Convergence of US GAAP and IFRS Essay

The Norwalk Agreement refers to a Memorandum of correspondence (MOU) which was signed in September of 2002 in Norwalk, Connecticut between the get together States financial explanation Standards Board (FASB) and the transnational key out Standard Boards (IASB) The MOU was an arrangement between the two organization to, use their best efforts to (a) start out their live monetary insurance coverage standards fully compatible as soon as is practic fitting and (b) to coordinate their afterlife work programs to ensure that once achieved, compatibility is maintained. The sure agreement c aloneed for all differences between US generally accepted be principles (Generally Accepted accountancy Principles) and IFRS (International Financial Reporting System to be eliminated by January 1, 2005, but problems speedily surfaced in this approach and according the US Securities and Exchange Commission (SEC) currently has a timeline of 2016 for all US corporations to adopt the IFRS. B efore discussing what the effect of these changes ar on US Corporations, one must first perceive the history of both the FASB/US generally accepted accounting principles and the IASB/IFRS.The Financial Accounting Standards Board was complete by the SEC in 1973 to take over the role of establishing standards for financial bill from the American Institute of Certified Public Accountants (AICPA)s Accounting Principles Board (APB). The US generally accepted accounting principles ar score rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly-traded and in camera-held companies, non-profit organizations, and governments. The US Government does non directly set accounting standards, instead believing that the private celestial sphere has a better ability to set these rules. The US GAAP is not formally written into law, but is instead codified into the FASB Accounting Standards codification and the Hierarchy of Generall y Accepted Accounting Principles.The FASB has four major types of publications it uses to make changes to the US GAAP 1. Statements of Financial Accounting Standards the most authoritative US GAAP setting publications. 2. Statements of Financial Accounting Concepts Part of the FASBs abstract framework project, these are fundamental objective and concepts that the FASB go forth use in developing future standards. They are not a part of the US GAAP, but instead represent future goals of the GAAP. 3. Interpretations Interpretations modify or affix existing standards and are a part of the US GAAP. There are currently 48 interpretations available 4. Technical Bulletins These are guidelines on applying standards, interpretations, and opinions. They usually solve a very specific accounting issue that does not clear a significant, long-lasting effect.The International Accounting Standards Board (IASB) is an independent, privately funded organization founded in London, England on April 1, 2001 with the stated objective to develop a single set of high quality, understandable, enforceable, and globally accepted financial reporting standards based upon clearly articulated principles. To achieve these objectives the IASB has veritable the International Financial Reporting Standards (IFRSs) and aggressively promoting the use of these standards. As of today over great hundred countries either require or permit the use of IFRSs and all members of the G20 assume established time lines to adopt the IFRSs in the near future (including the united States.) The IFRSs consist of the standards, interpretations, and frameworks issued by the IASB, and take on some(prenominal) of the standards formerly known as International Accounting Standards (IAS) which were issued by the now defunct International Accounting Standards Committee (IASC) which existed from 1973 until 2001.The IFRSs are principle based standards (as opposed to the US GAAP which uses rules-based standards) th at establish broad rules but generally leave specific treatments undefended to some interpretation. IFRSs consist of 1. International Financial Reporting Standards (IFRS) All standards issued aft(prenominal) the IASB was founded in 2001. 2. International Accounting Standards (IAS) Standard issues by the IASC prior to 2001. 3. Interpretations from the International Financial Reporting Interpretations Committee (IFRIC) Interpretations issued after 2001. 4. Standing Interpretations Committee (SIC) Interpretations issued ahead 2001. 5. Framework for the Preparations and Presentations of Financial Statements A statement of the basic principles of the IFRSs.The framework serves as a guide to resolving accounting issues not specifically address in a standard. Having established the backgrounds of the major players to the Norwalk Agreement it is important to understand how this convergence project volition affect US Corporations in their future financial reporting as the FASB / SEC begins their push towards full integrating by the year 2016. As converged standards are introduced, many US Corporations will see major changes in all areas of their business activities ranging from financial statements to leasing to employee benefits and although cover all these changes is beyond the scope of this paper, we will present some of the more than important changes. The largest major difference between the two regulations is in their scope, and direct of guidance for companies in the area of revenue enhancement recognition.The US GAAP has developed detailed guidance for many different industries incorporating standards suggested by a gang of accounting standards organizations in those specific industries. The IFRS, on the other hand, mentions two standards for revenue recognition for guidance and allows companies to determine which order they will use. Another major change for US Companies is in the area of inventory costing. Under US GAAP, companies may choose b etween using last in first out (Last-In-First-Out), FIFO (First-In-First-Out), or a variety of other inventory valuation methods, in accounting for cost of goods held in inventory. Once the switch is made to IFRS, the use of LIFO for inventory valuation will be prohibited so that all companies will be similar cost formulas. Several additional changes include1. The option to classify expenses based on either execute or nature under IFRS vs. the requirement to classify expenses based on function only under US GAAP. 2. The requirement to present noncontrolling (minority) worry as a component of equity on the balance tag end under IFRS vs. the requirement under US GAAP to present noncontrolling disport outside of equity. 3. The ability to use either the proportionate consolidation method or the equity method of accounting for joint venture accounting under IFRS vs. the current requirement to use the equity method of accounting 4. IFRS will allow followup of assets for several diffe rent classes of assets, even requiring their revaluation on a regular basis whereas currently US GAAP does not permit revaluation under any circumstance.5. Under IFRS, denote and promotional cost will have to be expensed as incurred vs. the US GAAP which allows for costs to either be expensed as they are incurred, or expense when the advertising takes place for the first time, leaving the choice up to the individual company. While these changes are just a few of the changes which will impact companys financial statements there are many changes coming which fall in areas outside financial statements. Nowhere is this clearer than in the area of US regulatory laws. As an article in the environ track Journal, Closing the Information GAAP, notes that, If an accounting and reporting framework that relies on professional judgment rather than detailed rules is to flourish in the U.S., the sub judice and regulatory environment will need to evolve in ship canal that remain to be seen.They suggest that laws in the US will have to move to accept more ambiguity in accounting, and that the change to IFRS could perhaps provide new defenses to executives and accountants who try to do the right thing. A last change noted by both the PriceWaterhouseCoopers and Accenture case studies, is the updating, sometimes at a very high cost, of companies Accounting Information Systems to be able to collect, store, and analysis financial data in ways that will be with the new IFRS standards. These two studies both believe that this activity will be the most painful and difficult for the majority of US companies to comply with. 1 . FASB. FASB Financial Accounting Standards Board. Norwalk Agreement. Accessed June 29, 2010. . 2 . SEC. SEC Proposes Roadmap Toward Global Accounting Standards to suspensor Investors Compare Financial Information More Easily. Accessed June 29, 2010. http//www.sec.gov/news/press/2008/2008-184.htm 3 . FASB. FASB Facts about FASB. Accessed July 03, 2010. 4 . IFRS mental hospital. Who we are and what we do. Published July 2010 5 . IASB. About the IFRS Foundation and the IASB. Accessed July 02 2010. 6 . IAS Plus. Summaries of International Financial Reporting Standards. Accessed July 03 2010. 7 . PriceWaterhouseCoopers. IFRS and US GAAP similarities and differences. September 2009. From the IFRS Readiness Series. 8 . Accenture. Preparing for International Financial Reporting Standards An fortune for Finance Transformation. 9 . Ernst & Young. US GAAP vs. IFRS The Basics. January 2009. 10 . The Wall Street Journal. Closing the Information GAAP. Accessed July 20 2010.