ACFI 3221 Advanced Financial Reporting : Financial Literacy and Rules

Introduction:

The particular report mainly puts emphasis on the notion of “Convergence” with respect to the standards of accounting. Moreover, the different factors of convergence along with its significance in the field of accounting have also been highlighted. This report illustrates the concepts regarding the International Standards of Accounting and connects them with the convergence of the standards of the accounting (Hoyle, 2015). Therefore, the report has been prepared for illustrating the convergence theories and conception with respect to the accounting principles. This section of report summarizes the conception of convergence and along with it put focuses on the advantages and restrictions with respect to the accounting principles. It also includes the argument regarding acceptance of IFRS in the E.U. by considering the primary method, its effect, advantages and limitations. Thus, this report structures an accurate isolation among the U.S. GAAP and IFRS convergence. Finally, the new principle of IFRS 15 has been discussed here and along with it, the IFRS 15 has been contrasted with the IAS 18. 

Convergence 

Conception of Convergence

Based on the fiscal declaration, it can be said that the convergence is described as a particular method that complements the accounting principles, especially those that several regulatory bodies issued. The convergence of the U.S. principles and International Standards of Accounting are considered as the instances of convergence (Nobes, International Classification of Financial Reporting, 2014). However, the primary aim of this concept is to provide familiar set of accounting principles of higher quality in order to enrich the comparability, efficiency and stability of the fiscal declarations. At present, two chief factors of convergence took place. These are as follows:

National GAAP Convergence – It is the acceptance of International Standards. For example, in the U.K., the “Accounting Standards Board (ASB)” works for convergence of the principles of own fiscal statements along with IASB (Laeven L. L., Financial innovation and endogenous growth., 2015).

International Convergence – This convergence is comprised of “National Standard-Setters (NSS)” and “International Accounting Standards Board (IASB)” along with their personal principles of fiscal declarations into a single set of worldwide accounting regulations.

Thus, it can be said that in case of both the chief theories, the IASB along with NSS works together in a nation for uniting the local GAAP “(Generally Accepted Accounting Practice)” and IAS, which have proposition for union of local GAAP with IAS in several other nations (Wahlen, 2014).

Convergence in Practice 

Based on the international perspective, it can be said that the worldwide comprehensive set of accounting principles are ideal conceptually. Therefore, this assists to ensure the comparability between the fiscal declarations. Moreover, the particular principles of accounting aid the corporations to enjoy a low amount of cost of capital in the fiscal declarations (Skaife, 2013). Moreover, a set of accounting principles has been found to ensure regarding facing lower obstacles to the accountants’ free movement within business and across the authority.

Important Events Related to the International Convergence

It can be said that in the road of International convergence, several significant events took place in the years of 2002, 2004, 2006, 2007 and 2008. The events that took place are stated below in detail:

Year	Events
2002	Ø March – The European Union (E.U.) took decision to accept the IAS with the aim to consolidate the accounts for the enlisted firms (Arslanalp, 2014). Ø September – The Norwalk Agreement took place, where both the FASB and the IASB recognize the assurance level with the intension to develop principles for companionable accounting and high quality principles for cross-border as well as domestic fiscal declarations.
2004	Ø October – The ASB and the IASB of the nation Japan decided to discuss a project in joint in order to reduce the differentiation between the accounting principles of Japan and the IFRS with an ultimate intention of standards convergence (Dunne, 2013).
2006	Ø January – Canada’s ASB endorsed a plan with the aim to converge with the IFRS. Ø February – The Finance Ministry of China declared that with the acceptance of the new system comprised of new principles of accounting of China, it brings considerable union along with the IFRS (Van Deventer, 2013).
2007	Ø November – In this period, the U.S. SEC declared that the convergence has proceeded through the process of removal of the needed, especially for the global corporations with the aim to file a resolution to the U.S. GAAP along with the fiscal declarations of the IFRS (Brigham, 2013).
2008	Ø February – In the agenda of the year 2008, the U.S. SEC declared that it would get involved within the continuance of the development, which was prepared in the U.S. for the reception of the IFRS for the household filers (Abeysekera I. , 2013).

Benefits and Limitations of Convergence 

Advantages of Accounting Principles Convergence

Comparability – It can be said that comparability is considered as one of the major advantages of accounting principles convergence and this recurrently offers as a forceful validation that expands the comparability among the countries. In addition to this, the managers as well as the investors of the firm in the capital market utilize the familiar principles, during the period of making any fiscal decision (Weil, 2013). However, the accounting principles convergence can result into gaining many advantages. Therefore, this factor discloses the matter that the convergence helps in minimizing the expenses that are required for operating a business through reduction of the requirement for gathering accompanying data.

