U.S. GAAP AND IFRS: ACCOUNTING STANDARDS AND …

U.S. GAAP AND IFRS: ACCOUNTING STANDARDS AND

CONVERGENCE

2016 Report

Prepared by Nicole Nevicosi Accounting Student at Bradley University

Prepared for

Accounting Students

Accounting Standards and Convergence

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ABSTRACT

The Financial Accounting Standards Board, FASB, is in charge of developing and publishing the

United States Generally Accepted Accounting Principles (U.S. GAAP). Accounting outside of

the US follows the International Financial Reporting Standards (IFRS) developed by the

International Accounting Standards Board, or IASB. There are a number of differences between

financial reporting according to U.S. GAAP and IFRS. Globalization is expanding, and many

large companies have locations outside of the United States. This raises the concern of how to

report financial information. Global stock traders often read financial statements when

determining the value of a company’s stock. Different financial standards across the world can

lead to difficulty evaluating a company’s stock and inaccurate comparisons of companies. In

order to match the accounting standards to the global economy, convergence projects began

between the U.S. and international accounting standards. Now, the outlined convergence projects

are ending, but significant differences remain between U.S. GAAP and IFRS. The future of the

accounting standards seems unclear, as the IASB is pushing for global standards and the FASB is

afraid of becoming irrelevant. This leaves accounting students navigating tricky waters of

constantly updating standards. By subscribing to accounting standard update email lists, students

can stay up to date on changing standards and learn more about accounting standards in the

United States and internationally.


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TABLE OF CONTENTS

ABSTRACT ........................................................................................................ ii

PREFACE .......................................................................................................... iv

EXECUTIVE SUMMARY ................................................................................. v

INTRODUCTION ............................................................................................... 1

Description of U.S. GAAP ........................................................................... 1

Description of IFRS ..................................................................................... 2

CONVERGENCE BETWEEN U.S. GAAP AND IFRS ..................................... 4

Norwalk Agreement ..................................................................................... 4

The FASB Standard Development Process for U.S. GAAP.......................... 5

The IASB Standard Development Process for IFRS ..................................... 5

Convergence and Next Steps ........................................................................ 6

CONCLUSION AND RECOMMENDATIONS.................................................. 7

WORKS CITED .................................................................................................. 8

APPENDIX A: FASB ASC Standard .................................................................. 9

APPENDIX B: FASB Transition Guide...............................................................10

APPENDIX C: IFRS Example .............................................................................11


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PREFACE

It is crucial for emerging accountants to have knowledge of the future of accounting standards.

My goal is to provide accounting students with a basic knowledge of the United States Generally

Accepted Accounting Principles (U.S. GAAP) and the International Financial Reporting

Standards (IFRS). This provides the groundwork for understanding how each set of standards is

developed, and what the future holds for these standards. My goal is also to inform accounting

students of the convergence projects between U.S. GAAP and IFRS. This has caused a number

of accounting standards updates, and could result in a total change in financial reporting

standards within the next 50 years.

As an accounting student, I am committed to furthering my education to prepare for an

accounting career. Even as a student, I am already affected by changing accounting standards. In

class, we have to skip some sections of the book because the FASB recently issued Accounting

Standards Updates. We have discussed briefly in class that these changes are working toward

converging U.S. GAAP with IFRS. There have already been a number of updates to work toward

this goal, but there is still a long way to go. The convergence projects and updates will directly

affect my accounting career, as the FASB will continue to issue updates. My fellow accounting

students and I will be responsible for implementing these changes throughout our careers.


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EXECUTIVE SUMMARY

This report provides a brief background about United States and international accounting

standards. The Financial Accounting Standards Board (FASB) sets the United States Generally

Accepted Accounting Principles (U.S. GAAP), which companies incorporated in the United

States must follow. U.S. GAAP can be viewed online through the FASB Codification System

(FASB ASC). The U.S. GAAP is the authoritative guidance on financial reporting in the United

States.

The International Accounting Standards Board (IASB) sets the International Financial Reporting

Standards (IFRS), which 128 countries permit or require companies to follow. The IFRS

standards can be viewed on the EIFRS site. Of the 138 countries that have or follow accounting

regulations, 10 neither permit nor require companies to file according to IFRS. The goal of the

IFRS is for all countries to either permit or require companies to file according to IFRS

regulations. The United States is one of the 10 countries that do not follow IFRS.

In order to develop global accounting standards to match a global economy, IFRS and FASB

began a convergence project in 2002. The detailed convergence timeline is complete; however,

there are still many differences between the standards. FASB is demonstrating resistance, and

fears extinction if IFRS becomes the global accounting standard. The future of accounting

standards is unclear, which can leave accounting students struggling to prepare for their

accounting careers.

