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420 Intl ACC. International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB),
420 Intl ACC
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For the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB), convergence is always on top of the agenda. These two accounting bodies believe that convergence is one integral step in addressing some areas of significance in financial reporting. There has never been any doubt about convergence bringing about reliability, straightforwardness, and streamlining in financial reporting.
Transparency and uniformity, however, remain the main objectives of convergence. The rule-based system of the US GAAP and the principle-based methodology of the IFRS have without a doubt made convergence more strenuous. While convergence aims at bridging the gap between International Financial Reporting Standards (IFRS) and US GAAP, there still will exist some differences between the two.
In the 2008 Memorandum of Understanding, IASB and FASB identified three areas for convergence. These areas included leases, financial instruments, and revenue recognition while insurance contracts are also reviewed jointly. The efforts of IASB and FASB are given a boost by the seconding and support from the US Securities and Exchange Commission (SEC). Microsoft is an example of a company that uses US GAAP in preparing its financial statements. Oracle, on the other hand, is another US company that uses IFRS in its financial reporting. An examination into the financial statements of both companies presented both similarities and differences in the two accounting standards.
Share-Based Compensation and Earnings per Share (EPS) are some areas that have had a feel of the difference between the two sets accounting principles and standards and the need for convergence. Despite such ‘divergence’, one can still find lots of similarities in the way financial reports prepared by either can be presented. IAS 33 and ASC 260 are provisions in the IFRS and US GAAP respectively that stipulates information to be disclosed on EPS. Because of that, irrespective of the standards used by a public entity; it will always disclose similar information on their common stock. For instance, when one looks at the income statements of companies that use either approach, both diluted and basic EPS can be shown. Both standards utilize the treasury stock method while establishing the effects of both warrants and security options while computing diluted EPS.
Share-based compensation determined by, IFRS 2 in IFRS and ASC 718 and ASC 505-50 in US GAAP, also show similarities between the two accounting standards. Fair value can be described as the amount an asset or liability could be traded in a present transaction involving two willing parties. It is this fair value that can be used by both in accounting for share-based compensations. Estimations from Option-pricing models, in the absence of a market value, it can be used to determine the fair value. This rule is applicable without exception to any company to both employees and non-employees (Brownell, 2011). For investor information, both standards demand that sufficient information on these share-based transactions is disclosed in the financial statements.
Despite all the similarities between the two, there exist numerous significant differences between the two standards. These differences are manifested in how the two standards treat certain aspects of both EPS and Share-based Compensation. Computation of year-to-date diluted EPS for warrants and options is one area where the two vary in methodology. US GAAP gets the number of incremental shares from the weighted average from each quarter. IFRS, on the other hand, does not average the present with prior quarters but instead uses the year-to-date period as the period in contention. The approach in handling contingently convertible debt is also different in both approaches. In both US GAAP and IFRS the potentially issuable shares are contingently issuable hence incorporated into the diluted EPS. While the US GAAP does inclusion irrespective of non-satisfaction of the market price trigger at the end of the period, IFRS insist on contingency satisfaction at the end of the financial period in question (Kirpalani, & Shapiro, 2010).
Share-based Compensation, on the other hand, varies when it comes down to deferred taxes, payroll taxes and grant dates. For instance, within the US GAAP, the grant date can either be the date which the employee starts/completes offering services or it can be reached by mutual understanding. IFRS, on the other hand, expressly stipulates the grant date as the exact date when the agreement is reached i.e. there is no performance commitment concept.
While payroll taxes are simply accrued when compensation is received by the employees under IFRS, US GAAP provides for that they be at exercise date. Another form of taxes, deferred taxes, is treated differently by both standards. IFRS recognizes tax assets when share options have current intrinsic value (Brownell, 2011). This implies that the present market price of stocks can be used to make adjustments hence increasing the volatility of what would be the impact on loss or profit. US GAAP, on the other hand, recognizes deferred taxes on the fair value at the grant date. This, as opposed to US GAAP, implies stability and non-volatility as the deferred tax assets are not subject to reevaluation with stock price changes.
Financially bilingual accountants find it easier to navigate through the capital market hence the need to understand the two. With the change in the US GAAP continually influenced by the IFRS, it is arguably important that all investors get a better grip of IFRS. As evident through the estimates of $6 Trillion US capital in foreign securities and an open US market for foreign companies using IFRS, all entities have no option but to learn the two standards.
References
Brownell, L. E. (2011). Acounting and finance. New York: Wiley.
Kirpalani, V. H., & Shapiro, S. J. (2010). Marketing effectiveness: Insights from acounting and finance; an annotated bibliography , 1960 – 77. Chicago, Ill.
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