Free Convergence of GAAP and IFRS Essay Sample
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International Financial Reporting Standards (IFRS) are standards, interpretations and framework which are based on principles that were adopted by the International Accounting Standards Board (IASB). The fact that IFRS are regarded as being based on principles means that the standards that are propagated by system establishes broad rules and also go as far as dictating the specific treatments to be used (Pounder, 2009). The components of IFRS are inclusive of: International Financial Reporting Standards (IFRS) that were formally released after 2001.
The International Accounting Standards (IAS) that were released prior to 2001; Interpretations that originated from International Financial Reporting Interpretations Committee that was released after 2001; the Standings Interpretations Committee (SIC) that was released before 2001 and the Framework for Preparations and Presentation of Financial Statements that was released in the year 1989. The financial statements that are recognized under the IFRS are inclusive of: a financial position statement; a comprehensive income statement; changes in equity statement and a cash flow statement.
On the other hand, Generally Accepted Accounting Principles (GAAP) includes the conventions, standards and rules that are followed by accountants in recording and summarizing financial transactions and in the preparation of financial statements. GAAP is never a single rule in accounting but it is a combination of several rules on how various financial transactions ought to be accounted for. The principles that are collectively put under the GAAP as a guideline for recording accounting transactions are inclusive of the principle of consistency, regularity, sincerity, performance of methods, periodicity, prudence, utmost good faith, non-compensation and materiality (Wiecek, 2009).
Convergence of the GAAP and the IFRS simply implies the process through which development of a common set of high standards of accounting principles that are global is successfully completed. As a matter of fact, it is through convergence that accounting standards can be developed to incorporate both the strong points of GAAP and IFRS so that global accounting standards are developed.
Analyze how convergence will affect public companies, accounting firms, and small and medium companies
Many investors and creditors can be able to utilize financial statements in the most effective manner possible. Investors and creditors can be able to make analysis and comparison of investment opportunities in the global scene. As a result of this, companies that are located at any point in the world are easily accessible to investment opportunities from any point in the globe since the uniform mode of accounting allows for understanding of a company's financial position with very much ease (Bazley, 2009). In a nutshell, companies from all spheres of the globe become almost equally competitive in the market for investors due to the uniform standards of reporting financial position.
Convergence also means that many people all over the globe would be carrying out the audit or even putting into application IFRS. By having many people involved in something it means that the helping hands also increase proportionally. In regard to this fact, by helping out in the audit of IFRS, it means that more and more scrutiny is done to the accounting firms so as to sense any slightest disorder in the running of the system. Although the primary role of this is to ensure that the IFRS runs smoothly, the accounting firms also get to have a better operation since they would perfect their operational effectiveness due to more scrutiny.
Finally, by having a global standard of reporting both small and large companies in the globe are posed to have a similar reporting method. This would mean that they would be forced into having their operations targeted towards ensuring that their staff is educated and more informed on the new accounting standards (Wiecek, 2009). The effectiveness of this would ensure that the company remains most competitive in the global market in comparison to the other companies.
Evaluate at least 3 significant differences and similarities between IFRS and GAAP and the impact these 3 similarities and differences can have on financial statements
There are several similarities and differences between GAAP and IFRS and some of them have been critically discussed in the part below. Under both cases, the financial statements that are used are inclusive of a balance sheet, an income statement and the statement that deals with the incomes and expenses that are non-operating. Another similarity is that both standards require that the financial statements are prepared using the accrual basis and not the cash basis. Incases that deal with inventory it is very open that both system in IFRS and GAAP employ the usage of cost as the main accounting principle. Key differences on the other hand are in the costing method used. In GAAP, LIFO (last in first out) is an accepted method of costing while it is not accepted in IFRS.
In GAAP inventory is usually valued at market cost or at lower cost while on the other hand, in IFRS, inventory can be prized at the net realizable cost (Bazley, 2009). Under predetermined circumstances, inventories can be written down in IFRS while under GAAP, inventories cannot be written down. The impact that the differences will be having on the financial statements would lead to very serious misunderstanding sin the interpretation of the costs of inventory. On the other hand, the similarities play a very crucial role in ensuring that the two principles are utilized in a smooth manner. Generally speaking, the differences would be a great challenge during the implementation of the convergence of the GAAP and IFRS the differences ought to be harmonized into one line of thought while the similarities play a crucial role in leading to the harmonious implementation of the global system.
Recommend 3 ways companies can prepare for IFRS and GAAP convergence
In preparing for the convergence of International Financial Reporting Standards and Generally Accepted Accounting Principles (GAAP), it is very important that companies have well drafted means of adopting the system in their operations in a manner that is not interruptive with the normal schedule of operations. The very first step that the company ought to take in an effort to prepare for the convergence is by having the latest news on the developments that have been achieved in the course of having the convergence (Wiecek, 2009). Being equipped with this information is very important in ensuring that the company best understands the new system of accounting.
Te other manner that can be used to prepare for the coming of the global system of accounting is by educating and training the accounting department staff members in the company on the developments that have been incorporated in the convergence. This ensures that the proper reporting of accounting information is correctly done. Finally, by having the whole company changes its basic operating principles so as to provide room for accommodating changes that may be brought about by the convergence is a good way to prepare.
Evaluate 3 potential risks of IFRS and GAAP convergence
Education of people in regard to the convergence of the Generally Accepted Accounting Principles and the International Financial Reporting Standards could be a real challenge to the accounting profession. The situation presented with where so many organizations and companies providing information using the converged GAAP and IFRS, it is very obvious that new information could be mandatory for accountants and companies to have. The new knowledge may prove to be a very precious item which cold pave way for very expensive modes of learning. In the end, people would use too much to get the new knowledge.
The convergence of the two systems of accounting could as well result into very open and accounting systems which would promote globalizations of companies. The meaning of this is basically that the new and small companies that are found within the boarders of their mother country only could be highly challenged in the market by the new multinationals corporations whose movement across the globe would not be easily stopped (Wiecek, 2009). By having a global accounting system, the large companies are in a position to spread their investment opportunities to countries all over the globe. This is a potentially risky move that could see most for the upcoming small companies shatter apart since they can not withstand the tight competition for investors.
Finally by having the International Financial Reporting Standards and the Generally accepted Accounting Principles integrated into a single item would mean that the governing body for accounting would also be forced to be compressed into a single authority. This is a huge potential fro destruction in the overall management for the accounting principles. By having the management body as a single entity with no other source of challenge very high chances is available for the accounting field to be fraud. This is due to the fact that a single source of authority plays a big role in ensuring that the accounting sector develops without a major source of challenge. With such a situation, the accounting principles may lack sharpness and thoroughness in their development as time goes by in the future since no direct channel of challenge is available.