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The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally.FASB, 2012
International Convergence of Accounting Standards—Overview
Retrieved on April 27, 2012.
Convergence in some form has been taking place for several decades, and efforts today include projects that aim to reduce the differences between accounting standards. Convergence is driven by several factors, including the belief that having a single set of accounting requirements would increase the comparability of different entities' accounting numbers, which will contribute to the flow of international
investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...
and benefit a variety of stakeholders. Criticisms of convergence include its cost and pace, and the idea that the link between convergence and comparability may not be strong.


Overview

The international convergence of accounting standards refers to the goal of establishing a single set of high-quality accounting standards to be used internationally, and the efforts of standard-setters towards achieving that goal. Convergence is taking place in various countries, with over 100 countries having made public commitments supporting convergence towards the
International Financial Reporting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's f ...
(IFRS). Efforts towards convergence include projects that aim to improve the respective accounting standards, and those that aim to reduce the differences between them.


European Union

In the
European Union The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been des ...
(EU), the
European parliament The European Parliament (EP) is one of the legislative bodies of the European Union and one of its seven institutions. Together with the Council of the European Union (known as the Council and informally as the Council of Ministers), it adopts ...
passed a regulation in July 2002 requiring companies listed in EU based stock exchanges to prepare their consolidated
financial statements Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
in accordance with the IFRS from 2005. Countries within the EU were allowed to make IFRS adoption optional for unlisted companies and for unconsolidated
holding company A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...
financial statements, and were allowed to make several exceptions to IFRS adoption in 2005, for example for companies whose only listed securities were debt securities.


United Kingdom

In the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
, the IFRS was adopted beginning 2005, and, as of 2011,
public companies A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (list ...
are required to use the IFRS for their consolidated accounts. Other companies are also allowed to use the IFRS, but most have chosen not to do so, and continue to use the UK accounting standards largely developed prior to 2005. Companies deemed small under the UK Companies Act were allowed to use the Financial Reporting Standard for Smaller Entities (FRSSE) until this was withdrawn. For accounting years ending on or after 1 January 2016, FRSSE is no longer available. For medium-sized entities that are not
public companies A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (list ...
, the
Accounting Standards Board The Financial Reporting Council (FRC) is an independent regulator in the UK and Ireland based in London Wall in the City of London, responsible for regulating auditors, accountants and actuaries, and setting the UK's Corporate Governance and ...
has proposed replacing the UK's
generally accepted accounting principles Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
(UK GAAP) with the Financial Reporting Standard for Medium-sized Entities (FRSME), which is based on the IFRS for Small and Medium-sized Entities.


United States

In the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, the
Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...
(FASB) is working with the
International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the IFRS Foundation. The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). ...
(IASB) to reduce or eliminate the differences between
United States Generally Accepted Accounting Principles Generally Accepted Accounting Principles (GAAP or U.S. GAAP, pronounced like "gap") is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC) and is the default accounting standard used by companies based in the Uni ...
(US GAAP) and the IFRS, in particular according to the convergence programme laid out by a 2006 memorandum of understanding, which was updated in 2008.IASB & FASB, 2012
IASB-FASB Update Report to the FSB Plenary on Accounting Convergence
Retrieved on May 2, 2012.
Short-term projects towards convergence between US GAAP and the IFRS involve the amendment of one of the boards' standards to better align them with the other board's, jointly issuing new standards. Some short-term projects and the corresponding actions taken are listed below. # Segment reporting: a new standard, IFRS 8 Segment Reporting, was issued in 2006. #
Fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset. The derivation takes into account such objective factors as the costs associated wi ...
option: US GAAP was amended to include the fair value option in 2007. #
Joint ventures A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to access ...
: IFRS 11 Joint Arrangements was issued in 2011. #
Income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
: A joint exposure draft was published in 2009. An update to the memorandum of understanding in 2008 introduced long-term convergence projects, including the following. # Derecognition: both boards issued amendments to their accounting standards. # Fair value measurement: FASB Statement No. 257 and IFRS 13 were issued in 2011. # Financial instruments with the characteristics of equity: a joint discussion paper was released. # Revenue recognition: the boards issued joint proposals in 2010. In a joint report published in 2012, the IASB and FASB stated that most of the short-term projects outlined in the memorandum of understanding had been completed, and that greater priority was now being placed on long-term projects.


