Since the advent of globalization in the world economy, there has been the need to come up with harmonized standards to be used in financial reporting. The International Accounting Standards Board reconstructed itself in 2001, after which it came up with objectives aimed at applying a single set of financial standards in accounting. The accounting standards and principles proposed by IASB also aim at bringing global convergence in the field of accounting. Since the harmonization of accounting standards, many countries have felt the need to reconcile their accounting standards used at the national level to be in line with the international standards (Needles & Powers 2012 p. 2-54). Listed companies have to prepare their financial statements using IFRS standards. The Norwalk Agreement and the Memorandum of Understanding that came to being in October 2002 have played an essential role in the convergence agenda.
An Overview of the Norwalk Agreement
In October 2002, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) came up with the Norwalk Agreement. The Memorandum of Understanding in this agreement was a notable step towards the convergence between International Accounting Standards and the Generally Accepted Accounting Principles (GAAP). Following the signing of the agreement, both Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) pledged their commitment to see the development of high quality accounting standards (Collins & McKeith 2010, p. 2-608).
The Norwalk agreement detailed that IASB and FASB would step up efforts to enhance the compatibility of the existing financial reporting standards. In addition, the two institutions agreed to enhance coordination in their work in order to ensure that once they achieve the compatibility, they will also maintain it. Certain agreements were laid down by both the International Accounting Standards Board and Financial Accounting Standards Board. These agreements aimed at achieving convergence and enhancing compatibility in financial standards (Needles & Powers 2012 p. 2-54).
Agreements between IASB and FASB in the Norwalk Agreement
The two agencies (IASB and FASB) agreed to give priority to certain issues that would enhance compatibility in the financial reporting standards. First, the two agencies agreed that they would undertake a project (short term), which would help to reduce variations between International Financial Reporting Standards (IFRS) and United States Generally Accepted Accounting Standards (GAAP). The differences to be removed and harmonized were differences that existed in International Accounting Standards. Secondly, the Boards agreed to do away with other differences between GAAP and IFRS that would not have ended by 1st January, 2005. As per the agreement, this would be done through the coordination of work programs in the future. In addition, the Boards agreed that this would be achieved by undertaking projects that had to be addressed by the two Boards (Botzem 2012, p. 67-90).
Moreover, during the Norwalk Agreement, the two agencies agreed to continue with the projects that they were jointly undertaking. Under the Norwalk Agreement, the two Boards were also to encourage the coordination of their activities through their bodies. The Memorandum of Understanding between IASB and FASB also stated that the two Boards had to commit their resources in order to enhance the achievement of the convergence objective. In addition, the Boards agreed that they would harmonize the differences that existed between them in order to enhance compatibility in the financial reporting standards (Collins & McKeith 2010, p. 2-608).
Norwalk Agreement and the Convergence Agenda
Since the Norwalk agreement and the Memorandum of Understanding thereof, the Financial Accounting Standards Board and the International Accounting Standards Board have stepped up efforts in order to achieve the convergence agenda. Several initiatives have been undertaken to ensure the convergence of IFRS with the United States Generally Accepted Accounting Principles (GAAPs). Therefore, it can be argued that the Norwalk agreement has played a crucial role in enhancing the convergence agenda (Botzem 2012, p. 67-90).
One way in which the agreement has enhanced convergence is through the undertaking of joint projects by both IASB and FASB. These projects include those projects that the two Boards have carried out together through coordination of efforts. For example, the International Accounting Standards Board and the International Accounting Standards Board have carried out projects that address issues to do with businesses combination such as takeovers. While addressing this issue, the Boards have ensured that uniform financial standards are followed in order to maintain the goal of convergence (Ernst & Young 2012, p. 20-80).
The Norwalk Agreement and the Memorandum of Understanding have also led to the emergence of short-term projects, which aim at enhancing the convergence agenda. The convergence projects are conducted jointly by both the FASB and IASB. The aim of the projects is to come up with standards, which will ensure convergence in accounting standards as outlined in the Norwalk Agreement. The short-term projects focus on the differences between IFRS and United States GAAP. The aim is convergence and coming up with solutions to the challenges facing financial reporting at the international level (Ernst & Young 2012, p. 20-80).
