Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) have common accounting principles and practices. However the two accounting standards have some differences when it comes to the valuation of inventory, asset valuing and impairment, depreciation rules and costs for accounting research and development. The report is composed of four sections. Section one compares and contrasts the harmonisation and convergence accounting concepts. Section two discuss Phase A of the conceptual framework for financial reporting 2010. Section three discusses the arguments for and against the use of fair values in the preparation and presentation of financial statements relative to the historical cost convention. Section four evaluates the converged standard, IFRS 15 – Revenues from Contracts with Customers, contrasting it with the superseded IASB standard, IAS 18– Revenue.
1. With the increasing cross boundaries trading between listed companies, there was the need to align the International Accounting Standards Board (IASB) and the U.S Financial Accounting Standards Board (FASB). The two boards came up with the concept of harmonisation and convergence in an attempt to develop similar accounting rules (Franklin, 2012, p. 7).
Harmonisation was established in the early 1950s by the FASB in the effort to align the international and the United States’ accounting rules. Harmonisation was based on the concept of minimising the difference between the GAAP and IFRS accounting standards. Although, harmonisation could not fully solve the differences between the two accounting concepts, is managed to reduce the differences (Franklin, 2012, p. 10).
There are several advantages of harmonisation. One, harmonisation eliminates the challenges of comparing accounting reporting between competing Multi Corporations. Two, harmonisation has simplified the process of consolidating financial statement for Multi Corporations. Three, harmonization makes financial forecasting easier and reliable. And four, harmonisation helps to increase the efficiency of pricing Multi Corporation shares in the stock market (Weetman, 2015, p. 444).
However, the concept has some limitations as well. One, contradicting needs of stakeholders make it difficult for its flexible application. In the UK and the US, financial reports are mainly used by investor hence such reports focus more on the capital market. However, Germany and other countries, main users are governments and tax authorities hence such reports focus more on the profitability of entities. And two, the adoption of harmonisation came with cost on its users (Bayerlein & Farooque, 2012, p. 94).
The shortcomings of harmonisation led to the adoption of the concept of convergence in the 1990s. The objective of convergence was to support both IFRS and GAAP into developing a single accounting standard to be adopted globally (Nobes & Parker, 2016, p. 113).
There are several advantages of convergence. One, convergence increases understandability and comparability of financial statements. Two, convergence would enhance clarity and transparency of financial statements. Three, convergence simplifies the processes of developing and adopting new accounting standards which reduce the over-reliance of accounting agencies to develop standards. And four, convergence contributed to cost savings where multinational companies save on transitional expenses (PACTER, 2013, p. 55).
However, the concept of convergence can only be achieved if it consistently applied and enforced by all the member countries. There has been inconsistent in the enforcement and application of convergence accounting practices globally. For example, the U.S considers its GAAP more competent was not ready to drop it for the convergence concept (Beke, 2013, p. 111).
2. A joint meeting between FASB and IASB in October 2004, formed the basis of forming a common conceptual framework. The conceptual framework was formed by aligning the accounting framework for IASB and FASB. The conceptual framework comprises of eight phases- from phase A to phase H (Allen & Ramanna, 2012, p. 67).
Phase A of the conceptual framework addresses the objectivity and qualitative characteristics of financial reporting. Objectivity addresses accounting issues such as stewardship, reporting entity, financial stability and primary users of financial reports (Delloite, 2018). Primary users of financial report are described at the people/ entities that rely on such information to invest or make decisions. Primary users comprise of future investors, shareholders creditors, government, employees among others. Financial reports are used by users to evaluate how efficient and effective is the management to run the organisation (stewardship) as well as estimating future cash flows (Allen & Ramanna, 2012, p. 71).
On the other hand, the qualitative characteristics of financial reporting refer to the accounting rules and principles that are applied to make financial and accounting information relevant, reliable and useful to the identified users. The qualitative characteristics of financial information are contained under chapter two of the conceptual framework.
The fundamental qualitative characteristics of financial information as presented under clause 2.5 of the conceptual framework are relevance and faithful representation. Relevance addresses the capability of relying on the information to make decisions. Faithful representation addresses the relevance of financial information to present the true and fair value of an organisation. Other accounting principles that support the fundamental characteristics are verifiability, understandability, timeliness, and comparability (Berrington & Bhandari, 2011, p. 81).
