Globalization has contributed to an increase in the business opportunities, investment, and capital across the world. With rising technological advancement, investors can acquire the data concerning their finances more easily than they could do in the past decade (Baudot, 2014). Consequently, the transnational listings have grown, and the business investors can initiate cross-border operations. For this reason, it is pertinent that the financiers have a collection of the financial standards, which are comparable and understandable to increase their ability to make informed decisions (Chen, Ding, & Xu, 2014).
For a long time, the United States has used Generally Accepted Accounting Principles also referred to as GAAP. They represent the auditing guidelines that are essential to the development of the fiscal statements for all organizations in the country. However, the other republics in the globe utilize the International Financial Reporting Standards (IFRS). The IFRS are the principles of accounting that are utilized in the financial reporting of several nations apart from the US. For over four decades, the International Accounting Standards Board (IASB) have been pursuing the development of an array of enforceable, understandable, and high-quality IFRS to manage equity creditors, lenders, and investors as well as different globalized capital markets (Baudot, 2014). As of 2018, more than 160 nations including the European Union (EU) had embraced the IFRS either partially or entirely (IFRS, 2018).
The International Accounting Standards Committee (IASC) and the Financial Accounting Standards Board (FASB) have for a long time noted that for the global capital markets to operate effectively and efficiently, a distinct collection of excellent, global auditing standards must be present (Chen et al., 2014). For this reason, the countries that have failed to integrate the IFRS have attempted to come up with the frameworks, which facilitate convergence. IASC has prioritized convergence of international and national standards. The concept mentioned above refers to the process of merging all the countries with universal accounting standards, which are applied across the globe (Baudot, 2014). Embracing the convergence implies that the nation will not adhere to the practices which it has created, but will instead utilize the IFRS.
More recently, debates have emerged on the probability of GAAP in the US to converge with the IFRS. It suggests that the Securities and Exchange Commission (SEC) would begin permitting nations to utilize the IFRS for their financial and accounting reporting as a substitution or in addition to the GAAP (Yallapragada, Roe, & Toma, 2013). Although total acceptance is less likely to take place, convergence is potentially viable. Furthermore, the FASB and IASB have devised a convergence strategy that will employ GAAP and contemporary the IFRS principles to substitute the US GAAP.
The Significance of IFRS-GAAP Convergence
A wide range of arguments has been advanced on the need to achieve convergence between the US Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS). Proponents of this development argued that it would be beneficial in the global accounting practices, because it would encourage transparency, the potential of simplification, and renewed clarity. Additionally, it would play a significant part in accomplishing comparability between diverse nations on financial and accounting reporting (Baudot, 2014). In the past, the world has witnessed financial crisis, especially during the Great Recession, which has increased the debates on the benefits of convergence.
Experts have noted that due to the existing gaps between these two accounting methods, the world is at risk of imprudent financial reporting. It is against this backdrop that the convergence would deliver beneficial impacts. For instance, it would facilitate an advanced flow of capital and transnational investment that would extremely lower the interest rates (Barth, Landsman, Lang, & Williams, 2012). Furthermore, the initiative would spur economic growth in different economies, especially where firms engage in business opportunities.
Issues in Convergence
Some countries including the United States have been reluctant to embrace the convergence of the two accounting methods. The US has cited a number of issues that have derailed its convergence efforts (Yallapragada et al., 2013). Firstly, it is opposed to guidelines of convergence because of the unwillingness of the various countries participating in the process to cooperate grounded on diverse types of economies, beliefs, standards, ethics, and culture. Furthermore, the country has issues with individual nations because of disagreements on political systems (Baudot, 2014). More significantly, it is opposed to the idea due to the time required to execute a new network of accounting standards and rules.
The US also contends that its GAAP is greater in quality as compared to the current global standards, since it is based on strict rules. The IFRS guarantee quality of standards as compared to those under GAAP, but the US has expressed opposition to the execution of the IFRS in its entirely due to the substantial obstacles and costs towards convergence (Qu, Fong, & Oliver, 2012). Interestingly, the United States tends to oppose the merging, because it believes that the GAAP protects the interests of its people as compared to the IFRS that advocate for the desires of all parties across the world. However, it has supported the IASB in not only the development of the accounting criteria, but the proliferation and improvement of the IFRS (Chen et al., 2014).
GAAP and IFRS
The United States was one of the founding nations of the IASC, which later became the IASB. Reports indicate that most of the IFRS were prepared with the contribution of the setters of criteria and professional accounting from the US. For this reason, most of the criteria between GAAP and IFRS are quite technically similar. Nonetheless, one of the key differences between the two is that the former is fundamentally rule-based (Baudot, 2014). On the other hand, IFRS is founded on principles. Therefore, the difference between the two systems is because