Motivation

Motivations for convergence include the belief that it will result in increased comparability between financial statements, which will benefit a variety of stakeholders. For example, the FASB believes that "investors, companies, auditors, and other participants in the U.S. financial reporting system" will benefit from converged standards because it will result in increased comparability between the financial statements of different firms. A 2008 report by
PricewaterhouseCoopers PricewaterhouseCoopers is an international professional services brand of firms, operating as partnerships under the PwC brand. It is the second-largest professional services network in the world and is considered one of the Big Four accounting ...
(PwC) stated that convergence of accounting standards would contribute to the flow of international investment and benefit "all capital markets stakeholders" because it: #renders international investments more comparable to investors; #reduces the cost of complying with accounting requirements for global businesses; #potentially establishes a more transparent accounting system with greater accountability; #reduces "operational challenges" for accounting firms; and #gives standard-setters the opportunity to "improve the reporting model".PricewaterhouseCoopers, 2007
ViewPoint – April 2007
Retrieved May 1, 2012.
Additionally, a survey conducted by the
International Federation of Accountants The International Federation of Accountants (IFAC) is the global advocacy organization for the accountancy profession; mainly for the financial accounting and auditing professions. Founded in 1977, IFAC has more than 175 members and associates i ...
found that 89% of accounting profession leaders who responded expressed that convergence was either very important or important for economic growth for their respective countries.


Criticisms

The goal of and various proposed steps to achieve convergence of accounting standards has been criticised by various individuals and organizations. For example, in 2006 senior partners at PricewaterhouseCoopers (PwC) called for convergence to be "shelved indefinitely" in a draft paper, calling for the IASB to focus instead on improving its own set of standards.Jopson B, 2006
PwC calls for convergence to be shelved
Retrieved on April 30, 2012.
In particular, Shyam Sunder of the
Yale School of Management The Yale School of Management (also known as Yale SOM) is the graduate business school of Yale University, a private research university in New Haven, Connecticut. The school awards the Master of Business Administration (MBA), MBA for Executiv ...
has called the link between convergence and comparability "overblown",Sunder S, 2011
IFRS Monopoly: The Pied Piper of Financial Reporting
Retrieved on April 30, 2012.
while the cost and pace of adoption have been cited as the most common criticism of the SEC's 2008 convergence roadmap,American Institute of Certified Public Accountants, 2009

Retrieved on April 30, 2012.
which set milestones that potentially lead to mandatory adoption of IFRS in 2014.Securities and Exchange Commission, 2008
Roadmap for the potential use of financial statements prepared in according with international financial reporting standards by U.S. issuers
Retrieved on April 30, 2012.


Nature of standards

Other criticisms center around the nature of the converged standards. For example, some critics are concerned that convergence will increase the use of
fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset. The derivation takes into account such objective factors as the costs associated wi ...
accounting. Other critics have also respectively cited shortcomings with rules-based and principles-based standards as reasons. Principles-based standards allow for "different interpretations for similar transactions",Forgeas R, 2008
Is IFRS That Different From U.S. GAAP?
Retrieved on April 30, 2012.
and have also been described as "less precise", while rules-based standards contain more exceptions and use bright-line rules and specific details to deal with "as many potential contingencies as possible". The above-mentioned PwC senior partners expressed that convergence will lead to an accounting system that is too rules-based for non-US listed companies, while other critics conversely criticize the principles-based nature of the IFRS as making it difficult for preparers of financial statements to defend against
litigation - A lawsuit is a proceeding by a party or parties against another in the civil court of law. The archaic term "suit in law" is found in only a small number of laws still in effect today. The term "lawsuit" is used in reference to a civil actio ...
.Forgeas R, 2010
Are Critics Against the Adoption of IFRS So Compelling?
Retrieved on April 30, 2012.


