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The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally.Convergence in some form has been taking place for several decades, and efforts today include projects that aim to reduce the differences between accounting standards.
Convergence is driven by several factors, including the belief that having a single set of accounting requirements would increase the comparability of different entities' accounting numbers, which will contribute to the flow of international investment and benefit a variety of stakeholders.Criticisms of convergence include its cost and pace, and the idea that the link between convergence and comparability may not be strong.
The international convergence of accounting standards refers to the goal of establishing a single set of high-quality accounting standards to be used internationally, and the efforts of standard-setters towards achieving that goal.Convergence is taking place in various countries, with over 100 countries having made public commitments supporting convergence towards the International Financial Reporting Standards (IFRS). Efforts towards convergence include projects that aim to improve the respective accounting standards, and those that aim to reduce the differences between them.
In the European Union (EU), the European parliament passed a regulation in July 2002 requiring companies listed in EU based stock exchanges to prepare their consolidated financial statements in accordance with the IFRS from 2005.Countries within the EU were allowed to make IFRS adoption optional for unlisted companies and for unconsolidated holding company financial statements, and were allowed to make several exceptions to IFRS adoption in 2005, for example for companies whose only listed securities were debt securities.
In the United Kingdom, the IFRS was adopted beginning 2005, and, as of 2011, public companies are required to use the IFRS for their consolidated accounts. Other companies are also allowed to use the IFRS, but most have chosen not to do so, and continue to use the UK accounting standards largely developed prior to 2005. Companies deemed small under the UK Companies Act are allowed to use the Financial Reporting Standard for Smaller Entities (FRSSE).
For medium-sized entities that are not public companies, the Accounting Standards Board has proposed replacing the UK's generally accepted accounting principles (UK GAAP) with the Financial Reporting Standard for Medium-sized Entities (FRSME), which is based on the IFRS for Small and Medium-sized Entities.
In the United States, the Financial Accounting Standards Board (FASB) is working with the International Accounting Standards Board (IASB) to reduce or eliminate the differences between United States Generally Accepted Accounting Principles (US GAAP) and the IFRS,in particular according to the convergence programme laid out by a 2006 memorandum of understanding, which was updated in 2008.
Short-term projects towards convergence between US GAAP and the IFRS involve the amendment of one of the boards' standards to better align them with the other board's, jointly issuing new standards. Some short-term projects and the corresponding actions taken are listed below.
An update to the memorandum of understanding in 2008 introduced long-term convergence projects, including the following.
In a joint report published in 2012, the IASB and FASB stated that most of the short-term projects outlined in the memorandum of understanding had been completed, and that greater priority was now being placed on long-term projects.
Motivations for convergence include the belief that it will result in increased comparability between financial statements, which will benefit a variety of stakeholders. For example, the FASB believes that "investors, companies, auditors, and other participants in the U.S. financial reporting system" will benefit from converged standards because it will result in increased comparability between the financial statements of different firms.
A 2008 report by PricewaterhouseCoopers (PwC) stated that convergence of accounting standards would contribute to the flow of international investment and benefit "all capital markets stakeholders" because it:
Additionally, a survey conducted by the International Federation of Accountants found that 89% of accounting profession leaders who responded expressed that convergence was either very important or important for economic growth for their respective countries.
The goal of and various proposed steps to achieve convergence of accounting standards has been criticised by various individuals and organizations. For example, in 2006 senior partners at PricewaterhouseCoopers (PwC) called for convergence to be "shelved indefinitely" in a draft paper, calling for the IASB to focus instead on improving its own set of standards.
In particular, Shyam Sunder of the Yale School of Management has called the link between convergence and comparability "overblown",while the cost and pace of adoption have been cited as the most common criticism of the SEC's 2008 convergence roadmap, which set milestones that potentially lead to mandatory adoption of IFRS in 2014.
Other criticisms center around the nature of the converged standards. For example, some critics are concerned that convergence will increase the use of fair value accounting.
Other critics have also respectively cited shortcomings with rules-based and principles-based standards as reasons. Principles-based standards allow for "different interpretations for similar transactions",and have also been described as "less precise", while rules-based standards contain more exceptions and use bright-line rules and specific details to deal with "as many potential contingencies as possible". The above-mentioned PwC senior partners expressed that convergence will lead to an accounting system that is too rules-based for non-US listed companies, while other critics conversely criticize the principles-based nature of the IFRS as making it difficult for preparers of financial statements to defend against litigation.
