Convergence of Accounting Standards

 

Introducing

The establishment of a single set of international standards that can be used globally and, particularly, for reducing the difference between the (IFRS) International Financial Reporting Standards and (US GAAP) US General Accepted Accounting Principles is what is mainly termed as convergence of accounting standards. For some decades, convergence has been taking place, and currently projects and major efforts are being made that mainly aim at reducing differences in the accounting standards.

Several factors affect convergence, which include the notion that a single set of accounting requirements would aid in the comparability of different entities, mainly in their accounting numbers, which would provide an additional set of benefits to various stakeholders, especially in terms of international investments. Criticism of convergence involves its pace and cost and questioning if the link between comparability and convergence may be strong (Hail, Leuz and Wysocki 355).

Relevance of Global Convergence of Accounting Standards

Several organizations and standard setting bodies are actively involved in the convergence of accounting standards. The main reasons behind this process include the following considerations.

First, the rapid internalization of versatile companies and international trade growth, new technologies and communication development, and the occasional emergence of international competitive forces, which perturb the financial environment immensely under global scenarios of business, put the global business community under urgent need of an accounting language that is common internationally. A globally shared financial reporting system is a prerequisite for present and prospective, foreign and local investors, accounting standards convergence could help achieve such a required shared knowledge. With the above understanding, it is clear that overseas investors often want to maintain a track of their securities issuers, and convergence of financial and accounting standards is the only way this knowledge can be achieved since it helps establish a common language that can be used globally (Daske 3).

Secondly, currently many stock exchanges have a large percentage of foreign capital on their total listings. The New York Stock Exchange (NYSE), according to the estimates of the ICAI, has 20 percent of foreign origin capital in their total listings. In the case of the London stock exchange, it is 16 percent, and Luxembourg - 82 percent respectively. There was an overwhelming vote by the European Parliament in favor of the proposal by the EU Commission that all the listed companies in the EU have to adhere to standards issued by the (IASB) International Accounting Standards Board in their financial statements that were consolidated and this proposal directly affected more than 7,000 companies listed in the EU.

Another aspect is that accounting standards divergence not only means difficulty in the manner, in which multinational companies effect transactions in their business, but also additional costs in financial reporting. Efficient transactions can give rise to profits under some conditions and may need another standard for its deferral. It often leads to some odd results when multinational companies (MNC) have to report under the standards of both of the countries, and with the converged standards, the difference can be more easily identified.

Convergence can also be used to end misinterpretation of financial data: deviations within different accounting standards make it hard to make the relevant evaluations of company’s performance. This phenomenon hinders the decision-making and consequently valuation process (Sawani 1).

Status

The IASB and FASB have international convergence programs that are short term. These occasional programs pursue objectives to improve the International Financial Accounting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) in the U.S. while concurrently eliminating varieties between the IFRS and GAAP.

The FASB current phase addresses five major areas, such as per share earnings, costs of the inventory, clarification of the balance sheet and income statement, and assets exchanges. On the other hand, among the short-term issues, the IASB has deliberated convergence projects. Under the short-term convergence projects goals, there is a limit to their scope of influence outside the major projects in which the high quality convergence solutions appear to be achievable in the short term basis, usually by the selection between U.S. GAAP and IFRS (Hail, Leuz and Wysocki 360).

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The IASB and FASB have announced international convergence projects that target long-term basis that cover topics like fair value measurements, leases and revenue recognition. There is also a joint conduction of most of the major projects done by the Boards. A survey conducted globally by International Federation of Accountants, who are the leaders of the accounting profession on international standards convergence, suggest that a single set of accounting standards is a key to successful economic development. The study revealed that, out of the 91 countries and the 143 leaders who responded within the framework of the survey, 89 percent admit that international financial reporting standards convergence is relevant to the country’s economic growth.

Major Changes under the New Revenue Recognition Accounting Standards

Various significant changes have occurred recently under the new Revenue Recognition Accounting Standards. Some of these include goodwill impairment testing and revenue recognition; however, the most significant one includes the United States accounting for leases regulated by the Financial Accounting Standards Number 13 (and Financial Accounting Standards Board (FASB) and the reviewed articles state that point).

The lessee accounts, under the records of the operating lease, cover the expenses of the rent over the lease term, and a credit to either rent or cash payable. If there are changes in the rents’ operating schedule, normally the basis of the rent must be on a straight line over its life, with assets reported on the balance sheets for the main differences between cash outlay and expense (Lee 5).

The lessee under the capital lease does not record rents as expenses. Instead, there is a reclassification of rent as an obligation and interest payment, similarly to a mortgage. The asset is depreciated concurrently. If the leases have bargain purchase options and ownership transfer, then this is the assets economic life, which is depreciable; otherwise the lease term is the depreciable life. Over the leases terms, the depreciation and the interest combined will be equivalent to the payment of the rent. For both the operating and capital leases, a separate future minimum financial statement footnote discloses the rental commitments, for all remaining group years and the next five years.

Other financial accounting issues involve future expenses repayment for the lease bonus categorized mainly as assets that can be amortized through the life of the lease (using the straight-line method). Percentage rent and rent Kicker are often common in the retail stores, which are premium rent payment that the lessors need and which they treat as an expense over the respective period. Improvements that are made by the lessee (also known as leasehold improvements) are often affixed permanently to the lessor and reverted at the lease termination, and they are attached to the properties.

The leasehold value improvements should be depreciated and capitalized over the lease life of the lessee or the improvements of the leasehold life. If there is an extension on the leasehold improvement life past the initial term life of the lease and into optional periods, normally that optional period is considered part of the lease life (Lee 5).

The lessor records rent revenue under the operating lease credits and corresponding debits to either rent or cash that are receivable. The lessors’ books retain the remaining assets as assets owned and record the life of the assets as depreciation assets. The receivable lease debits account for the current rents value and lessor credits under the capital lease. Cash is debited with each payment and the unearned and credited income or interests are also accredited by the same measures.

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