The project milestone for Phase A of the conceptual framework was initiated and completed as shown below;
3. The use of fair value- the current value- to measure assets and liabilities has gained momentum over the past two decades. The trend indicates the use of the historical cost to value assets and liabilities is slowly fading away. Shifting from the historical valuation to fair valuation of assets and liabilities has major implication on the accounting and financial basis of managing business entities. However, users of financial information, as well as financial experts, have differed on the better asset and liabilities measurement method between fair value and historical value. The critical issues have been the impact either of the options has on management and investment options as well as their consequences of the economic and financial activities of business entities (Greenberg, 2013, p. 71).
Supporters of fair value accounting state that the practice present information that is relevant for users compared to the historical value accounting. On the other hand, the supporters for historical valuation consider it as more reliable and conservative compared to fair value accounting. Fair value accounting has been blamed globally for facilitating unethical accounting practices since the 1920s. For example, fair value was blamed for the crash of Wall Street in 1929 and led to the U.S Securities and Exchange Commission banning it in 1930 before being adopted again in the 1970s. Moreover, fair value was also blamed for the financial crisis of 2008. Critics have held that the concept of fair value was used by corporate managers to recognise the gains from assets as income. Managers would then use such basis to calculate bonuses for themselves. Treating gains from assets as income led to the falling of asset prices (Weetman, 2015, p. 54).
The finance theory has been used to explain the increasing adoption of fair value over historical value. The theory maintains that the performance of the financial markets can be efficiently and effectively measured using the prevailing prices in the market. Fair value uses the current prices to measure the values of assets and liabilities hence deemed a reliable measure. The application of finance theory to support fair value accounting led academic experts to conduct research seeking to establish its relative merits with historical values. Generally, both IFRS and GAAP support the application of fair value in asset and liability measurement. Fair value accounting has been adopted fully by at least 100 countries globally while its use has been extended to other accounting elements such as accounting for employee stock options, testing goodwill impairment, financial assets, and the accounting for hedges and derivatives (Samarasekeraa, et al., 2012, p. 79).
There are three main reasons, identified under the academic researches, which support the shifting from historical value to fair value. First, asset and investment managers support fair value because it makes easier to manage risks associated with daily operations and decision making. Second, in the U.S GAAP define profit using fair value accounting and not historical value accounting. Therefore, the adoption has shaped the preference of fair value over historical value. Third, fair value also defines how goodwill realised from merger and acquisition should be tested. Compared to the amortising goodwill under historical value, testing goodwill for impairment provides a more reliable approach (Mirza, et al., 2011, p. 83).
Amid criticism from some users of financial reports, the use of fair value accounting has increased over the past two decades. Fair value has been praised for providing a reliable and relevant method for asset and liability measurement as compared to historical value accounting. Compared to the historical value, fair value offers additional perspective for measuring other accounting items besides asset and liabilities. Lastly, fair value has been adopted by both GAAP and IFRS which has enhanced its preference among users globally over historical cost accounting (Brown & Tarca, 2005, p. 123).
4. Before the adoption of IFRS 15– Revenues from Contracts with Customers by the FASB and IASB, IAS 18-Revenue was characterised with weaknesses and inconsistencies. Therefore, IFRS 15 was adopted to address such accounting issues. This section is a comparative approach for IFRS 15 and IAS 18. The IFRS 15 is a five-step model which covers; identification of contracts with a customer, identification of performance obligation, determination of transaction price, allocation of price to the obligations, and recognition of revenue when a business entity is satisfied with the customer’s performance (Delloite, 2018).
a. Customer identification
IFRS 15 identifies the customer as parties that have been approved underwritten or orally contracts in accordance with established business practices to perform specific contractual obligations. However, the IAS 18 did not define customers/ parties under a contract.
b. Contract combination
According to paragraph 17 of IFRS 15 entities are allowed to combine two or at least two contracts as far as such contracts have been negotiated as a single commercial package. However, IAS 18 states that contracts cannot be combined- contracts should be handled separately. Therefore, IFRS 15 clearly offer adequate details on circumstances at which contracts can be combined (Choi & Meek, 2013, p. 105).
c. Contract modification
Paragraphs 18 to 21 of IFRS 15 provided clear guidance for contract modification on basis of price and scope. On the other hand, IAS 18 does not provide guidance for contrast medication.
d. Identification and separation of customer obligation
Paragraphs 22 to 30 of the IFRS 15 provides guideline on how obligations should be identified and performed. The guideline also states that resources can be bundled as far as they can generate economic benefit to a customer. Although IAS 18 provides a reference for separating customer obligations, it fails to offer a guideline for bundling or separating goods and services for economic benefits (Henderson, et al., 2015, p. 77).
