Convergence of US GAAP and IFRS Essay

The Norwalk Agreement refers to a Memorandum of Understanding (MOU) which was write in kinsfolk of 2002 in Norwalk, Connecticut betwixt the United States fiscal Accounting Standards gore (FASB) and the world-wide Accounting Standard Boards (IASB) The MOU was an stipulation between the two face to, use their best efforts to (a) make their be fiscal reporting standards fully compatible as soon as is viable and (b) to coordinate their future work programs to ensure that once achieved, compatibility is maintained. The original agreement c everyed for all differences between US generally accepted chronicle principles (Generally Accepted Accounting Principles) and IFRS (International monetary insurance coverage System to be eliminated by January 1, 2005, that when problems quickly surfaced in this approach and according the US Securities and Ex alteration Commission (SEC) currently has a timeline of 2016 for all US corporations to adopt the IFRS. Before discussing what the effect of these varys are on US Corporations, one must first at a lower placestand the history of twain the FASB/US generally accepted accounting principles and the IASB/IFRS.The monetary Accounting Standards Board was complete by the SEC in 1973 to take over the role of pull ining standards for financial story from the American Institute of Certified Public Accountants (AICPA)s Accounting Principles Board (APB). The US GAAP are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly-traded and privately-held companies, non-profit organizations, and governments. The US Government does non outright set accounting standards, instead believing that the private sector 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 pecking order of Generally Accepted Accounting Principles.The FASB has four m ajor types of publications it uses to make changes to the US GAAP 1. Statements of pecuniary Accounting Standards the nigh authoritative US GAAP setting publications. 2. Statements of Financial Accounting Concepts Part of the FASBs conceptual mannequin project, these are fundamental objective and concepts that the FASB tolerate 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 extend 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 turn a very specific accounting issue that does not slang 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 sensation set of high quality, chthonianstandable, enforceable, and globally accepted financial reporting standards establish upon clearly articulated principles. To achieve these objectives the IASB has developed the International Financial Reporting Standards (IFRSs) and aggressively promoting the use of these standards. As of today over 120 countries all require or permit the use of IFRSs and all members of the G20 have established time lines to adopt the IFRSs in the near future (including the United States.) The IFRSs represent of the standards, interpretations, and frameworks issued by the IASB, and include many of the standards formerly known as International Accounting Standards (IAS) which were issued by the now defunct International Accounting Standards delegacy (IASC) which existed from 1973 until 2001.The IFRSs are principle based standards (as opposed to the US GAAP which uses rules-based standards) that establish broad rules but generally leave specific treatments open to nigh interpretation. IFRSs consist of 1. International Financial Reporting Standards (IFRS) All standards issued after 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 before 2001. 5. fashion model 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 addressed in a standard. Having established the backgrounds of the major players to the Norwalk Agreement it is master(prenominal) to understand how this crossroad project forget affect US Corporations in their future financial reporting as the FASB / SEC begins their push towards full integration by the year 2016. As co nverged standards are introduced, many US Corporations will disclose major changes in all neighborhoods of their business activities ranging from financial statements to leasing to employee benefits and although covering all these changes is beyond the scope of this paper, we will present some of the more important changes. The largest major difference between the two regulations is in their scope, and level of counseling for companies in the area of revenue light.The US GAAP has developed critical guidance for many different industries incorporating standards suggested by a multitude 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 method they will use. Another major change for US Companies is in the area of stocktaking existing. Under US GAAP, companies may choose between using LIFO (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 pick to classify write downs based on either function or spirit under IFRS vs. the requirement to classify expenses based on function only under US GAAP. 2. The requirement to present noncontrolling (minority) interest as a component of equity on the balance sheet under IFRS vs. the requirement under US GAAP to present noncontrolling interest exterior 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 revaluation of assets for several different 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, advertising 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 man-to-man company. While these changes are just a few of the changes which will force companys financial statements there are many changes climax which fall in areas outside financial statements. Nowhere is this clearer than in the area of US regulatory laws. As an article in the Wall road Journal, Closing the Information GAAP, notes that, If an accounting and reporting framework that relies on sea captain judgment rather than detailed rules is to flourish in the U.S., the legal and regulatory environment will need to evolve in ways that breathe to be seen.They suggest that laws in the US will have to come to to accept more ambiguity in a ccounting, and that the change to IFRS could possibly provide in the raw defenses to executives and accountants who try to do the right thing. A final 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 summary financial data in ways that will comply 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 Help Investors differentiate Financial Information More Easily. Accessed June 29, 2010. < http//www.sec.gov/news/press/2008/2008-184.htm> 3 . FASB. FASB Facts rough FASB. Accessed July 03, 2010. 4 . IFRS Foundation. 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 Opportunity for finance Transformation. 9 . Ernst & Young. US GAAP vs. IFRS The Basics. January 2009. 10 . The Wall bridle-path Journal. Closing the Information GAAP. Accessed July 20 2010.