October 25, 2007
Date: October 25, 2007
To: Whomever it May Concern
From: Ms. Ashley Walker
Subject: Accounting Harmonization
Convergence of IFRS and U.S. GAAP is an important project which has not yet come to its final conclusion. As the world becomes more global so should the policies and standards that govern the businesses and their practices. Numerous professional accounting organizations, national and international, have worked together to try and establish a conceptual framework that would provide consistency and comparability. An international conceptual framework would establish accounting and auditing standards that benefits all parties involved worldwide. This is still a fairly new project for the International Federation of Accountants but the need for a certain degree of accounting uniformity is becoming more and more apparent in businesses all over the world. With the help of a united, global accounting system, companies can begin to compare financial statements with greater assurance and verifiability for current and potential investors and creditors. This will allow greater insight into the accuracy of financial reporting for all stakeholders.
Many companies today are moving towards a more united or harmonized accounting system. International accounting harmonization does not mean complete standardization of different accounting practices. Harmonization recognizes national differences in accounting systems and attempts to reconcile the differences to attain an acceptable degree of uniformity. To ensure that different countries can provide useful, reliable, and comparable financial information, various international, regional, and professional bodies have made substantial efforts to harmonize accounting standards across countries (Yu, 1999, p. 248). While some analysts and accountants see the need for uniformity and consistency through accounting harmonization, others see it as a way to reduce the comparability issues by decreasing the available accounting alternatives.
By implementing new policies and procedures, a number of countries have started to take greater strides towards accounting harmonization. For example, the European Union, consisting of 25 members and over 7, 000 publicly traded companies, required adoption of the IFRS standards in 2005. In preparing for this drastic change, the IASB completed its stable platform of standards in March 2004. New and revised standards included five new International Financial Reporting Standards and 17 amended International Accounting Standards (Thetford, 2005). So the question remains: Is harmonization of international accounting standards actually occurring? Researchers analyses say yes. Because of the positive results from many international stock exchanges, International Accounting Standards are now being accepted by global stock markets from numerous foreign registrants. Those include the stock markets in Australia, London, Germany, Hong Kong, Kuala Lumpur, Paris, Singapore, and Zurich (Larson and Kenny, 1999). Most countries are advocates for the convergence from domestic standards to the international standards, so much so, that supplementary disclosures and footnotes are not required. However, foreign nations are not the only ones dealing with the challenge of accounting convergence issues the US has many conformity concerns of its own.
In 2002, the FASB embarked on a project to eliminate major differences between IFRS and U.S. GAAP. In order to resolve the major differences, the FASB and the International Accounting Standards Board decided to issue, The Norwalk Agreement. The Norwalk Agreement, more commonly referred to as the Convergence Project, has marked a significant step towards formalizing FASBs commitment to the convergence of U.S. and international accounting standards (the official FASB website). Through the agreement, FASB and the IASB pledged to use their best efforts to make their existing financial reporting standards fully compatible as soon as it is practicable and to coordinate their future work programs to ensure that once achieved, compatibility is maintained (Venuti and Jones, 2004). Through the process, FASB has undertaken many projects to further the goal of convergence, such as business combinations, revenue recognition, consolidations, hedging, lease accounting, and comprehensive income just to name a few. The move towards international convergence will not be an easy transition for any entity, but with the help of the FASB and other major accounting standard frameworks the process will hopefully make significant progress in the next few years.
Accounting and auditing standards have traditionally been formulated by national bodies and regulatory agencies. The business environment is no longer a national market it has become a global marketplace. This shift has created a need for the development of international accounting, auditing, and ethical standards. The International Federation of Accountants has formed a standard setting body for global accounting and auditing standards. Many countries, including the United States, are either already reporting their financials based on international standards or are in the process of converging toward international standards. The users of financial statements would benefit from the harmonizing of accounting and auditing standards due to a higher level of comparability resulting in the financial statements being more useful in decision making.
Financial Accounting Standards Board Foundation, Convergence with the International Accounting Standards Board, http://www.fasb.org/intl/convergence_iasb.shtml, April 10, 2007.
Larson, R. and Kenny, S., 1999, Harmonization of International Accounting Standards: Progress in 1990s?, Multinational Business Review, http://findarticles.com/p/articles/mi_qa3674/is_199904/ai_n8841660.
Thetford, S., 2005, Global Accounting Harmonization: A Challenging Change, The Trusted Professional, Vol. 8, No. 6.
Venuti, E. and Jones, R., 2004, Developments in International Standards Setting: Equity-Based Compensation, The CPA Journal, November issue.
Yu, L., 1999, The International Hospitality Business: Management and Operations, Prentice-Hall, Englewood Cliffs, NJ, page 248.