History


1950s and 1960s

The idea of convergence has roots in the 1950s, and was a response to greater
economic integration Economic integration is the unification of economic policies between different states, through the partial or full abolition of tariff and Non-tariff barriers to trade, non-tariff restrictions on trade. The trade-stimulation effects intended b ...
and international
capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used f ...
flows after
World War II World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
. Before the 1990s, convergence took the form of ''harmonization'', the reduction of differences between the various accounting standards used internationally.FASB
International Convergence of Accounting Standards—A Brief History
Retrieved on April 30, 2012.
At the 8th International Congress of Accountants hosted by the American Institute of Certified Public Accountants in 1962, many participants expressed the need for the development of accounting standards on an international basis; in the same year the AICPA reactivated the Committee on International Relations, that aimed to improve cooperation among accountants globally.


1970s and 1990s

The International Accounting Standards Committee (IASC), the predecessor to the
International Accounting Standards Board (IASB) The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the IFRS Foundation. The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). It ...
was established in 1973 with the goal of developing accounting standards and promoting them internationally; by 1987 the IASC had issued 25 standards, and by the late 1980s there was "worldwide interest" in the need for convergence. In 1991 the FASB formally set out the goal of developing an internationally used set of accounting standards, and in subsequent years the FASB and IASC undertook various projects to lay the groundwork for convergence. In 1996, the National Securities Markets Improvement Act became law; the act expressed support for convergence efforts and required the SEC to report to congress on progress towards convergence.


2000s

The IASC was reconstituted into the IASB in 2001, and the FASB and IASB began working towards convergence in 2002, expressing their commitment to convergence in the Norwalk agreement and pledging to make their respective standards "compatible as soon as is practicable" and to maintain compatibility by coordinating future programs.AICPA, 2008
Convergence with International Accounting Standards
Retrieved on April 27, 2012.
In the
European Union The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been des ...
(EU), the
European parliament The European Parliament (EP) is one of the legislative bodies of the European Union and one of its seven institutions. Together with the Council of the European Union (known as the Council and informally as the Council of Ministers), it adopts ...
passed a regulation in July 2002 requiring companies listed in the EU to prepare their consolidated
financial statements Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
in accordance with the IFRS from 2005. The IASB and FASB signed a memorandum of understanding in 2006 which laid guidelines on their convergence projects and set short-term goals such as to issue converged standards on business combinations by 2008.FASB, 2006
A Roadmap for Convergence between IFRSs and US GAAP—2006-2008 Memorandum of Understanding between the FASB and the IASB
Retrieved on April 27, 2012.
Work towards the goals were reviewed in 2008, and a progress report published that also set out subsequent steps for each convergence topic. The FASB and IASB met again in 2009 and agreed to "intensify their efforts" in working towards the goals of the memorandum of understanding, while laying down future plans and targets.


2010s

Convergence between the IFRS and US GAAP appeared to stall in 2012, with the IASB suggesting that it would no longer seek to converge with the US GAAP. In 2013, fifteen of the largest banks in the United States, including
Bank of America Corporation The Bank of America Corporation (often abbreviated BofA or BoA) is an American multinational investment bank and financial services holding company headquartered at the Bank of America Corporate Center in Charlotte, North Carolina. The bank ...
,
Capital One Financial Corporation Capital One Financial Corporation is an American bank holding company specializing in credit cards, auto loans, banking, and savings accounts, headquartered in McLean, Virginia with operations primarily in the United States. It is on the list o ...
, Citigroup Inc., JPMorgan Chase & Co.,
Morgan Stanley Morgan Stanley is an American multinational investment management and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in more than 41 countries and more than 75,000 employees, the fir ...
and
Wells Fargo & Company Wells Fargo & Company is an American multinational financial services company with corporate headquarters in San Francisco, California; operational headquarters in Manhattan; and managerial offices throughout the United States and intern ...
, wrote a letter to the chairmen of FASB and the IASB encouraging the boards to resolve their differences over the accounting standards for credit losses. By 2013, over 100 jurisdictions required the use of IFRS for all or most publicly accountable entities in their capital markets, and 115 jurisdictions had made public commitments supporting the convergence of accounting standards.


References

{{International Financial Reporting Standards Accounting research Accounting systems International Financial Reporting Standards