Wednesday, March 11, 2009

The Differences between IASB and FASB

This academic paper discusses existing differences between the accounting standards regimes set by International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB), with specific attention to intangible assets and goodwill, lease accounting and pensions. The paper is presented in tree main sections

In introduction a brief background information concerning the gap between two standard sets and the history for its narrowing is given. In methodology section the main research method, which was used is presented and certain aims for this paper are established and its structure is explained. The next sections deals with intangible assets, criteria for their recognition, depreciation impairment testing etc. In this section specific attention is paid to accounting goodwill and then depreciation policies for intangible assets are described. The leasing section describes in detail accounting procedures by lessors and lessees under national and international rules, discusses specific questions concerning sale-leaseback transactions, financial and operating leases and their treatment under different systems. Finally, disclosure requirements by lessor and lessee separately for every form of lease are given in this section. Section that deals with pensions outlines the major inconsistencies between the two systems. Research findings section discusses results of this research paper and finally conclusions are drawn.

The comparative analyses used in the paper identified a wide range of differences between FASB and IASC standards. Indeed, not all differences will influence the final results obtained from applying this or that standards set. It is true, that the differences in methods used for accounting are less important than the differences between the results of accounting. For instance, two standards may have fundamentally different bases for recognition of a certain financial event, but the information in the report could be the same. However, other types of differences may prevent the financial reports from being comparable.

The differences revealed in the paper may be classified into following categories:
1. Differences in guidance for initial of subsequent recognition and criteria for it may cause differences in whether the difference is recognized at all, whether the item is capitalized or recorded as an income and other effects on financial statements, in what period item is recognized.
2. Measurement differences. Different treatments of items in what concerns initial or subsequent measurement may lead to different amounts being recognized for the same item under different accounting systems. For instance, an item can be depreciated or revalued to current cost in each reporting period.
3. Alternatives. When one standard allows a choice between two or more methods of accounting the same transaction, and another provides strict guidelines differences may also arise. Existence of alternatives may also lead to differences between financial statements issued by institutions following the same accounting standards.
4. One standard may provide specific rules for dealing with certain type of transaction, and its counterpart might lack guidance in that area.

All the differences outlined in this report, minor as well as major ones, prevent many companies to enter American capital and other markets, slow down cross-border investment. Also, it takes multinational companies a lot of time and money to prepare financial statements under more than one accounting standards set. As it was mentioned in the beginning of the paper, many short and long-term projects are run jointly by IASB and FASB with the objective of narrowing the gap between their regimes, and to create on set of universal accounting standards as an ultimate goal. Some were a success, while the others were not. The project, which is being done jointly by FASB and IASB, grew out of an agreement reached by the two boards in September of 2002.

Some differences have arisen in statements recently issued by FASB. These include the definition and presentation of discontinued activities, costs associated with exit or disposal activities (including provisions for restructuring costs), assets held for sale, and government grants.

Still, other differences are more long-standing but may be capable of resolution in a relatively short time. These include idle capacity and spoilage costs of inventories, accounting policies, changes in estimates and errors, depreciation of idle assets or those held for disposal, application of the temporary difference approach to income taxes, construction contracts; investments in joint ventures, interim financial reporting, and research and development costs.

The following opinion from The Economist would be good to conclude the paper:
"Immediately after Enron went bust, hopes were high that America would become disenchanted with GAAP and abandon its opposition to adopting the International Accounting Standards (IAS), opening the way to a single, worldwide set of accounting standards. This may happen eventually. But in the short term, the Americans are likely to resist the IAS and instead try to improve GAAP. At the same time the IAS—which currently are not quite as good as GAAP—will also be upgraded. These reforms may move in a similar direction. The incoming boss of FASB has served on the IASB, and the two bodies are likely to pursue a covert strategy of convergence on a common set of standards".

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