Network Externalities – It is regarded as one of the advantages of the accounting principles convergence that describes the particular occurrence, where an individual gets advantage by using set of principles of accounting (Drexler, 2014). On the other hand, when numerous users use the particular system of accounting, the comprehensive advantages are offered to all those users who surpass from an individual’s confidential benefit. Generally, network externalities are incorporated within the principles of accounting and this implies that uniform national principles of accounting are the evidence.

Drawbacks of Convergence of the Standards of Accounting

• The usage of principle-based nature within the convergence of the standards of accounting makes the situation complex in order to prepare the fiscal declarations with the aim to protect against the lawsuit (Laeven L. L., 2015).
• The convergence increases the usage of the fair value accounting.

Adoption of IFRS in Europe 

Procedure

The EU accepted the standards of IFRS in 2002 and it is mainly used for the combined fiscal declarations from the overall EU nations, especially whose equity or liability securities are traded in the regulated market. This market of Europe is affected since 2005. Moreover, the Accounting Regulation generates the procedure of implementation of IFRS standards in EU (Villiers, 2014). The following table indicates the present status of EU implementation procedure of IFRS amendments and standards that were issued in 2015 (December) by IASB and this became effective since 2015 (1^st January).

It has been found that the First-time Adoption of International Financial Reporting Standards or the IFRS 1 is considered as an international standard of fiscal reporting that was issued by the IASB (International Accounting Standards Board). This has been noted to set out the needs on the representation and presentation of the fiscal declaration and the interim fiscal reports through entities that are accepted by the IFRS for the first time. This was done for ensuring that they are comprised of various data of high quality. It has been found that the ACCA (Association of Chartered Certified Accountants) cited the IFRS 1 due to possess of “great practical significance” in the jurisdictions, which are adopted by the IFRSs. Moreover, it has been noted that the European Commission endorsed the standard for utilizing within the EU (European Union) along with the Commission Services that was founded in the year 2009 and the newest account of the IFRS 1 possess advantages that compensate the adoption of the costs.

It has been found that the European Commission has settled with the European Parliament, this has found to influence the new accounting standards, and along with it, interpretations for the endorsement took place in the E.U. Moreover, it has been found that the EFRAG (European Financial Reporting Advisory Group) along with the Commission Services help in preparing the studies. This is comprised of description of the issues involved related to accounting and this has resulted from the consultations of the stakeholder and the analysis of the impacts of utilizing the newer rules of accounting in the E.U. The EFRAG has been noted to perform an effective study for the amendments to the IFRS 1 about the loans of the government. In addition to this, it can be said that depending on the effective study of the EFRAG, the Commission Services have been regarded as the primary expenses and advantages regarding the endorsement of the modifications to the IFRS1.

Impact

The adoption of the IFRS is regarded as the chief monetary transformation because this gives rise to main line of research. However, the empirical literature is performed in order to appreciate the impacts of IFRS acceptance. This research represents the evaluation of the effect of changing principles particularly on the quality of fiscal reporting and impacts of alters on the capital market (Henderson, 2015). It mainly adds value to the understanding of the aspects, which affects the results of changes. Thus, this is a key factor for the nations’ regulators because they prepare to change the principles, but for those regulators who have already performed the entire thing by considering the manners to develop the implementation of IFRS.

Advantages

The adoption of IFRS helps in setting up principles that makes able for attaining better data. This outcome from utilizing measuring and recognition criteria as these focuses the financial reality of the firms. The adoption of IFRS will be done at an international level because it raises the comparability of fiscal declarations (Tong, 2014). It can be said that the increased comparability and quality of the fiscal declarations have positive effect on the forecasted amount. It has been found that the strong proof includes obligatory adoption of IFRS as this reflects the macro-economic advantages for the capital market. The impact of IFRS acceptance in the E.U. results into fiscal declaration quality as this highlight the exploration on the relevant values.

Limitations

Based on the above study, it can be said that the IFRS acceptance in the E.U. are restricted to the monetary consequences. The results were limited as the legal requirements regarding the acceptance of the IFRS have taken place recently (Sabev, 2015). However, there was deficiency of related increase in the valuation of the equity and the decrease in the optional accumulations.

