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Creating a Universal Standard for Accounting and FinanceResearch Paper

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¶ … Long-Term Impacts of IFRS and GAAP Convergence?

In the world of accounting, there has been a focus on creating a workable standard for firms to utilize around the world. This is taking place based upon the need for greater amounts of transparency and reporting. To determine the overall scope of what is happening requires carefully examining the convergence of IFRS and GAAP guidelines. These elements will offer specific insights which are highlighting the scope of these changes and the way they are impacting different stakeholders.

Globalization is having a positive impact on corporations by giving them access to new markets and cliental. This is because technology is improving and the world is becoming more interconnected thanks in part to advancements in communication. As a result, the accounting standards are converging to provide greater amounts of transparency to investors and regulators. However, the biggest problem with these issues is that the new standards are often confusing and create added amounts of uncertainty in understanding the financial information provided by the organization. To address these challenges, regulators have focused on creating a universal standard called the International Financial Reporting Standards (i.e. IFRS). These are guidelines that are designed to address the differences between countries and the practices most commonly utilized. (Bragg 2010)

One of the biggest challenges with firms listing on multiple stock exchanges is the way they account for revenues. In some countries, these standards are more lax and give personnel greater amounts of flexibility. While at other times; they are discouraged based upon the amounts of confusion and misrepresentations. For example, under Generally Accepted Account Principals (i.e. GAAP) some countries will allow for reverse entries to improve their financial results. This occurring with them reporting revenues on potential sales in the quarter the transaction was completed. However, throughout the process, there is a probability these projections are inaccurate. This is because the customer could cancel the contract or the size of the purchases. When this happens, the firm will have to restate earnings from taking an overly optimistic perspective on their revenues. This is problematic, as it can cause regulators and investors to question the validity of the information they are provided with. This makes it appear as if financial improprieties are taking place. Yet, actuaries have no control over the impact of outside events on the firm. (Bragg 2010)

The problem with this approach is that it is allowed under GAAP standards inside the United States. However, there are other countries (i.e. Canada, Australia and Europe) w do not recognize these methods. This is because, their figures make it harder for them to project how much money they are earning or the impact it is having on their forecasts. At the same time, others will want to use this approach, in order to take immediate write offs and inform investors about the impact numerous events will have on their bottom line results. These differences will vary from one company to the next. They are based upon, the management and accounting philosophies which are embraced by the organization. (Bragg 2010)

To address these issues, there has been a focus on integrating all of the different standards together under the IFRS protocol. According to a study conducted by Barth (2010), she determined that these shifts are creating a change in practices and attitudes. Yet, they are also underscoring significant challenges which still remain. Evidence of this can be seen with Barth saying, "IFRS firms have greater accounting system and value relevance comparability with U.S. firms when IFRS firms apply IFRS than when they applied domestic standards. Comparability is greater for firms that adopt IFRS mandatorily, firms in common law and high enforcement countries, and in more recent years. Earnings smoothing, accrual quality, and timeliness are potential sources of the greater comparability. Although application of IFRS has enhanced financial reporting comparability with U.S. firms, significant differences remain." (Barth 2010) These insights are showing the potential long-term benefits and drawbacks. To fully understand what is taking place requires carefully examining these shifts and their lasting impacts. This will be accomplished by conducting a literature review, examining the research methods and having a discussion / analysis. Together, these different elements will show the long-term effects and how they are influencing financial reporting standards.

Literature Review

Since the 1950s, there has been a focus on creating single standard that is integrating American guidelines with others around the world. This began when various oversight boards wanted to improve transparency and make it easier for companies to list on multiple stock exchanges. The basic idea is to create standards that improved transparency and ensure everyone is following the most widely accepted guidelines. (Ball 2006)

The Pros and Cons of Integration

However, many countries (i.e. The U.S.) have been slow to adapt these kinds of standards. This is because economic and political forces are influencing the process. According to a study that was conducted by Ball (2006), these shifts are forcing firms to accept universal principles and standards. Yet, at the same time, there are issues with many of the older system continuing to influence which standards are utilized. In these situations, it is shaped by economic and political forces. This is following worldwide integration of both markets and politics. These factors makes the integration of financial reporting standards inevitable. The pros and cons are the unbridled enthusiasm of allegedly altruistic proponents. On the benefits side, there are extraordinary successes achieved in developing a comprehensive set of high quality IFRS standards. This has proved successful by persuading 100 countries to adopt them. On the negative side, there are problems with fascination of the IASB (and the FASB) in regards to fair value accounting. A much larger concern is that there will be substantial differences between countries in implementing these guidelines. (Ball 2006)

These insights are showing how the convergence of accounting standards is a logical process to simplify and streamline reporting procedures. The problem is that there are certain practices which the old systems continue to support and the new IFRS standards are taking a one size fits all approach. This is making it harder for universal guidelines to be accepted. Thanks in part, to its inability to adjust to the needs of firms inside specific regions. The result is that there are obvious gains and limitations from these challenges.

Furthermore, Daske (2008) determined that IFRS guidelines are effective when there is an incentive for organizations to embrace them. However, in those countries where they are voluntary, many will often choose to embrace the old standards. In this case, he examined the economic consequences of mandatory International Financial Reporting Standards (IFRS) around the world. His analysis is focusing on the effects on market liquidity and the cost of capital using a sample of firms that are mandated to adopt IFRS. He found that market liquidity increases around the time of the introduction of IFRS. He also documented a decrease in the firms cost of capital and an increase in equity valuations, but only if it accounts for the possibility that the effects occur prior to the official adoption date. Partitioning out the sample, he found that the capital-market benefits occur only in countries where firms have incentives to be transparent and where legal enforcement is strong, underscoring the central importance of firms' reporting incentives and countries' enforcement regimes for the quality of financial reporting. Comparing mandatory and voluntary adopters, he found that the capital market effects are most pronounced for firms that voluntarily switch to IFRS, both in the year when they switch and again later, when IFRS become mandatory. While the former result is likely due to self-selection, the latter result cautions us to attribute the capital-market effects for mandatory adopters solely or even primarily to the IFRS mandate. Many adopting countries make concurrent efforts to improve enforcement and governance regimes, which likely play into our findings. (Daske 2008)

This is illustrating the motivating factors that are encouraging firms to embraces IFRS standards. The result is that there are higher levels of liquidity and these firms function more effectively in these environments. Yet at the same time, a larger number of organizations will not embrace them if there is no incentive to do so. In these situations, they will focus on using old methods based upon the lower costs and convenience provided. This is something many integration efforts are not taking into consideration using a one size fits all approach.

Key Differences between IFSR and GAAP Standards

The biggest differences between both standards are in the way various assets are accounted for. Using GAAP protocols, this occurs when an asset is recognized using current or fair market value. Whereas IFRS guidelines, are focusing on what the asset is worth in the future. This makes it difficult for actuaries to report the value of different assets based upon separate views about what they are worth and how they are applied to the organization's balance sheet. (Bellandi 2012)

For instance, intangible assets are reported using their current… [END OF PREVIEW]

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