This paper explores the ongoing convergence process between International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP), tracing the history of collaborative efforts between the FASB and IASB since 2002. It identifies four major outstanding areas of disagreement — revenue recognition, leases, financial instruments, and insurance — and discusses the formation of the Accounting Standards Advisory Forum (ASAF) as a mechanism to broaden international participation. The paper also examines the specific implications for Australia, noting that the country has largely aligned with IFRS for publicly traded reporting entities, while non-profits and public sector entities still face outstanding compliance questions.
International Financial Reporting Standards (IFRS) are becoming the global standard for financial accounting. To accomplish this, convergence between IFRS and other national accounting standards is necessary. Many nations have their own Generally Accepted Accounting Principles (GAAP). It is widely understood that when 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).
U.S. GAAP are set by the Financial Accounting Standards Board (FASB). Since 2002, the FASB and the International Accounting Standards Board (IASB) have been working on the convergence process, reviewing the two sets of accounting standards individually to determine how they can be reconciled (IFRS, 2013). The latest updates on the convergence process were released in 2013, along with a timeline to address the remaining issues. Other bodies — primarily in Commonwealth countries — are closely monitoring the convergence process and considering how it will affect their own adoption timelines.
The convergence process is taking longer than originally anticipated because there are significant differences on many individual issues that are difficult to reconcile. By 2013, the process had reached a point where it appeared that multiple sets of standards may need to coexist for the foreseeable future until the final outstanding issues are resolved.
One notable 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 body includes members from countries that do not currently use IFRS, including Australia, Canada, Japan, China, and South Africa. The ASAF will meet regularly to help guide the final stages of international convergence (IFRS Foundation, 2014).
There are four outstanding areas causing the most difficulty in the convergence process: revenue recognition, leases, financial instruments, and insurance. A process is being developed to address each of these issues in turn. Revenue recognition in particular has been a significant challenge for policymakers. There are substantial conceptual differences between IFRS and U.S. GAAP on this issue, and the new unified system may need to simply adopt one approach 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, a situation that may harm small business growth opportunities (Hail, Leuz & Wysocki, 2010).
Further research has identified additional concerns about IFRS that are of interest to U.S. regulators, particularly the Securities and Exchange Commission (SEC). There is concern that IFRS produces 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 raise questions in the United States about the reliability of financial statements prepared under IFRS (Pologeorgis, 2013).
"Australia's IFRS alignment status and next steps"
The end of the convergence process will effectively establish IFRS as the de facto global standard. For Australia, which has already achieved a high level of alignment with IFRS for publicly traded reporting entities, the primary task is to monitor ongoing developments and make incremental adjustments as the final convergence issues — particularly revenue recognition, leases, financial instruments, and insurance — are resolved between the FASB and the IASB. Australia's participation in the ASAF ensures it will have a voice in shaping the outcome of that process.
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