To stay informed about convergence projects and standard updates, accountants and accounting

students should sign up for email subscription lists. This will enable them to prepare for future

changes in financial reporting.


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INTRODUCTION

Accounting plays a crucial role in the evaluation of companies. Boards develop standards to

ensure that all accounting is uniform and financial statements are prepared the same. Financial

statements are released primarily for outside users. For example, investors analyze financial

statements to determine if they should invest in a certain company. In this process, investors

often compare two companies side by side. If these financial statements are not prepared in the

same way, it is difficult to make an accurate comparison between the two. For this reason,

financial statements must be prepared based on uniform standards.

An added complexity occurs when there are more than one set of accounting standards

worldwide. In the global economy that exists today, it is common for companies to operate in

more than one country. Additionally, people invest in foreign companies’ securities. The world

of business surpasses country borders, and financial information passes from one country to the

other quickly. The accounting standards do not currently reflect the fluidity of the business

world, as different standards apply to different countries. The United States follows U.S.

Generally Accepted Accounting Principles (U.S. GAAP). The leading international accounting

standards are the International Financial Reporting Standards (IFRS).

Description of U.S. GAAP

The United States Generally Accepted Accounting Principles (U.S. GAAP) are the required

standards that companies based in the United States must follow. The Financial Accounting

Standards Board (FASB) develops the U.S. GAAP. If the FASB decides to update a current

standard, they prepare and release the U.S. GAAP Accounting Standard Update. Since the

standard update will have a widespread effect on U.S. based companies, FASB gives the public

the option to provide their feedback on the proposed accounting standard before they officially

issue it. The thorough feedback process allows the FASB to consider many of the possible

impacts of the Accounting Standard Update.

All U.S. GAAP is documented within the FASB Accounting Standards Codification system

(FASB ASC). The main categories of U.S. GAAP within the codification system are as follows

(FASB ASC):

General Principles

Presentation

Assets

Liabilities

Equity

Revenue

Expenses

Broad Transactions

Industry

Master Glossary

For an example of an accounting standard within the FASB Accounting Codification System,

view Appendix A: FASB ASC Standard. The FASB is constantly re-evaluating the standards to

determine if adjustments are necessary. When a standard update is released, the FASB

announces the Accounting Standard Update along with an adoption schedule. The adoption


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schedule ensures that companies know by what date they must adjust their accounting to match

the new standard. For an example of an Accounting Standard Update Transition Guide, see

Appendix B: FASB Transition Guide.

Description of IFRS

The leading international accounting standards are prepared by the International Accounting

Standards Board (IASB), and are called the International Financial Reporting Standards (IFRS).

According to the IFRS 2015 Pocket Guide, “IFRS is a globally recognised set of Standards for

the preparation of financial statements by business entities.” IFRS can be accessed on the EIFRS

site. To view a portion of an IFRS, see Appendix C: IFRS Example.

In addition to a conceptual framework, there are 15 categories for International Financial

Reporting Standards (IFRS Pocket Guide):

First-Time Adoption of IFRS

Share-Based Payment

Business Combinations

Insurance Contracts

Non-Current Assets Held for Sale

and Discontinued Operations

Revenue from Contracts with

Customers

Financial Instruments: Disclosures

Operating Segments

Financial Instruments

Consolidated Financial Statements

Joint Arrangements

Disclosure of Interests in Other Entities

Fair Value Measurement

Regulatory Deferral Accounts

Exploration for and Evaluation of

Mineral Resources

As of 2015, 138 countries follow IFRS. 114 countries require that companies follow IFRS, and

14 countries allow or require only some companies to use IFRS (IFRS Pocket Guide). Figure 1

provides additional detail regarding IFRS jurisdictions by continent.

Figure 1: IFRS Jurisdictions (IFRS Pocket Guide)


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Figure 1 shows the prevalence of IFRS. It is important to note that in the European region, all but

one country require accounting according to IFRS. That one country permits or requires IFRS for

at least some public companies (IFRS Pocket Guide). Europe is home to many advanced

economies, and the separate standards used by the United States make it difficult to prepare and

compare financial statements.


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CONVERGENCE BETWEEN U.S. GAAP AND IFRS

Pricewaterhouse Coopers (PwC), one of the Big Four accounting firms, highlights a few reasons

why convergence is so important. As the global economy is expanding, many companies are

increasing their international presence by opening facilities, raising capital, and merging with

companies in other countries (PwC IFRS and U.S. GAAP). These processes are complicated,

because the accounting in many countries must be completed according to IFRS (PwC IFRS and

U.S. GAAP). U.S. based companies are then required to file financial statements according to

U.S. GAAP, which sometimes requires adjustments to transactions originally accounted for

according to IFRS. Additionally, non-U.S. investors and stakeholders in U.S. companies are

interested in the financial statements. If the financial statements were prepared according to

IFRS, investors would not have to understand two sets of reporting standards.