The idea of convergence has roots in the 1950s, and was a response to greater economic integration and international capital flows after World War II . Before the 1990s, convergence took the form of harmonization, the reduction of differences between the various accounting standards used internationally.
At the 8th International Congress of Accountants hosted by the American Institute of Certified Public Accountants in 1962, many participants expressed the need for the development of accounting standards on an international basis; in the same year the AICPA reactivated the Committee on International Relations, that aimed to improve cooperation among accountants globally.
The International Accounting Standards Committee (IASC), the predecessor to the International Accounting Standards Board (IASB) was established in 1973 with the goal of developing accounting standards and promoting them internationally; by 1987 the IASC had issued 25 standards, and by the late 1980s there was "worldwide interest" in the need for convergence.
In 1991 the FASB formally set out the goal of developing an internationally used set of accounting standards, and in subsequent years the FASB and IASC undertook various projects to lay the groundwork for convergence. In 1996, the National Securities Markets Improvement Act became law; the act expressed support for convergence efforts and required the SEC to report to congress on progress towards convergence.
The IASC was reconstituted into the IASB in 2001,and the FASB and IASB began working towards convergence in 2002, expressing their commitment to convergence in the Norwalk agreement and pledging to make their respective standards "compatible as soon as is practicable" and to maintain compatibility by coordinating future programs. In the European Union (EU), the European parliament passed a regulation in July 2002 requiring companies listed in the EU to prepare their consolidated financial statements in accordance with the IFRS from 2005.
The IASB and FASB signed a memorandum of understanding in 2006 which laid guidelines on their convergence projects and set short-term goals such as to issue converged standards on business combinations by 2008.Work towards the goals were reviewed in 2008, and a progress report published that also set out subsequent steps for each convergence topic. The FASB and IASB met again in 2009 and agreed to "intensify their efforts" in working towards the goals of the memorandum of understanding, while laying down future plans and targets.
Convergence between the IFRS and US GAAP appeared to stall in 2012, with the IASB suggesting that it would no longer seek to converge with the US GAAP.In 2013, fifteen of the largest banks in the United States, including Bank of America Corporation, Capital One Financial Corporation, Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Company, wrote a letter to the chairmen of FASB and the IASB encouraging the boards to resolve their differences over the accounting standards for credit losses.
By 2013, over 100 jurisdictions required the use of IFRS for all or most publicly accountable entities in their capital markets, and 115 jurisdictions had made public commitments supporting the convergence of accounting standards.
Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "language of business", measures the results of an organization's economic activities and conveys this information to a variety of users, including investors, creditors, management, and regulators. Practitioners of accounting are known as accountants. The terms "accounting" and "financial reporting" are often used as synonyms.
International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company’s financial performance and position so that company financial statements are understandable and comparable across international boundaries. They are particularly relevant for companies with shares or securities listed on a public stock exchange.
Financial statements are formal records of the financial activities and position of a business, person, or other entity.
In accounting, an economic item's historical cost is the original nominal monetary value of that item. Historical cost accounting involves reporting assets and liabilities at their historical costs, which are not updated for changes in the items' values. Consequently, the amounts reported for these balance sheet items often differ from their current economic or market values.
The American Institute of Certified Public Accountants (AICPA) is the national professional organization of Certified Public Accountants (CPAs) in the United States, with more than 418,000 members in 143 countries in business and industry, public practice, government, education, student affiliates and international associates. Founded in 1887, the organization sets ethical standards for the profession and U.S. auditing standards for audits of private companies, non-profit organizations, federal, state and local governments. It also develops and grades the Uniform CPA Examination. The AICPA maintains offices in New York City; Washington, DC; Durham, NC; and Ewing, NJ.
The Financial Accounting Standards Board (FASB) is a private, non-profit organization standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the US. The FASB replaced the American Institute of Certified Public Accountants' (AICPA) Accounting Principles Board (APB) on July 1, 1973.