Convergence of IFRS and U.S. GAAP 

The FASB and IASB signed in the Norwalk Agreement in 2002 as a preliminary point for a particular project to meet their individual sets of standards regarding fiscal reporting (Bloom, 2014). Both the standards committed to develop high quality and compatible standards of accounting that are appropriate for both cross-financial and domestic fiscal declarations. Norwalk Agreement has mainly two aims for making present standards of accounting compatible in nature.

Moreover, FASB and IASB were found to publish “Memorandum of Understanding” i.e. “Roadmap” in 2006. These boards detect the long and short-term union projects and are prepared depending upon those principles, which involve accounting standards convergence. Moreover, this also includes elimination of the dissimilarities between both the standards, which need important developments. Thus, a common standard (new) should be developed for improving the fiscal data that are reported to the shareholders. However, the other includes serving the investors’ needs and the Board looks for convergence through replacement of present standards and to create new ones.

There are certain regions where the IFRS varies from the U.S. GAAP. These are:

Fair Value Measurement – its main aim is to enlighten the description of fair value and to develop a single guidance source.

Revenue Recognition – Its intension is to extend a model for revenue acknowledgment that can be incorporated in and across the geographical regions and industries.

Post-employment benefits – Here, both the FASB and IASB aimed to shift to a universal standard. Thus, there is an important differentiation among their individual positions.

Conceptual Framework – It highlights on the goals of preparing fiscal declarations and qualitative features of fiscal reporting information.

Earnings per share – It includes both the FASB and IASB after the appraisal of the proposed alterations for computing the earnings per share (diluted).

Leases - It results into the operating leases in the new standards that are being considered as a property for identifying the responsibility for making the payments (rental).

IFRS 15 – Revenues from Contracts with Customers 

The IFRS 15 mainly focuses on the process and the time when a reporter of IFRS detects the entities’ revenue as this provides the fiscal declaration users with more data and related disclosure. However, the Standard represents a principle-based, single model, which could be implemented to every contract that is made with the clients. In 2014, IFRS 15 was issued and was incorporated in the period of annual reporting which will start on or after January 2018.

IFRS 15’s main intension is to include the standards which an entity should incorporate for preparing useful report to the fiscal declaration users, based on timing, nature, uncertainty, amount of revenue and the cash flow that generates from client contracts. This will become a mandatory factor for preparing annual report from the period of January 2018.

Generally, the IFRS 15 Revenue from Clients and Contracts is mainly applied to every contract with clients, exemption in leases case in the IAS 17 Leases scope. It uses the fiscal tools and contractual obligations in the scope of IFRS 10 Consolidated Fiscal Declarations, IFRS 9 fiscal tool, IAS 28 Investments within Joint Ventures and Associates, IFRS 11 Joint Arrangements and IAS 27 Separate Fiscal Declaration (Hladika, 2014). Moreover, the insurance contracts in the scope of non-financial exchanges among the entities of similar field and IFRS 4 Insurance Contracts. All these would assist the sales for the clients.

Differentiation between IAS 18 and IFRS 15

Based on the study, regarding the revenue system of the IAS 18, it can be said that the Revenue IAS 18 (IAS 1.8-1.6) should be implemented within accounting for the purpose of revenue under IAS 18, as the revenue rises from provided events and transactions (Kamm, 2014). These include - service-rendering, sales of goods. On the other hand, the revenue system of the IFRS 15 includes Revenue from the contracts made with clients IFRS 15. It should be implemented when the principle is made for all contracts that have been made with the clients. However, it excludes Insurance contracts in the scope of IFRS 4, Lease contracts in scope of “IAS 17 Leases Non-financial exchanges fiscal tools and obligations in scope of Financial Tools IFRS 9.

In addition, under the revenue recognition timing of the IAS 18, the revenue takes place from sale of goods that are identified through satisfaction of criteria. Moreover, revenue amount can be measured based on reliable terminologies. On the contrary, underneath the revenue recognition timing of the IFRS 15, an entity transfer generally controls the over passage time of goods that would satisfy the obligations of performance (Abeysekera, 2013). The reason behind this is that it helps in identifying that if any criteria are not met.

Conclusion: 

The accounting is outlined based on political and economic factors and convergence of the principles of accounting plays a vital role recently. Here, the acceptance of IFRS in the E.U. has been illustrated in detail. Moreover, the impact of acceptance of IFRS on the quality of the information and capital market has been discussed. Furthermore, this study puts focus on the theoretical underpinnings by the usage of analysis of the theories and concepts that reflect the consequences of the adoption of IFRS in the E.U.

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