11.07.2019 in Exploratory

The Merging of FASB and IASB Essay

In the late 1999, the FASB expressed their desire of supporting the merging of the IFRS and U.S GAAP. Since 2002, the FASB and IASB have made collaborative efforts in converging of the accounting principles. In 2006, the Financial Accounting Standards Board and the International Accounting Standards Board signed an agreement aimed at merging the IFRS and the U.S GAAP. Following the agreement, there have been various preliminary drafts released in regard to the merging. The two boards seek to develop a common model that would influence the presentation of financial information in the financial statements. Other financial and accounting elements include equity, leases, the fair value measurement concept, revenue recognition, and post-employment benefits among others (Alexander and Archer 128). The main idea of the convergence of the two boards is to develop a universally accepted international accounting standard across the world. The two different accounting standards should converge to promote the quality of the accounting standards. Therefore, the paper will provide a comprehensive discussion on the merging of IASB and FASB based on the convergence of the IFRS and the U.S GAAP.

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The boards have unified some of the major accounting standards including fair value measurement, non-controlling interests and the principles of business combinations. However, the two boards are yet to combine the accounting standards related to insurance, revenue recognition, financial instruments and accounting for the leases. Revenue is one of the significant elements in financial statements that help the users assess the company’s financial performance. Currently, US GAAP and IFRS have differing approaches to revenue recognition. The consolidation would be harmonized and have universal nature applicable in different countries (Gilbertson, Lehman, and Gentene 179). FASB has developed a model of the reporting entities that would manage the overall consolidation across different countries. Derecognition of the financial assets is another major component of the recent merging of the FASB and IASB.

In addition, the model of presenting the financial statements has been identified in the merging. The boards have emphasized the need to have common principles related to revenue recognition. In May 2014, both FASB and IASB issued a statement of converging principles of recognizing revenues related to contracts with clients. This is a major step taken by the boards in an effort to develop common accounting standards in financial reporting. Second, the leases act as a crucial source of finance to businesses that lease assets. Nevertheless, the lease transactions are not recognized in the balance sheet (Stice and Stice 112). The boards seek to enhance transparency and comparability of the lease transactions among the different firms across the world. In terms of financial instruments, the boards have established a three-phase process that would help create common accounting practices for reporting the financial instruments. Most importantly, the boards suggested the replacement of the credit loss approach with the current incurred loss approach. The boards have made serious deliberations on hedging.

Furthermore, the element of insurance is well covered in the current U.S GAAP, but the IFRS lacks specific accounting provisions for insurance contracts. The board would create a common model of estimating the insurance obligations of the companies. Both FASB and IASB are committed to unifying the IFRS and US GAAP. However, the stakeholders in both FASB and IASB have complained about the lack of time to evaluate and respond to the exposure drafts. In 2011, the merging process was slowed due to the delayed release of the exposure drafts. Today, the standards enforced by the convergence of the IASB and FASB affect large corporations, but the small and middle-sized firms are exempted. The success of the merging of IASB and FASB is based on various aspects including the presence of well-trained staff, updated systems, understanding the exposure drafts and the identification of the technical differences of the accounting standards (Ahmed, Neel, and Wang 1345). The convergence of the IASB and FASB is beneficial for handling the challenges present in the dynamic business climate.

The merging of IFRS and U.S GAAP has helped reduce the differences caused by the two parallel accounting standards. In the past, financial reporting and procedures varied from one country to another creating inconsistencies in the financial statements and reporting process. This challenge affects the investors’ decision-making as sole providers of funds to the companies. For instance, foreign investors would be unable to interpret the financial statements and reports of another country limiting their investment confidence in the specific companies. The International Accounting Standards Board (IASB) sought to eliminate the increased complexity and confusion from the inconsistencies of the varied accounting reporting standards. One of the main differences between the GAAP and IFRS is that US GAAP relies on rules and regulations in reporting the accounting transactions while the IFRS relies on the accounting principles approach (Carmona and Trombetta 5). On the one hand, the U.S GAAP comprises of the complex guidelines relevant in creating rules of reporting financial transactions. On the other hand, IFRS comprises of the objectives and goals of appropriate financial reporting and offers relevant procedures on how the objectives are fulfilled in different situations.


Impacts of Merging of the FASB and IASB

Factors including globalization, economic downturn, the Sarbanes-Oxley Act, and the recent implementation of SEC have pressured the different countries such as the United States to reduce the gap that exists between the U.S Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) (Warren, Reeve, and Duchac 89). The convergence of the accounting has a significant impact on the stock markets, corporate management, and investment portfolio among others. It also changes the attitudes of the certified public accountants (CPAs) towards creating common standards in accounting as well as affects the quality of the accounting standards.

First, the convergence of the accounting standards would affect the corporate management related issues in the organizations. It would make corporate management simpler and easily applicable across the world. Most important, corporate management would benefit from the ability to increase funds at lower interest rates. This situation would also lower the risks associated with investment and business operations. Second, it would have a significant impact on the investors. The investors would be forced to readjust their understanding of the existing accounting standards. The investors would be re-educated on how to interpret the accounting reports and statements. Also, they would benefit from reliable investment information making it easy to invest in different countries (Jia and Zhang 19). Generally, the new accounting standards would expand the flow of foreign capital in the global economy.

Moreover, the stock markets would be affected by the new accounting standards, since it leads to the reduction of the expenses of entering new foreign exchanges and markets. All the markets would be using the same rules and principles making it possible for the markets to compete internationally as well as opening global investment projects. In addition, the CPAs and other accounting personnel would be required to learn the new accounting standards. This is because the convergence of the accounting standards would create new universal accounting standards creating consistency in the accounting field. Also, it would take more time for the bodies involved in the setting of the accounting standards to amend and develop the universal accounting standards (Alexander and Archer 128). However, after the merging of the accounting standards, it would be simple to develop and implement the new standards. For example, it would eradicate the cases of relying on particular agencies to make decisions on the specific accounting standards.

However, the new standards would improve the quality as well as encourage disclosure of the financial information in the financial statements. The CPA’s negative attitude towards the merging of the two boards has also slowed the convergence of the standards. The CPA indicates that the existence of cultural differences is a major challenge for the creation of a universal accounting standard. In addition, the Securities and Exchange Commission (SEC) still plays a crucial role in encouraging the merging of the IASB and FASB. SEC has undertaken both domestic and international collaborative efforts in merging the two boards to create efficient capital markets. The organization believes the convergence of the accounting standards would promote the accuracy and reliability of the accounting information provided (Carmona and Trombetta 4).SEC has sought to develop the domestic financial reporting standards to match the international accounting standards that would in turn improve the current quality of the financial reporting. It is also an interpretive body that facilitates the coordination of the financial reporting activities in the U.S.


In conclusion, the merging of the FASB and IASB would offer numerous benefits in financial reporting including improved quality and full disclosure of information among others. However, the convergence of the US GAAP and IFRS has faced strong opposition from various stakeholders and top managers in the corporate world. The involved parties have an increased resistance to changes in the merging of the accounting standards. Many companies in U.S have challenged the merging of the two boards due the claim that the IFRS lacks specific guidelines on the reporting of the business transactions. The corporate management has criticized the IFRS arguing that it is of low quality. In spite of all the criticism and challenges, the merging of the two boards, FASB and IASB, would develop new accounting standards eradicating conflicts and inconsistencies that result from the different accounting frameworks. Legally, companies would be compelled to disclose adequate information related to the customers. This shows the significance of the convergence in enhancing the development of the accounting profession across the world.

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