The International Accounting Standards Committee (IASC) was founded in June 1973 in London at the initiative of Sir Henry Benson, former president of the Institute of Chartered Accountants in England and Wales. The IASC was created by national accountancy bodies from a number of countries with a view to harmonizing the international diversity of company reporting practices. Between its founding in 1973 and its dissolution in 2001, it developed a set of International Accounting Standards (IAS) that gradually acquired a degree of acceptance in countries around the world. Although the IASC came to include some organizations representing preparers and users of financial statements, it largely remained an initiative of the accountancy profession. On 1 April 2001, it was replaced by the International Accounting Standards Board (IASB), an independent standard-setting body. The IASB adopted the extant corpus of IAS which it continued to develop as International Financial Reporting Standards.
Generally Accepted Accounting Principles is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the latter differ considerably from GAAP and progress has been slow and uncertain. More recently, the SEC has acknowledged that there is no longer a push to move more U.S companies to IFRS so the two sets of standards will "continue to coexist" for the foreseeable future.
Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on the cash method of accounting which can often be simple and straight forward. Larger firms most often operate on an accrual basis. Accrual basis is one of the fundamental accounting assumptions and if it is followed by the company while preparing the Financial statements then no further disclosure is required. Accounting standards prescribe in considerable detail what accruals must be made, how the financial statements are to be presented, and what additional disclosures are required.
Materiality is a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in conformity with an identified financial reporting framework such as Generally Accepted Accounting Principles (GAAP).
The New Zealand Institute of Chartered Accountants (NZICA) was the operating name for the Institute of Chartered Accountants of New Zealand. The Institute represented over 33,000 members in New Zealand and overseas. Most accountants in New Zealand belonged to the institute.
The International Accounting Standards Board (IASB) is the independent, accounting standard-setting body of the IFRS Foundation.
Constant purchasing power accounting (CPPA) is an accounting model approved by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) as an alternative to traditional historical cost accounting under hyper-inflationary environments and all other economic environments. Under this IFRS and US GAAP authorized system, financial capital maintenance is always measured in units of constant purchasing power (CPP) in terms of a Daily CPI during low inflation, high inflation, hyperinflation and deflation; i.e., during all possible economic environments. During all economic environments it can also be measured in a monetized daily indexed unit of account or in terms of a daily relatively stable foreign currency parallel rate, particularly during hyperinflation when a government refuses to publish CPI data.
Norwalk Agreement refers to a Memorandum of Understanding signed in September 2002 between the Financial Accounting Standards Board (FASB), the US standard setter, and the International Accounting Standards Board (IASB). The agreement is so called as it was reached in Norwalk.
An impairment cost must be included under expenses when the book value of an asset exceeds the recoverable amount. Impairment of assets is the diminishing in quality, strength amount, or value of an asset. Fixed assets, commonly known as PPE, refers to long-lived assets such as buildings, land, machinery, and equipment; these assets are the most likely to experience impairment, which may be caused by several factors.
The International Financial Reporting Standards Foundation, or IFRS Foundation, is a nonprofit accounting organisation. Its main objectives include the development and promotion of the International Financial Reporting Standards through the International Accounting Standards Board (IASB), which it oversees.
International Financial Reporting Standard 1: First-time Adoption of International Financial Reporting Standards or IFRS 1 is an international financial reporting standard issued by the International Accounting Standards Board (IASB). It sets out requirements on the preparation and presentation of financial statements and interim financial reports by entities that are adopting the IFRS for the first time, to ensure that they contain high-quality information.
IFRS 9 is an International Financial Reporting Standard (IFRS) published by the International Accounting Standards Board (IASB). It addresses the accounting for financial instruments. It contains three main topics: classification and measurement of financial instruments, impairment of financial assets and hedge accounting. The standard came into force on 1 January 2018, replacing the earlier IFRS for financial instruments, IAS 39.
IFRS 15 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB) providing guidance on accounting for revenue from contracts with customers. It was adopted in 2014 and became effective in January 2018. It was the subject of a joint project with the Financial Accounting Standards Board (FASB), which issues accounting guidance in the United States, and the guidance is substantially similar between the two boards.
IFRS 16 is an International Financial Reporting Standard (IFRS) promulgated by the International Accounting Standards Board (IASB) providing guidance on accounting for leases. IFRS 16 was issued in January 2016 and is effective for most companies that report under IFRS since 1 January 2019. Upon becoming effective, it replaced the earlier leasing standard, IAS 17.