e. Determination of transaction price
Paragraph 47 of IFRS 15 clearly define transaction price as the amount a company is expected to pay in exchange for the contractual obligations to be performed by a customer. Factors stipulated under IFRS for determining transaction price are a variable consideration, financing components, and non-financial considerations. IAS 18 only addresses the issues of financing components and variable consideration to determine transaction price.
f. Recording of revenue
According to IFRS 15, revenue should be recorded immediately after the customer has gained control of resources from an entity. On the other hand, IAS 18 states that a revenue should be recorded based on the nature of goods and services delivered to the customer.
g. Allocation of price to the obligations
According to paragraph 76 of IFRS 15, transaction price should be allocated to an obligation on the basis of stand-alone selling price basis. On the other hand, IAS 18 does not provide a guideline for allocation of transaction price to contractual obligations (Allen & Ramanna, 2012, p. 51).
h. Recognition of cost when a business entity is satisfied with the customer’s performance.
IFRS 15 states that the cost of obtaining a contract should be amortised and capitalised over the contract life. Whereas, IAS 18 states that conceptual framework was used as the basis of recognising the cost of obtaining a contract as an asset.
Conclusion
The general purpose of the study was to compare and contrast the concepts of convergence and harmonisation and their application in the modern accounting practices. The report was divided into four sections. Section one focussed on establishing the key concepts under convergence and harmonisation in aligning the FASB and IASB accounting concepts. While harmonisation concepts focussed on reducing the conflicts between the two accounting boards, convergence was meant to develop a single accounting concept to be adopted globally. Section two has established the traits of Phase A of 2010 conceptual framework which comprises of concepts such as verifiability, understandability, timeliness, and comparability. Section three found out that the use of fair value accounting has increased over the past two decades because it is a reliable and relevant method for asset and liability measurement as compared to historical value accounting. Section four discussed the adoption of IFRS 15 to address the weaknesses and inconsistencies under IASB, IAS 18.
References
Allen, A. & Ramanna, K., 2012. Towards an Understanding of the Role of Standard Setters in Standard Setting. Journal of Accounting and Economics.
Bayerlein, L. & Farooque, O., 2012. Influence of a mandatory IFRS adoption on accounting practice:Evidence from Australia, Hong Kong and the United Kingdom. sian Review of Accounting,, 20(2), pp. 93-118.
Beke, J., 2013. International Accounting Standardization. Chicago: Chartridge Books.
Berrington, M. & Bhandari, . V., 2011. Pinnacle Financial Statements. illustrated ed. New York: IFRS SYSTEM.
Brown, P. & Tarca, A., 2005. FASB ISSUES STATEMENT ON ASSET IMPAIRMENT. Journal of accountancy, 6(16-18), p. 179.
Choi, F. D. S. & Meek, G. K., 2013. International Accounting. London: Pearson.
Christian, D. & Lüdenbach, N., 2013. IFRS Essentials. New York: John Wiley & Sons.
Delloite, 2018. Conceptual Framework Phase A – Objective and qualitative characteristics, New York: Delloite.
Franklin, L., 2012. Harmonisation – The desire by the IASB to harmonise accounting is the triumph of hope over experience. Berlin: GRIN Verlag.
Greenberg, M. D., 2013. Fair Value Accounting, Historical Cost Accounting, and Systemic Risk: Policy Issues and Options for Strengthening Valuation and Reducing Risk. Santa Monica, California: Rand Corporation.
Henderson, S., Peirson, G., Herbohn, K. & Howieson, B., 2015. Issues in Financial Accounting. Sydney: Pearson Higher Education.
Kieso, D. E., 2010. Intermediate Accounting: IFRS Edition, Volume 1. New York: John Wiley & Sons.
Mirza, A. A., Holt, G. & Knorr, L., 2011. Wiley IFRS: Practical Implementation Guide and Workbook. New York: John Wiley & Sons.
Nobes, C. & Parker, R. B., 2016. Comparative International Accounting. Sydney: Pearson Education Limited.
PACTER, P., 2013. What have IASB and FASB convergence efforts achieved?. Journal of Accountancy.
Samarasekeraa, N., Chang, M. & Tarca, A., 2012. IFRS and accounting quality: The impact of enforcement, Crawley, Western Australia: University of Western Australia.
Weetman, P., 2015. Financial Accounting: An Introduction. Sydney: Pearson Education.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download