The Convergence of Gaap and Ifrs

The Convergence of GAAP and IFRS

Intermediate Accounting II

Standards are defined as “something considered by an authority or by general consent as a basis of comparison.” Accounting standards ensure that accounting decisions are made in a unified way and financial statements are prepared by different companies in the same manner. This allows comparability of companies by investors and stakeholders. Since the world economy has become globalized, the use of one set of accounting standards would improve the preparation and comparability of financial statements. Since 2002, the U.S Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working together to create one set of globally accepted accounting standards by converging the accounting standards used in the U.S, Generally Accepted Accounting Principles (GAAP), with the standards used by over one hundred countries, International Financial Reporting Standards (IFRS). The convergence effort has been time consuming and could be costly to businesses in the U.S.

In 2002, the FASB and the IASB started working formally together to develop one set of globally accepted accounting standards with the convergence of GAAP and IFRS. The two boards created the “Norwalk Agreement” which detailed their goals of developing standards jointly and eliminating differences between GAAP and IFRS. By 2006, the boards issued an update on their progress of convergence with the “Memorandum of Understanding”. Joint projects were established where GAAP and IFRS differed the most, but no progress had been made at this point in the convergence effort. The boards decided that instead of eliminating differences between GAAP and IFRS, they would develop a new common standard that improved the quality of financial information. By 2010, they had converged accounting standards in the areas of business combinations, non-controlling interests, and fair value measurement (Financial Accounting, n.d.). Timetables on joint projects in areas where GAAP and IFRS differed the most, including the way revenue is recognized, the handling of financial instruments, leasing issues, and insurance contracts, were pushed back due to the extensive differences between GAAP and IFRS and the inability of the boards to reach a unified decision on the proposed changes.

The many differences between GAAP and IFRS results from the different concepts that each set is based on. GAAP is a “rule based” accounting system, while IFRS is “principle based” (IFRS, 2013). GAAP contains more detailed, specific requirements that are industry