IFRS and GAAP convergence

IFRS

International Financial Reporting Standards (IFRS) are becoming the global standard for financial accounting. To accomplish making them the standard, there needs to be convergence between IFRS and other accounting standards. Many nations have their own generally accepted accounted principles (GAAP). It is understood, however, that when the U.S. GAAP and IFRS achieve convergence, the rest of the world will need to follow, Australia included. Thus, the U.S. GAAP/IFRS convergence process is of considerable interest to Australians as well. For companies operating internationally, the convergence process is relevant for mergers and acquisitions, international stakeholders, and for foreign subsidiaries operating under multiple sets of accounting standards (PWC, 2013).

History of Convergence

The U.S. GAAP are set by the Financial Accounting Standards Board (FASB). Since 2002, the FASB and IASB have been working on the convergence process, going through the two sets of accounting standards individually to determine how they can be converged (IFRS, 2013). The latest updates on the convergence process were released in 2013, along with a timeline to address the remaining issues. Other bodies, in Commonwealth countries mainly, are keeping close watch on the convergence process and thinking about how this convergence will affect their own convergence processes.

Recent Developments

The convergence process is taking longer than originally anticipated, because there are significant differences in many individual issues that are difficult to reconcile. In 2013, the process reached a point where it appears that perhaps multiple sets of standards of going to need to coexist for the foreseeable future until the final issues are hammered out.

One recent development is that in early 2013, the IFRS Foundation created the Accounting Standards Advisory Forum (ASAF) "to broaden the scope of the IASB's collaborative efforts" (FASB, 2014). This board includes members from countries that currently do not use IFRS, including Australia, Canada, Japan, China and South Africa. This board will meet regularly to help guide the final stages of international convergence (IFRS Foundation, 2014).

There are four outstanding areas that are causing the most difficulty in the convergence process. These are revenue recognition, leases, financial instruments, and insurance. There is a process being developed to tackle each of these issues in turn. Revenue recognition in particular has been a challenge for policymakers in recent years. There are significant conceptual differences between IFRS and U.S. GAAP on the issue of revenue recognition, and the new system might need to simply choose one or the other, rather than attempting to integrate both (Wustermann & Kierzek, 2005). It has been noted -- and this is a significant concern -- that while the costs of the proposed convergence will be borne by all U.S. companies, the benefits of IFRS-style revenue recognition will accrue mainly to multinationals, something that harms small business growth opportunities (Hail, Leuz & Wysocki, 2010).

Further research has indicated other issues with IFRS that are of concern to U.S. regulators, in particular to the Securities Exchange Commission. There is concern that IFRS has a higher variance of net income changes, higher change in cash flows and a lower negative correlation between accruals and cash flows, all of which lead to concerns in the United States about the reliability of financial statements produced under IFRS (Pologeorgis, 2013).

Herz (2013) notes that the end of convergence will essentially bring about an era where IFRS is, for the most part, the de facto standard around the world. However, the process has also compelled the IASB to be more responsive to its constituents.