The main purpose of this assessment is to understand the concept of convergence in accounting standards and also the implantation of convergence projects which are undertaken by International Accounting Standard Board (IASB) and Financial Accounting Standard Board (FASB). The convergence of accounting principles and practices around the world allows businesses to promote consistency in accounting practice and also in setting universal approach in accounting practices which is followed across the world. The report will be citing and identifying various convergence projects which have been undertaken by different accounting words. The report will be identifying the benefits and limitations related to convergence and also the qualitative characteristic of financial statements in the next few paragraphs. The report will further discuss the significance of the use of fair value in accounting process and the report will be concluding with a conclusion.
The convergence of accounting standards is a key process in which accounting boards tend to set up a single sets of accounting standards which can be used internationally. Convergence of Accounting standards have taken places several times over the years and the same are done with a view to bring about consistency in the accounting practices which are followed by accounting professionals (Crawford et al. 2014). In other words, it can be said that convergence is the process which can make global accounting standards similar in every way possible. International Convergence of Accounting standards aims to establish a single set of standards which are of high quality and the same can be used universally. Various accounting boards are involved in the process of convergence so as to ensure that the accounting standards which are established can be applied to accounting in different regions (Wang, 2014). The origin of Convergence of accounting standards can be traced backed to 1950s when lots of international capital flowed in due to the impacts of the second world war in order to stabilize the world economy. In such an instance convergence took the form of harmonization of accounting records and the reduction of differences between various accounting standards which are used internationally (Chen et al. 2014).
Convergence of US and International accounting standards in recent era is being decided and the pace of such an evolution has quickened due to the need of a global accounting standards which is due to the increase in international trade and outsourcing of services. The process of Convergence is a challenging process which is not only due to the goal of a universally applicable accounting standards but also due to the expectations of the users of the financial statements (Adibah Wan Ismail et al. 2013). The users of the financial statements need to be educated as to what effects will the convergence process bring about in the accounting standards and the overall impacts on the financial statements of a company. The need for convergence of accounting standards is to avoid the confusion, conflicts, promote simplicity and consistency (Taipaleenmäki and Ikäheimo, 2013). In many countries convergence of accounting standards has already taken place and some are at its planning stage to either adopt IFRS or converge towards it. Examples can be given of Canada which required all listed companies to follow IFRS framework in preparing financial accounts of the businesses (Jackling, 2013). The international convergence of accounting standards can be referred to as both a goal and a path for achieving the convergence. As per FASB, the main goal of convergence is the development of single set of high quality accounting standards which can be used worldwide by companies when dealing with domestic transactions or engaging in cross border transactions. FASB is working continuously in achieving the convergence of accounting standards so that a universality can be achieved but until the same happens boards is working to pave the way for convergence of accounting standards. The path for convergence can be achieved through effective collaboration of FASB and IASB for combining the frameworks of US GAAP and IFRS (accaglobal.com. 2018). Another example which can be provided is that of adoption of IFRS framework by EU Accounting Regime. On 19 July 2002, the parliament in Europe and the European council agreed on adoption of IFRS framework in business. This was done to bring about consistency in the accounting practices and especially those companies which were engaged in international trade (Iasplus.com. 2018).
In the present era, IASB and FASB has signed a memorandum of understanding which sets out their convergence projects and includes the short-term goal to issue converged standards. The efforts of convergence can be demonstrated by the continuous efforts of IASB and FASB (Albu et al. 2014). There are various examples which are available of convergence projects which are undertaken by IASB and FASB. IAS 23 which is on Borrowing cost is an example of convergence projects undertaken by the boards and the standard was reissued in 2008. The boards have successfully issued converged standards on consolidations of accounts, Fair value measurements. IFRS 15 is the most recent project which is undertaken by the boards in recent time (Iasplus.com. 2018). The overall process of convergence of accounting standards have their own set of advantages and disadvantages. The benefits which are associated with convergence of accounting standards are given below in point form:
The limitations of Convergence of accounting standards are discussed below:
The convergence program which was initiated with the memo random of understanding between FASB and IASB led to the implementation and adoption of conceptual framework of reporting. The main objective of the conceptual framework is to ensure that the financial statements are prepared in such a way that all relevant information are disclosed in a systematic manner in the financial statements of a business (Francis et al. 2013). Convergence of conceptual framework which is followed in various areas can bring about a consistency and transparency in the accounting approach.
The qualitative characteristics of a financial statement are of two types which are fundamental qualitative characteristic and Enhancing qualitative characteristic. The fundamental qualitative characteristics are discussed below in details:
The enhancing Characteristics of financial statements tends to further improve the quality of reporting and the same are discussed below in details:
The importance of conceptual framework is immense in promoting transparency and effectiveness of the presentation of financial data in the financial statement of a business. Thus, convergence of accounting standards can also bring about improvements in the conceptual framework of accounting and thereby improve the overall reporting process of the business.
Fair value may be defined as the estimated price at which assets of a business can be sold and liabilities of a business can be settled considered the current market prices (Altamuro and Zhang, 2013). Fair value has wide range implications and the same can affect the choices of investments of investors and also management decisions. Fair value accounting is a financial approach which is also known as mark-to-market accounting practice and falls under Generally Accepted Accounting Principles (GAAP). With the help of fair market value approach, many companies measure their assets and liabilities on the basis of their actual or estimated market prices (Blankespoor et al. 2013). The advantages of fair value accounting can be explained below in details:
The limitations of Fair value accounting are listed below in details:
Historical cost method reflects the prices of the assets at which the assets were originally purchased. This approach is also used under the GAAP framework of accounting. Theses prices normally reflects the results of arm’s length prices and transactions and is also known to be a conventional accounting method (Christensen and Nikolaev, 2013). The method of Historical cost is based on realization principle which can affect both the profit and loss statement and the balance sheet of the business. The advantages of using Historical cost method are stated below:
The limitations which are associated with historical cost method are listed below:
Conclusion
Thus, from the above discussions, it can be clearly identified that the overall role of convergence in accounting standards can bring about improvements and transparency and consistency in the global accounting process. The process of convergence has more of advantages than limitations and the same can lead to a better reporting framework not just domestically but also internationally. It can be said that the convergence of accounting standards will bring about transparency and consistency in the accounting standards. The above analysis also shows the uses of fair value and historical cost in the overall accounting process and the benefits and limitations of both the methods.
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