The other importance of the Norwalk Agreement and the Memorandum of Understanding to the convergence agenda is that it has enhanced liaison between FASB and IASB. The presence of members of IASB in FASB promotes the convergence agenda. As a result of the agreement, both the FASB and IASB have been able to exchange crucial information regarding convergence. The other role played by the Norwalk Agreement, and the Memorandum of Understanding is that it allows the projects, which IASB carries out, to be monitored by FASB. The monitoring of the projects ensures focus on goals and objectives of the convergence agenda (Gibson 2012, p. 20-35).
The Norwalk agreement and the Memorandum of Understanding have played a crucial role in facilitating research projects, which aim at ensuring that convergence in reporting standards is achieved. As stated in the agreement, the two Boards (FASB and IASB) should make efforts to carry out research projects that will make recommendations that are necessary to enhance convergence. The research projects aim at identifying the differences between IFRS and GAAP and come up with strategies, which will resolve these differences (Gibson 2012, p. 20-35).
Thus, the Norwalk Agreement has been useful in coming up with standards and measures that have helped in achieving the convergence agenda. Since the Agreement came to being, International bodies dealing with the issue of convergence of financial standards have made several achievements. International financial reporting standards have been harmonized between IASB and FASB, especially with regard to the propositions made by the Norwalk Agreement and the Memorandum of Understanding.
Developments in the international financial reporting framework and the aims and objectives of the FASB and the IASB
An Overview of International Financial Reporting Framework
Over the years, there have been developments in the international financial reporting framework. The IASB came up with the conceptual framework for financial reporting in 1989. Since the inception of the framework, several changes have been witnessed in international reporting standards. The international financial reporting framework gives a description of the various rules that should guide the preparation of financial reports. The IFRS framework also guides IASB and FASB while coming up with future standards to be used in the reporting of financial statements. The framework for financial reporting has been essential in solving accounting issues and ensuring harmonization of financial reporting standards (Cahill 2010, p. 298-316).
How the developments in the international financial reporting framework have succeeded in meeting the objectives of IASB and FASB
The objectives of IASB and FASB include the harmonization of accounting standards and coming up with guidelines, which will ensure uniformity in financial reporting. In order to achieve their objectives, both IASB and FASB have come up with conceptual frameworks, which help in the reporting of financial statements. One of these frameworks is the IASB’s Framework for the Preparation and Presentation of Financial Statements. This framework gives guidelines, which should be used in preparing financial statements. The developments in international financial reporting frameworks have helped in the achievements of the objectives of IFRS and IASB in a number of ways (Cathey 2012, p. 130-145).
First, the developments in the international financial reporting frameworks have helped the Boards of IASB and FASB to come up with guidelines while preparing financial standards. In addition, the international framework has helped IASB and FASB to come up with solutions to issues, which may not be addressed or resolved through International Accounting Standards. The developments in the international financial reporting framework have also helped IASB and FASB to enhance consistency in financial reporting standards. The international Accounting Standards Board and the Financial Accounting Standards Board have also been able to enhance comparability. For instance, conceptual frameworks have ensured that companies adhere to consistent financial standards and statements (Cathey 2012, p. 130-145).
Developments in the international financial reporting standards have also contributed to the achievement of the objectives of IASB and FASB by emphasizing the purposes, which should be met by the financial statements that an organization prepares. For example, the frameworks emphasize that financial statements should serve the information needs of the various users of financial statements. Moreover, the conceptual frameworks for the preparation of financial statements have helped accounting Boards (IASB and FASB) to review the International Accounting Standards already in place and make improvements to these standards (Jones & Wolnizer 2011, p. 375-387).
The arguments in favor of and against the application of principles based rules
The application of principles based rules can be considered as essential in a number of ways. First, principles based rules allow users of financial statements to interpret the information contained in the financial statements based on international standards. Secondly, these principles can be regarded as useful since they allow organizations to review their financial statements in line with international standards. Principles based rules are also helpful as they enhance uniformity while preparing financial statements. Despite the arguments in favor of principles based rules, there might be shortcomings associated with the use of these rules in the preparation of financial statements. One of the shortcomings is that the rules may not be applicable in all organizations. For example, some organizations may encounter financial situations that tend to be in contradiction of the principles based rules (Kaminski 2011, p. 16-26).
