IFRS convergence with US GAAP
There has been a lot of discussion in recent years about the convergence of US GAAP and IFRS. Many believe it is only a matter of time before the two accounting standards merge into one global standard. However, some argue that this will never happen.
This blog post will explore the fundamental difference and provide our thoughts on the matter.
Fundamental differences exist between US GAAP and the accounting rules of other countries. US GAAP consists of rules that are independently created, are considered to be “best practices”, and serve as the basis for litigation. As promulgated by FASB, US GAAP can be copyrighted and must be purchased by users.
Much of the basis for US GAAP is the common-law system modelled after Great Britain. Alternately, numerous other countries model accounting standards on civil law in which the standards are incorporated into a code of law and are freely distributed. Code law is created by the government and is enforced through governmental penalties.
FASB’s codification of accounting standards into a single code notwithstanding, US GAAP is common law and is considered by some to be the superior method of standardizing accounting rules.
Under common law, standard setters can change the standards with oversight by governmental agencies without the time-consuming and political inconsistencies attributed to code law-based standards.
Shareholders exact common law penalties in the form of litigation. Common law-based standards are considered to be more transparent, are revised in a more timely manner and are more market-oriented.
On the other hand, code law standards require a change in the law to change the standard.
Considering that IFRS governs the accounting standards of numerous countries with different accounting laws, it would seem likely that complete convergence is impossible. “Carve-outs”, or arbitrary changes to the standards, seem inevitable.
The idea that US GAAP and IFRS will ultimately converge and that all users will report under identical standards seems somewhat idealistic.
Even though both sets of standards are based on familiar concepts, key differences prevent full convergence. The US GAAP is more rules-based, while IFRS is principles-based.
This means that US GAAP is more detailed and specific, providing step-by-step instructions on how to account for certain transactions. On the other hand, IFRSs are general statements that leave room for interpretation.
While this gives preparers more flexibility and creates more opportunities for errors, as a result, some believe that complete convergence is impossible without making one set of accounting standards more like the other.
What do you think? Will US GAAP and IFRS ever fully converge? Or are these two fundamentally different ways of looking at financial reporting?
Whether the two converge or not, having a firm understanding of both will give you a competitive edge in the job market. With Eduyush courses, you can learn at your own pace and get certified quickly and easily. So why wait? Get started today!