Research Project_Final

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International Accounting Research Project: FASB’s Push for Greater Comparability International Accounting Research Project: FASB’s Push for Greater Comparability Richard Cotton Saint Leo University International Accounting ACC-430-OL01 Dr. Wendy Achilles Table of Contents/Outline 1

International Accounting Research Project: FASB’s Push for Greater Comparability Why FASB is Seeking Greater Comparability ............................................................................................ 3 A Brief History of Comparability ................................................................................................................ 3 How FASB is Seeking Greater Comparability ............................................................................................ 4 Real World Challenges to Greater Comparability ....................................................................................... 6 Real World Example: Comparing U.S. Financial Statements to Foreign Financial Statements ................... 7 Conclusion ................................................................................................................................................... 8 Works Cited: ................................................................................................................................................ 9 2

International Accounting Research Project: FASB’s Push for Greater Comparability Why FASB is Seeking Greater Comparability To start off FASB is the Financial Accounting Standards Board and their main goal is to improve financial reporting. FASB is seeking comparability, which notably is not the same as them seeking consistency within reporting as in to make it the same. But instead for like things to look alike and different things to look different but have a common bridge with one another so that they can be compared (Beerbaum, 2021). This is to help investors as well as other individuals or entities that are using or reviewing financial information in U.S. financial markets to better understand them. Namely this is done through the use of Generally Accepted Accounting Principals (GAAP) and these standards are what U.S. financial entities prepare their financial information to align with. With those standards in mind there are different financial standards across the globe namely the International Financial Reporting Standards (IFRS) under which most international companies outside of the U.S. operate under. FASB would like to seek the improvement of both GAAP and IFRS standards in a way that allows for them to be compared in an easier manner. This will help to reduce costs for organizations that operate both inside and outside of the U.S., make preparation of financial statements easier and ideally make financial markets around the world more efficient. This ultimately will help to improve transparency, accountability and efficiency in financial markets which I believe to be incredibly positive for the accounting world as a whole (Tarca, 2020). A Brief History of Comparability Comparability is not necessarily a modern want from FASB it has however received more attention in the past decade as our world has become increasingly interconnected. The concept of convergence first came about post World War II in the late 1950s as economies across the globe 3

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International Accounting Research Project: FASB’s Push for Greater Comparability began integrating into one another (Barth, 2013). At that time a focus was on harmonization which was to reduce the differences between accounting standards found across the globe. As we know now from FASB’s goal to seek comparability this did not last for to long and in 1973 the move towards convergence began replacing the push form harmonization (Chen, 2017). This was accomplished by the International Accounting Standards Committee being formed (IASC) which sought to develop a set of unified high-quality international accounting standards. Following its creation, it worked towards its goal before being reorganized into the International Accounting Standards Board (IASB) in 2001. Since then, IASB has been working with FASB together to improve and converge the U.S.’s GAAP principals with IFRS’s standards. In addition to work with the U.S. IASB has also been working within China and Japan to help converge their accounting standards with the IFRS standards. As of 2011 a bi-annual meeting was started by IASB to bring together 20 different national standard settings organizations where they discuss mutual matters of interest regarding financial standards convergence (Barth, 2013). In addition, to this that meeting serves to allow for the proposal of new policies as well review current convergence projects to establish or extend a timetable further. Overall, the history of convergence has been a long one and some progress has been made but there is still a long path ahead. Fortunately, the IASB has been helping to steer the ship in the right direction both in the U.S. and in foreign financial markets who choose to utilize IFRS instead of GAAP. How FASB is Seeking Greater Comparability It may come to mind as a I mentioned that FASB would align completely with the mission of the IFRS when it comes to comparability but their goal is a bit different. The IFRS is seeking to generate one set of high-quality global standards that can be used across global financial markets (Nurunnabi, 2021). 4

International Accounting Research Project: FASB’s Push for Greater Comparability However, FASB’s current course of action is to do three things develop high quality GAAP standards, participate actively in the development of future IFRS standards and improve relationships with foreign national standard setters (Waymire & Basu, 2022). These three goals are important components of FASB’s mission as it provides them a clear direction and allows all involved with the organization to be working towards a stated common goal. First of which being the development of high-quality GAAP standards, these are created, audited and refined to meet the needs of investors and businesses themselves. During their development FASB is also making sure to stay cognizant of ever evolving IFRS standards to make sure they are as compatible as possible with those standards. This forward thinking is important as it allows for FASB to help progress GAAP further towards comparability while also leading by example and creating an example for other to follow when developing their own standards. Now with that in mind FASB is now also participating in the development of the IFRS standards. This is done by FASB providing its perspective, past experiences, analysis and internal deliberations to IFRS during their process of development for new standards (Mert, 2022). An example of a project currently being worked on is the short-term convergence project which is a joint FASB and IASB. This project is meant to analyze all GAAP and IFRS standards and where possible offer high quality convergence solutions. Wo/rking together in this capacity also advances another part of FASB’s agenda and that is to help improve relationships with other foreign standard setters. As a major benefit to improving these relationships is getting to learn and collaborate with one another. Allowing for these standard setters to swap ideas, form dialogues and keep information as well as communication constantly flowing between one another. Altogether these three goals are an incredibly important part of FASB’s mission to move GAAP and IFRS towards a point of convergence. Each helping in their own ways to move the needle 5