The significant historical and other influences on the development of national and international standards
The notion of convergence and the development of international and national standards of financial reporting came to being during the late years of 1950s. The aim was to respond to economic integration that occurred after the end of the Second World War. Initially, the main focus entailed harmonization, which dealt with the reduction in the differences that existed in the accounting standards used then. During the 1990s, the term convergence was coined; this term replaced harmonization. Following its formation in 1973, the International Accounting Standards Committee became the first international body to deal with the setting of international standards. The recognition of IASC in 2001 saw the change of the Committee into a Board (IASB). The efforts to enhance convergence were stepped up in 2002, with IASB and FASB agreeing to work together towards the harmonization of accounting standards. In 2010, the Securities and Exchange Commission (SEC) supported the development of global accounting standards, as well as convergence in accounting principles (Zhang 2010, p. 2-16).
The role of national standard setters and particularly the US FASB and the International Accounting Standards Board
The United States Financial Accounting Standards Board and the International Accounting Standards Board play a crucial role in setting financial reporting standards. One the roles of the two Boards encompass updating and establishing principles of financial accounting in the private sector. The two Boards also publish and clarify the standards, which should be applied globally in financial reporting. US FASB and IASB also deal with issues of post-employment benefits. The Boards also come up with acceptable rules and guidelines, which should be employed while preparing financial statements. The Boards are also responsible for pointing out information that should be contained in financial statements prepared by companies (Zhang 2010, p. 2-16).
Arguments for and against the development of a single set of international financial reporting standards
A single set of international financial reporting standards will enhance the quality in financial reporting, thus allowing stakeholders to come up with reliable economic decisions. A single set of accounting standards will also ensure that convergence between IFRS and GAAP is achieved. The development of a single set of financial reporting standards will also ensure that companies carry out financial reporting consistently. Apart from the arguments for the use of a single set of financial reporting standards, several arguments have been raised against the use of a single set of financial reporting standards. One of the arguments against a single set of financial standards is that most of the propositions made by Boards tend to highlight conservative principles of accounting. This may reduce the value of earnings, assets, as well as revenues. As a result, organizations may report high losses as well as costs (Miller & Bahnson 2011, p. 20-21).
The IASB’s current programme aiming towards international convergence
The current projects being undertaken by IASB focus on the progress made in financial reporting; for example, the Board is reviewing changes that can be made in the classification of financial instruments. In addition, IASB is making preparations to partner with FASB in order to complete projects dealing with leases, recognition of revenues, financial instruments, and insurance contracts. The current programmes by IASB towards convergence also entail issues to do with classification categories, especially the measurement of assets using the fair value (Ernst & Young 2012, p. 20-80).
Conceptual differences between “convergence” and “uniformity”
Convergence refers to efforts towards enhancing the union and standardization of financial reporting standards. Convergence aims at ensuring that companies conform to the same set of standards in financial reporting. On the other hand, uniformity details a form of clustering, which can be associated with upholding a single method. Uniformity requires that companies use similar standards in financial reporting and the preparation of financial statements (Pacter 2010, p. 67-83).
Potential difficulties in achieving international convergence
Some of the difficulties witnessed in the achievement of international convergence include challenges in the implementation of the standards. There has also been resistance from countries such as the USA, which has expressed interest to continue using GAAP. Difficulties have also been experienced due to the failure to come to a consensus about the appropriate standards, which should be used globally. These challenges are being addressed through a joint work programme between the FASB and IASB; this programme is working towards the harmonization of standards to enhance convergence (Walton 2011, p. 1-123).
In conclusion, the agenda of convergence has taken centre stage in the last decade. Through the propositions made in the Norwalk Agreement, IASB and FASB have strived to ensure that they meet the requirements of the Memorandum of Understanding. Convergence between IFRS and IASB will ensure the harmonization of accounting standards, especially through the introduction of a conceptual framework to be used in financial reporting.
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