The development of global economic ties has led to the need for internationally recognized accounting standards. The International Financial Reporting Standards (IFRS) were developed in an attempt to create global standards for financial reporting and regulation. However, several countries including the US are yet to adopt IFRS. The US has the generally accepted accounting principles (GAAP) which have certain differences with the IFRS. Although convergence involves significant costs, it is important for the future development of international trade.
The convergence of US GAAA and IFSR is important for the development of a global standard of accounting. Although the IFSR is termed as an international standard, the impact of the US economy and business activities around the world is significant and can affect the credibility and effectiveness of any international standard. A significant number of multinational companies are based in the US, and therefore, the accounting standards in the US affect financial reporting and regulation in many countries. Companies using the US GAAP represent about 35% of global capitalization (Fosbre, Kraft & Fosbre, 2009). The convergence would compel the multinational companies based in the US to use financial reporting standards that are recognized by investors and other stakeholders in the international market. Apart from the US, all other major economies are using IFRS or have plans to transition to the international accounting standards in future (Fosbre, Kraft & Fosbre, 2009). The US should not be left behind in the transition going by its role in international trade.
The convergence of US GAAP and IFSR would facilitate the development of international trade. The use of different accounting standards necessitates the preparation of multiple reports to reconcile transactions taking place between entities using different approaches in financial reporting. The preparation of these reports takes time and may create the basis for confusion among various stakeholders, such as investors. The use of a uniform accounting approach would foster a sense of transparency in the transactions taking place in the international market. Therefore, convergence is important in improving confidence in business transactions involving multinational companies. The need for reconciliation of accounting standards is demonstrated by various cases of business transactions involving the US and countries using the IFSR. For example, an effort to list a German company in the New York Stock Exchange was faced by an accounting problem because of a discrepancy showing that the company made a profit of $733 million under the IFSR standards and a loss of $589 million under the US GAAP (Fosbre, Kraft & Fosbre, 2009). These discrepancies create barriers in global trade because of presenting conflicting figures about the financial situation of business entities.
However, the transition to a new standard can be costly to business entities and the economy. The convergence of the US GAAP and IFSR would require business entities to change their accounting practices. Costs are expected in the implementation of the new standards, including training for accountants. Every business entity using the US GAAP would be forced to incur the costs, and the US economy can suffer as a result (Fangshu, 2015). The cost to the economy can be billions of dollars. Besides, the convergence of standards may eliminate incentives to innovate on financial reporting standards.
The convergence of accounting practices is critical to the future development of international trade. The quality of accounting in the global business environment can suffer because of confusions in financial reporting. The convergence should ensure that the key issues considered by stakeholders in business decisions, such as revenue and loss recognition, are not affected by the use of different accounting standards.
References Fangshu, Z. (2015). Review of U.S. GAAP and IFRS Convergence: Revenue recognition aspects. Research Journal of Management Sciences, 4(5), 21-36. Fosbre, A., Kraft, E., & Fosbre, P. (2009). The globalization of accounting standards: IFSR versus US GAAP. Global Journal of Business Research, 3(1), 61-71.