Running head: CONVERGENCE OF ACCOUNTING PRINCIPLES 1

The convergence of Accounting Principles

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Introduction

Since 2002, Finacial Accounting Standard (FASB) and the International Accounting

Standard Board (IASB) have made an effort to converge the U.S Generally Accepted

Accounting Principles (GAAP) and the International Finacial Reporting Standard I(FRS) to

improve comparability across 100 countries that use the IFRS standard of reporting. The aim

of the convergence of the two accounting standards is to reduce the difference between

accounting principles and improve the comparability of the financial statement for major

capital markets around the world. In this paper, we are going to review the benefits of

converting the GAAP to IFRS from both the company and investor perspective.

Benefits of Converting GAAP to IFRS from Company Perspective

The U.S Financial Accounting Standard Board and the International Accounting

Standard Board (IASB) have worked tirelessly to converge the international accounting

standard for several years. Since the project commenced, numerous studies have been carried

out to advocate the importance of converting the GAAP to IFRS, one of the studies was

carried out by Elaine Henry, Stephen Lin, and Ya-Wen Yang in 2007. The study noted

numerous advantages of converting the GAAP to IFRS to companies and shareholders. The

advantages are highlighted below.

According to (Henry et al., 2009, pg 7), companies report high profitability when the

shift from using the GAAP to IFRS. Their analysis revealed that there is a significant

difference that exists between the profitability reported under GAAP and IFRS. Moreover, it

was evident that specific industries tend to report higher profitability under IFRS as

compared to U.S GAAP. Therefore, it means when the project between the Finacial

Accounting Standard (FASB) and the International Accounting Standard Board (IASB) is

complete, the U.S companies are likely to enjoy the benefits of higher profitability.
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The second benefit of converting from the GAAP principle to IFRS principles according to

(Henry et al., 2009, pg 7) is that companies create substantial economic benefits, especially in

countries with inflexible regulation over financial reporting. When companies shift from

using the GAAP, they enjoy an increase in the stock market value, improvement in market

liquidity, and reduction in the cost of capital. The empirical evidence indicated that

companies with the key difference between GAAP and IFRS standard demonstrated the

highest benefit when supported by strong accounting regulation.

Moreover, when the U.S companies adopt the IFRS standards that are used by more

than 100 countries, they are likely to benefit comparability advantage (DASKE et al., 2013).

If the IFRS is adopted in the major capital market in the world, it would be easier to compare

the company’s performance from different regions. The comparability will help not only the

local investors but also other stakeholders who use the financial statement.

Benefits of Converting GAAP to IFRS from Investor Perspective.

Investor plays a key role in the capital market; in recent days, the globalization has

enabled investors to invest their capital in different markets around the world. However, since

different country uses Unique GAAP, the comparability of the financial statement becomes a

challenge (DASKE et al., 2013). However, the convergence of U.S GAAP with IFRS is

likely to improve the comparability of the financial statement in most financial market

helping the investor to make the right decision

In addition to comparability, investors are likely to enjoy more transparency in

financial reporting. The convergence of the U.S GAAP principle to IFRS principle is

expected to improve the consistency of the financial statement across the boundaries. The

improvement of transparency is likely to remove the trade barriers allowing an investor to

take advantage of other markets that have not yet been exploited. The single reporting
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standard is expected to improve the investor’s confidence since they can understand financial

statements from various regions and countries.

According to the study conducted by (Ball 2006), the convergence of the GAAP and

IFRS is likely to benefit the investor through the provision of a more accurate, compressive,

and timely financial statement. When companies use different accounting principles, the level

of inaccuracies increases; however, a single reporting standard improves the accuracy of the

financial statement by removing confusion and contradiction.

Ongoing Project by FASB and IASB

Currently, numerous joint projects are ongoing between the FASB and IASB; most of

them are expected to be completed soon while others have been discontinued due to their

viability. Some of the projects that were discontinued include a financial instruments project

that was terminated on June 24, 2010, an insurance contract that was discontinued in 2017.

Still, the project can be revisited and post-employment benefit that was discontinued in

November 2015.

The following are ongoing projects; a conceptual framework that has been completed

partially, the project is aimed at converging the existing IASB framework with the FASB

conceptual framework. The second project that is underway is a lease project that seeks to

improve the accounting for lease by developing a standard that is more consistent with the

conceptual framework. Lastly, the financial instrument project that is aimed at removing the

current challenges faced by IASB AN FASB current standard, the project focus on how the

financial instruments should be recognized and measured.

Conclusion

After reviewing the numerous benefits of converging the U.S Generally Accepted

Accounting Principles (GAAP) and the International Finacial Reporting Standard it is evident

that there is a need to step up the effort to convert the GAAP to IFRS since it will accrue
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numerous benefits to the preparers of the financial statement and the users. According to Ball,

2006, the convergence of GAAP to IFRS is likely to increase the accuracy, comprehensive,

and timely financial statements.

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References

Current Status of project  https://www.iasplus.com/en/projects/completed/other/iasb-fasb-

convergence

Ball, R. (2006). International financial reporting standards (IFRS): Pros and cons for

investors. Accounting and Business Research, 36(sup1), 5-

27. https://doi.org/10.1080/00014788.2006.9730040

DASKE, H., HAIL, L., LEUZ, C., & VERDI, R. (2013). Adopting a label: Heterogeneity in

the economic consequences around IAS/IFRS adoptions. Journal of Accounting

Research, 51(3), 495-547. https://doi.org/10.1111/1475-679x.12005

Henry, E., Lin, S., & Yang, Y. (2009). The European-U.S. “GAAP gap”: IFRS to U.S.

GAAP form 20-F reconciliations. Accounting Horizons, 23(2), 121-

150. https://doi.org/10.2308/acch.2009.23.2.121