The main focus of this assignment is expounding activities showcasing in the course of conducting the project of interlinking the International Accounting Standards Board principles to the Financial Accounting Standard Board in order to form common International Financial Reporting Standards (IFRS). Moving forward, the assignment provides an illustration meant to portray the significance of the aforesaid process towards the development of economies.
The convergence of the FASB and IASB to form IFRS
“International Convergence of Accounting Standards” refers to both the objective as well as the methodologies which are used to achieve the goal pertaining to the common standard. The main focus of the project is to bring about a single set of interdependent and qualitative international accounting standards which companies, as well as accounting personnel, can use to enhance both domestic and cross-border relations in respect to effective financial reporting. Notwithstanding, the methodologies are deployed to depict the collaborative efforts put forth by both FASB and IASB in order to improve on the American GAAP, as well as IFRS. Thus, the crucial element of the process is to eradicate differences which exist between the two bodies in respect to financial reporting procedures. Therefore, this paper tries to examine the efforts put forth by both of these bodies to bring about the formulation of International Financial Reporting Standards (IFRS).
Notably, the process of formulating this convergence dates back to 2002 when both FASB and IASB described the meaning as well as the goals for converging of their respective policies. Furthermore, the two financial bodies came up with two crucial documents which are aimed at assisting these bodies to achieve the goals of the project at hand. These documents are the “Norwalk Agreement” which was issued in 2002 as well as the “Memorandum of Understanding” (MoU) between FASB and IASB which was formulated and issued in 2006 (Financial Accounting Standards Board Website, 2012a).
The methodologies through which the two bodies could be brought together and commence with the initiative is perceived through participation in joint projects aimed at establishing well-formulated common principles altogether. In 2011 these two Boards made progressive efforts since they finalized on the four pillars of the overall project which include the wider financial statement presentation project, financial instruments pertaining a firm’s characteristics of equity, emissions trading projects and the fundamental entity conceptual framework.
Moving forward, these Boards embarked with the plans aimed at completing the aforementioned projects before the end of 2011. In the letter to the IFRS trustee Board, FASB laid down some of the issues which were to be tackled in the course of the convergence. Such issues as governance, mission, and process necessary for successful convergence were widely evaluated.
The Norwalk Agreement
In the course of the meeting held in Norwalk, on September 2002, both of the two bodies: FASB and IASB, agreed to the fundamental need to work together to fulfill their common commitment of developing compatible accounting principles which could be utilized in conducting both local and international financial reporting. Also at the meeting both of the bodies agreed to put intense efforts aimed at improving the compatibility as well as maintaining it in respect to the existing financial principles (Financial Accounting Standards Board, 2012b).
In the effort to achieve compatibility of the financial standards, the aforesaid bodies agreed on the following terms:
I) Include a short-term objective which is meant to eliminate several differences between the Unites States’ GAAP and IFRS.
II) Eliminate the possibility of the differences existing between IFRS and U.S GAAP which may hinder smooth coordination of future working programs, that is, the mutual performance of extensive financial reporting projects.
In cementing the aforementioned measures, the IASB is expected to liaise actively with other international principles’ setters in order to provide practical proposals to the solutions regarding short-term projects.
Memorandum of Understanding (MoU) between FASB and IASB:
In the course of formulating common accounting standards for both the local and international users of accounting information, both FASB and IASB recognized the need to enlighten these financial users of accounting in matters pertaining to an efficient implementation of the yet to be established IFRS financial standards in both companies and other relevant areas of jurisdiction. In developing the common accounting standard, both FASB and IASB agreed upon the following matters:
I) The development of common accounting standards and principles could be attained only through the formulation of qualitative pieces of accounting standards over a substantial period of time.
II) The efforts reflected towards removing the existing differences between two accounting principles which are in need of efficient improvement could not promote the positive utilization of FASB and IASB resources. Instead, effective common financial standards and principles were to be formulated to aid with the process of improvising the validity of financial data which is reported to different users of accounting information (Financial Accounting Standards Board, 2012b).
III) Serving the different needs of potential investors meant that both FASB and IASB should replace weaker common accounting standards and principles to stronger common standards.
The initial step towards effective convergence was dubbed “short-term convergence” which focused on the different areas to be tackled by two bodies separately.
For FASB the following accounting items were proposed for thorough examination: fair value option, investment properties, research, and development as well as other necessary events preceding the items, while for IASB such accounting items as borrowing costs, government grants as well as joint ventures and segment reporting were put forth for a similar process.
In a joint operation, the two Bodies are expected to conduct a thorough examination with respect to the impairment reporting and income tax. It is safe to assume that before the two bodies were engaged in direct contribution, it was made clear that they should include relevant shareholders of the accounting information in the course of developing the common standards.
Furthermore, under the watch of both the European Commission and SEC, both FASB and IASB are made to differentiate between the ongoing issues and the fundamental conceptual framework in order to minimize the possibility of bringing about immense confusion while practicing financial reporting. It is also expected that these bodies include such measurable attributes of accounting information as determination of cost and fair value (Forgeas, 2008).
In the effort to meet the goals of the convergence, FASB puts up with certain straightforward measures in order to execute its mandate effectively and efficiently in that matter. Measures were laid out in the “work plan” which includes:
I) Estimating the exact dates of publications for those projects whose deadline is in 2012. These publications include Exposure Drafts (Es), Financial Accounting Standards and Principle Updates.
II) Commenting on the full closure of project periods assigned to the body as a whole.
III) Reporting on both planned and unplanned public convergences (Financial Accounting Standards Board, 2012b).
In the “investment project”, conducted by both FASB and IASB, it was decided that mortgage REITs should be eliminated and replaced with the mortgage REIT, which met the requirements necessary for an investment company to adhere and follow. In the case of classification and measurement, there were few changes effected. However, immense changes were made to reflect upon the fair value for financial liabilities in order to address the issue concerned with individual credit risks (Financial Accounting Standards Board, 2012b).
For both hedging and impairment accounting instruments, intense changes were made to re-deliberate necessary accounting models. In the course of disclosure framework, the FASB made substantive changes which were aimed at minimizing the volume of information pertaining to the disclosure of the financial information to the users of accounting information. This is aimed at improvising the organization, presentation, and styling of accounting statements of different potential users. In reporting the financial instruments for non-profit organizations, a common standard was developed to aid in improving classification of the net asset, as well as to the amount of data which is provided for in the financial statements in respect to performance and cash flow activities (Financial Accounting Standards Board, 2012a).
Significance of the Convergence to the Economy
The need to converge the standards put forth by FASB and IASB into common accounting standards and principles cannot be overlooked. It is safe to assume that the process is of such significance to both individual accounting profession as well as large corporate bodies whose undertakings surpass boundaries. The aforementioned need is based upon the fact that these individuals and corporate bodies require a crucial basis upon which comparison of accounting information can be compared and in turn shared in that matter. This move should promote growth and development of the economy towards fair business undertakings.