Further complicating the matter, foreign subsidiaries of U.S. companies are often required to

follow IFRS. The accounting must be converted to follow U.S. GAAP when the parent company

files their financial statements (PwC IFRS and U.S. GAAP). PwC stressed the importance of

being “financially bilingual” in the United States. It is important to understand how IFRS

impacts companies based in the United States. U.S. investors are also increasingly turning

toward foreign investments (PwC IFRS and U.S. GAAP). According to PwC, over $6 trillion is

invested in foreign securities (PwC IFRS and U.S. GAAP). U.S. investors need to understand

IFRS in order to interpret financial statements.

Norwalk Agreement

According to the FASB, convergence efforts with the IASB began in October 2002 with the

Norwalk Agreement. Both the FASB and IASB met in Norwalk, Connecticut on September 28,

2002 to discuss their commitment to high-quality accounting standards (FASB Convergence).

Both organizations understand that compatible standards would ease both domestic and foreign

accounting. At the meeting, both organizations agreed to work towards developing compatible

accounting standards. The FASB and IASB agreed to place a high priority on four tasks (FASB

Convergence):

Begin a short-term project to eliminate small differences between the U.S. GAAP and

IFRS

Begin to remove other accounting standard differences through joint projects, beginning

in 2005

Continue to partake in current joint projects

Encourage coordination with other organizations involved in the accounting standards

process

To accomplish these tasks and continue working toward convergence, a full-time IASB liaison

member is in the FASB office. This ensures communication and cooperation between the two

organizations. The FASB also has the opportunity to monitor the project that the IASB is


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working on. Convergence between the United States and international standards boards will

reduce the differences between U.S. GAAP and IFRS.

The FASB Standard Development Process for U.S. GAAP

The FASB is responsible for developing the U.S. GAAP standards. They use a thorough process

to ensure that all stakeholders are considered (FASB Standards-setting process). They use the

process to consider all the benefits and costs. Figure 2 displays the steps in the FASB standards-

setting process. The steps vary somewhat based on the standard that the FASB is considering.

Figure 2: The FASB standard-setting process (FASB Standards Setting Process)

First, the board identifies a reporting issue, and then they determine if they should add the project

to the meeting agenda. The FASB then holds a couple of public meetings to discuss the standard

with stakeholders involved (FASB Standards Setting Process). The FASB uses this to gain an

accurate understanding of the benefits and concerns surrounding the proposed standard. After the

meetings, the FASB releases a draft to get additional input from stakeholders that were unable to

attend the public meetings (FASB Standards Setting Process). After gaining feedback on the

draft, the FASB might hold another meeting to discuss the draft and feedback. After considering

all feedback, the Board releases an Accounting Standard Update (FASB Standards Setting

Process).

The IASB Standard Development Process for IFRS

The International Accounting Standards Board develops the IFRS through an international due

process. Since the IFRS are used around the world, the standard-setting process requires

worldwide feedback. Figure 3 provides a broad idea of the IFRS standard setting process.


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Figure 3: Development process of IFRS (IFRS How We Develop Standards)

The IASB begins the standard process by setting an agenda and developing the project (IFRS

How We Develop Standards). Next, the IASB publishes a discussion paper, then an exposure

draft, which includes public commentary. Following the discussion, the standard is published

and procedures are issued (IFRS How We Develop Standards).

Convergence and Next Steps

Both the IASB and FASB standards setting processes are very thorough, which means it takes a

while to issue the standards. This plays a role in the convergence timeline and the amount of

effort required for convergence. It is also important to note that convergence is far from

accepting the IFRS in the United States. The process of convergence is solely the FASB

adjusting accounting standards to be closer to matching the IFRS. This does not mean that the

FASB will allow U.S. companies to follow the IFRS. Although one set of global accounting

standards is the goal of the IASB (IFRS Pocket Guide), it will most likely not happen in the near

future.

There is evidence of resistance to the convergence process. According to the FASB convergence

page, “because of the volume of differences and the complex nature of some issues, the FASB

anticipates that many differences between U.S. and international standards will persist well

beyond 2005” (FASB Convergence). It is slightly alarming that the FASB has not updated this

page since 2005. The timeline listed within the Norwalk Agreement does not go past 2005. As it

is 2016, we are left wondering where we are at in the convergence project. Based on the lack of

updates, it is not a far stretch to guess that the convergence may have some resistance.

