Accounting Theory: US GAAP vs IFRS and the Need for Convergence

This presentation discusses the differences between US GAAP and IFRS accounting standards and the need for convergence. It explores the impact on revenue recognition, inventory valuation, and lease classification. The feasibility and benefits of convergence in accounting theory are also discussed.

ACCOUNTING THEORY

INTRODUCTION
 US GAAP and IFRS are the most widely used
accounting standards
 There are many differences between the two
 Addressing the differences is the need of the
hour
 Unified approach is vital
 Component of both GAAP and IFRS will
enhance the AS and hence, convergence is
essential

US GAAP
 US GAAP is the accounting standard for
entities for US
 Rule based accounting system
 Provides financial information to the users
who needs them
 Cumbersome and complicated
 IFRS is needed as there is high enforcement
of current rules (Carmichael & Graaham,
2012)

IFRS
 IFRS stress upon the concept that accountant
should use the accounting interpretation that
provides the meaningful information
 IFRS supports the fair value method
 IFRS helps the company in ascertain the
current situation

RELEVANT STANDARD
A. Revenue Recognition
 Key performance indicator helps in
evaluating the company
 Project the most important number on the
Income Statement, as well as profitability
 Guides companies that have contract with
customers (Nobes, 2015)
 In new standard, company will recognize
revenue based on the transfer of promised
goods, as well as services

 Largest impact on the company
 It can influence the manner in which the company
bill the clients
 Business procedure can be redesigned
 Convergence will lessen the revenue needs
 The comparability of revenue will be more
prominent in nature (Carmichael & Graaham,
2012)
 Financial statements will be simplified

WHY CONVERGENCE
 US GAAP complex in nature
 Similar transaction will be dealt in a different
manner in different industry
 On the other hand, IFRS has deficit when it
comes to guidance for complex transactions

B. Inventory
 Defined as asset held for sale
 Utilize in the operations of business
 Convergence of GAAP and IFRS under the
valuation will disallow the usage of LIFO valuation
(Albu, Albu & Alexander, 2014)

 Before convergence Lease was either capital or
operating
 US GAAP has more detailed needs than IFRS that
specifies the ownership (Albu, Albu & Alexander,
2014)
 Similar disclosures on qualitative and quantitative
mechanism
 U.S. GAAP, ASC 330 helps in ascertaining cost for
the purpose of inventory (Ali, Ahmed & Henry, 2006)
 IAS2 needs the utilization of particular identification
for inventory

WHY CONVERGENCE
 LIFO is acceptable under GAAP
 Life prohibited under IFRS
 To ensure cost basis smooth in nature
convergence is essential and will eradicate
the difference (Peirson et. al, 2015)

C. Leases
 Contract through which the party makes land
available or equipment in return for the
payment.
 Lessens the risk of malfunction of equipment
 GAAP, as well as IFRS leads to guidance for
lessor and lessee (Nobes, 2015)
 As per new guidance, leases undertaken by
lessor and lessee should reflect the
subsistence and definition of assets, as well
as liabilities.

 Convergence will lead to better
understanding
 Enhanced harmonization for the companies
 Presence of less specific criteria when it
comes to lease classification
 Influence of the assets and liabilities in the
companies report

FEASIBILITY
 Rapid progress in terms of comparability
 Sharing of same fundamental principles
 Differences are projected in details
 US GAAP is a rule based accounting system
that provides certain guidance for the
guidance as a whole.
 IFRS can be said to b the accounting
standard that leads to flexibility when the
application of the accounting concepts be
done.

 Convergence will lead to benefits because
both have the same fundamental properties
 Strong movement for countries if it
converges to IFRS (Peirson et. al, 2015)
 Ensure proper judgement
 Combination of both AS will ensure flexibility
in approach
 FASB shown reluctance to the project

 With many accounting fraud, the process of
convergence is delayed
 Require more rules and regulations
 SEC is support of convergence
 IFRS convergence leads to cost-benefit
analysis
 Corporation bear the majority of cost with the
process of convergence (Peirson et. al, 2015)

CONCLUSION
 AS should cater to the requirements of the
user
 Should be reliable
 If non-reliance on the AS then it is not
meaningful
 With convergence, managers will be in a
better position to ascertain the cost of
budgeting and revenue
 The weakness in the revenue needs will be
eliminated

REFERENCES
 Albu, C. Albu, N and D. Alexander. (2014). When global
accounting standards meet the local context? Insights from
an emerging economy. Critical Perspectives on Accounting.
25 (6), 489-510. Retrieved from
https://www.researchgate.net/publication/256044793_Inter
national_Financial_Reporting_Standards_in_an_Emerging_Ec
onomy_Lessons_from_Romania
 Ali, M. J., K. Ahmed, and D. Henry. (2006). Harmonization of
Accounting Measurement Practices in South Asia. Advances
in International Accounting. 19, 25-58.
 Carmichael, D.R. and Graham, L. (2012) Accountants
Handbook. Financial Accounting and General Topics, John
Wiley & Sons.
 Nobes, C.(2015). IFRS Ten Years on: Has the IASB Imposed
Extensive Use of Fair Value? Has the EU Learnt to Love
IFRS? And Does the Use of Fair Value make IFRS Illegal in
the EU? Accounting in Europe. 12 (2), 153.
 Peirson, G., Brown, R., Easton, S., Howard, P & Pinder, S.
(2015). Business FinanceNorth Ryde: McGraw-Hill
Australia.