards Board (IASB) was established in 1973 with the goal of developing accounting standards and promoting them internationally; by 1987 the IASC had issued 25 standards, and by the late 1980s there was "worldwide interest" in the need for convergence.[2]

In 1991 the FASB formally set out the goal of developing an internationally-used set of accounting standards, and in subsequent years the FASB and IASC undertook various projects to lay the groundwork for convergence. In 1996, the National Securities Markets Improvement Act became law; the act expressed support for convergence efforts and required the SEC to report to congress on progress towards convergence.[2]

2000s to present

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The IASC was reconstituted into the IASB in 2001,[2] and the FASB and IASB began working towards convergence in 2002,[1] expressing their commitment to convergence in the Norwalk agreement and pledging to maker their respective standards "compatible as soon as is practicable" and to maintain compatibility by coordinating future programs. Their commitment to working towards convergence was reaffirmed at meetings in 2005.[3]

The IASB and FASB signed a memorandum of understanding in 2006 which laid guidelines on their convergence projects and set short-term goals such as to issue converged standards on business combinations by 2008.[15] Work towards the goals were reviewed in 2008, and a progress report published that also set out subsequent steps for each convergence topic.[16] The FASB and IASB met again in 2009 and agreed to "intensify their efforts" in working towards the goals of the memorandum of understanding, while laying down future plans and targets.[1]

Convergence of accounting standards is also taking place in other jurisdictions; the IFRS Foundation has stated that "all major economies" have plans to either converge towards or adopt the IFRS "in the near future", and that the Group of 20 Leaders (G20) have encouraged accounting bodies globally to increase efforts to achieve convergence.[8]

References

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  1. ^ a b c d e f FASB, 2012. International Convergence of Accounting Standards—Overview. Retrieved on April 27, 2012.
  2. ^ a b c d e f FASB. International Convergence of Accounting Standards—A Brief History. Retrieved on April 30, 2012.
  3. ^ a b c d AICPA, 2008. Convergence with International Accounting Standards. Retrieved on April 27, 2012.
  4. ^ a b PricewaterhouseCoopers, 2007. ViewPoint – April 2007. Retrieved May 1, 2012.
  5. ^ a b American Institute of Certified Public Accountants, 2009. [http://www.ifrs.com/updates/aicpa/IFRS_SEC.html Where Will the SEC Take the IFRS Roadmap? An AICPA Analysis of Comment Letters on the SEC's Proposal]. Retrieved on April 30, 2012.
  6. ^ a b Sunder S, 2011. IFRS Monopoly: The Pied Piper of Financial Reporting. Retrieved on April 30, 2012.
  7. ^ a b c d IASB & FASB, 2012. IASB-FASB Update Report to the FSB Plenary on Accounting Convergence. Retrieved on May 2, 2012.
  8. ^ a b IFRS Foundation, 2012. The move towards global standards. Retrieved on April 27, 2012.
  9. ^ a b c Jopson B, 2006. PwC calls for convergence to be shelved. Retrieved on April 30, 2012.
  10. ^ Securities and Exchange Commission, 2008. Roadmap for the potential use of financial statements prepared in according with international financial reporting standards by U.S. issuers. Retrieved on April 30, 2012.
  11. ^ a b Forgeas R, 2008. Is IFRS That Different From U.S. GAAP? Retrieved on April 30, 2012.
  12. ^ Agoglia C, Doupnik T, Tsakumis G, 2010. Principles-Based Versus Rules-Based Accounting Standards: The Influence of Standard Precision and Audit Committee Strength on Financial Reporting Decisions. Retrieved on April 30, 2012.
  13. ^ Shortridge R, Myring M, 2009. Defining Principles-Based Accounting Standards. Retrieved on April 30, 2012.
  14. ^ Forgeas R, 2010. Are Critics Against the Adoption of IFRS So Compelling?. Retrieved on April 30, 2012.
  15. ^ FASB, 2006. A Roadmap for Convergence between IFRSs and US GAAP—2006-2008 Memorandum of Understanding between the FASB and the IASB. Retrieved on April 27, 2012.
  16. ^ FASB, 2008. Completing the February 2006 Memorandum of Understanding: A progress report and timetable for completion. Retrieved on April 27, 2012.

Raw references and other notes

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  • Consider changing title to International convergence of accounting standards or Convergence (accounting)

Overviews

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News

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Other than FASB/IFRSF

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Recent work

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Arguments against

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Misc sites

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Misc news

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