According to PwC, the period of the convergence process is ending (PwC). However, there are

still differences between U.S. GAAP and IFRS. The FASB might continue to change U.S.

standards to more closely resemble IFRS. The FASB could also decide not to converge toward

IFRS for some standards. The convergence process and agreement was not specific as to what

extent standards would converge, so there is a possibility that total convergence will not be

completed.

The goal for IFRS is to achieve one set of global accounting standards and have IFRS accepted

internationally as the authoritative standards (IFRS Pocket Guide). The convergence project is

one step in that process, but is not the final answer. The FASB still has total control on what

areas to converge. Clearly, the FASB wants to avoid extinction and avoid further convergence

between U.S. GAAP and IFRS.


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CONCLUSION AND RECOMMENDATIONS

While there has been some convergence between U.S. GAAP and IFRS, I have reached the

conclusion that the convergence process is slowing down. The FASB does not want to be

eliminated, so we could see more resistance from them in the future. This could lead to future

tension between the FASB and the IASB. The goal of the IASB is for IFRS to become the one

global accounting set of standards. However, the United States will most likely not permit or

require IFRS anytime soon.

Accounting standards, both U.S. GAAP and IFRS, are constantly changing. It is crucial that

accounting students stay up-to-date on the changes. I recommend signing up for the following

email subscriptions that will inform you of upcoming updates and convergence projects:

FASB eNewsletter Subscription: Check the interests that apply, including FASB

Codification Updates and the FASB projects, to learn about upcoming changes. Available

at:http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectio

nPage&cid=1176164527267

IFRS Foundation email subscription: By signing up, you will receive email alerts, can

submit comment letters about current projects, and can view the unaccompanied

standards. Available at: http://eifrs.ifrs.org/eifrs/Register


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WORK CITED

FASB. Accounting Standards Codification. March 21, 2016. Available at: https://asc.fasb.org/.

FASB. Convergence with the International Accounting Standards Board. March 27, 2016.

Available at: http://www.fasb.org/intl/convergence_iasb.shtml.

FASB. Facts about FASB. March 20, 2016. Available at:

http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=117615452 6495.

FASB. Memorandum of Understanding. March 20, 2016. Available at:

http://www.fasb.org/news/memorandum.pdf.

FASB. Standard Setting Process. March 21, 2016. Available at:

http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1351027215692.

IFRS. 2013. Convergence between IFRSs and US GAAP. March 20, 2016. Available at:

http://www.ifrs.org/use-around-the-world/global-convergence/convergence-with-us-

gaap/Pages/convergence-with-us-gaap.aspx.

IFRS. EIFRS. March 26, 2016. Available at: eifrs.ifrs.org

IFRS. How We Develop Standards. March 21, 2016. Available at: http://www.ifrs.org/How-we-

develop-standards/Pages/How-we-develop-standards.aspx.

IFRS Foundation: Paul Pacter. 2015. IFRS as Global Standards: a pocket guide. March 23, 2016.

Available at: http://www.ifrs.org/Use-around-the-world/Documents/IFRS-as-global-

standards-Pocket-Guide-April-2015.PDF.

IFRS. 2015. Who We Are. March 22, 2016. Available at: http://www.ifrs.org/The-

organisation/Documents/2015/WhoWeAre_ENGLISH_July%202015.pdf

PwC. 2014. IFRS and US GAAP: similarities and differences. March 20, 2016. Available at:

https://www.pwc.com/us/en/issues/ifrs-reporting/publications/assets/ifrs-and-us-gaap-

similarities-and-differences-2014.pdf.

PwC. 2015. IFRS by Country. March 25, 2016. Available at:

http://www.pwc.com/us/en/cfodirect/assets/pdf/pwc-ifrs-by-country-2015.pdf.

https://asc.fasb.org/

http://www.fasb.org/intl/convergence_iasb.shtml



http://www.ifrs.org/Use-around-the-world/Documents/IFRS-as-global-

http://www.ifrs.org/Use-around-the-world/Documents/IFRS-as-global-

http://www.ifrs.org/The-%09organisation/Documents/2015/WhoWeAre_ENGLISH_July%202015.pdf

http://www.ifrs.org/The-%09organisation/Documents/2015/WhoWeAre_ENGLISH_July%202015.pdf

http://www.pwc.com/us/en/cfodirect/assets/pdf/pwc-ifrs-by-country-2015.pdf


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APPENDIX A: FASB ASC Standard

FASB ASC 205-10-45-1 and FASB ASC 205-10-45-1A


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APPENDIX B: FASB Transition Guide

FASB ASC 606-10-65-1


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APPENDIX C: IFRS Example

EIFRS Fair Value Measurement

U.S. GAAP AND IFRS: ACCOUNTING STANDARDS AND …

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