International Accounting Research Project: FASB’s Push for Greater Comparability further in that direction and reach an overall higher quality of accounting standards across the globe. Real World Challenges to Greater Comparability As mentioned previously ever since the IASB’s establishment in 2001 there has been significant progress made towards comparability. This is mostly due to many countries over the past two decades choosing to adopt IFRS standards and FASB’s push towards higher quality GAAP standards and convergence with IFRS standards (Nurunnabi 1, 2021). Additionally, there are programs from both FASB and the IASB to help converge countries across the globe into either GAAP standard practices or IFRS standards. While the initiatives may be helpful and helping to push the industry as a whole in the right direction that does not mean there are not challenges to overcome. One major challenge is that most countries have different financial regulations, different reporting standards and different business cultures (Nurunnabi 2, 2021). This can be challenging to navigate as a reporting body may want to begin making changes but if those changes most go through a regulatory body it drastically increases the attention required for the change. In addition to having to deal with different regulatory bodies within countries there is also the matter of making regulations in place more compatible. This means that prior to adoption of IFRS or another suitably comparable standard like GAAP, FASB must consider how different local standards are to see the steps necessary to begin making them more comparable. Finally, business culture could be drastically different meaning that workers within the financial industry in the country are resistant both at the top and bottom from changing practices (Bengtsson, 2021). These differing business practices are something that top management should be aware of and have the knowledge to help facilitate a transition if regulators deem the 6

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International Accounting Research Project: FASB’s Push for Greater Comparability adoption of IFRS or GAAP standards necessary. Helping to make sure standards are either adjusted to fit more comfortably with local practices. One other issue that arises from local business practices is that within the IASB code of conduct there is an allowance for accountants to make judgements for themselves (Al-Adeem, 2020). As these judgements could result in comparability declining instead of improving. With these challenges considered I think they are solvable with time especially as standards continue to be refined and adoption becomes more widespread. It will begin to be easier to transition emerging nations whose accounting standards may be underdeveloped and whose culture may at present not be suitable to adopt IFRS or GAAP standards. Real World Example: Comparing U.S. Financial Statements to Foreign Financial Statements Now, with all of the above in mind how FASB is working towards comparability I think it would be helpful to provide a full understanding on how FASB has worked towards comparability by providing some comparisons. U.S. GAAP does differ from IFRS in a few key areas but the main area is in financial statement presentation. I will provide a few examples of how the U.S. can present certain information vs. how an India company could present it as India currently utilizes IFRS standards. First as far as financial periods required on statements under GAAP in the U.S. only the period that is being reported is necessary while IFRS requires a previous year as a comparison (Jawarneh, 2021). Currently FASB has lobbied with the SEC and is working on requiring the two most recent years as comparison for the reported year which would help to align GAAP and IFRS standards. A second difference between GAAP and IFRS standards is how the income statement is classified. As under GAAP there is no particular requirement currently under policy while IFRS standards require them to be classified under 1 of 7

International Accounting Research Project: FASB’s Push for Greater Comparability two options, those options being by function or nature (Jawarneh, 2021). I believe the way IFRS requires the income statement classifications to be grouped is an overall better method. So, I would personally encourage FASB to work on aligning GAAP standards with IFRS standards in this matter. A final difference that I’d like to address is one in which GAAP standards are actually more detailed than IFRS standards. Which is that GAAP standards do require public companies to follow detailed regulations when it comes to the layout of their balance sheets (Jawarneh, 2021). Conversely IFRS standards only require a specific number of line items to be present but they are not required to be in any particular order. I dislike this standard that IFRS lacks as it will make comparability more difficult if there is not any commonality with how assets and liabilities are sorted on a balance sheet for example. These differences standing things are not all different there are also a few similarities. The biggest in my opinion is that both GAAP and IFRS standards allow for deferred assets and liabilities to be classified as non- current. The real-world examples provided of how a country like India who utilizes IFRS standards and the U.S. GAAP standards help to provide an overview about how things are progressing towards comparability. Conclusion From my research done for this project I do end feeling optimistic that FASB is making steady progress towards making financial statements across the globe more comparable. Be it through their refinement of GAAP standards, contributions to IFRS standards or outreach to other standard setters. While it may continue to require more work, I’m confident that FASB will eventually reach its goal! 8

International Accounting Research Project: FASB’s Push for Greater Comparability Works Cited: Aladeem, K. R. (2020). Cultural challenges for countries implementing International Financial Reporting Standards (IFRS) without contributing to their creation. African J. of Accounting, Auditing and Finance , 1 (1), 66–86. https://doi.org/10.1504/ajaaf.2020.10028476 Barth, M. E. (2013). Global comparability in financial reporting: What, why, how, and when? China Journal of Accounting Studies , 1 (1), 2–12. Beerbaum Dr., Dirk Otto and Piechocki, Maciej and Weber, Christoph, Is there a Conflict between Principles-based Standard Setting and Structured Electronic Reporting with XBRL? (April 30, 2021). Bengtsson, M. M. (2021). Determinants of de jure adoption of International Financial Reporting Standards: A Review. Pacific Accounting Review , 34 (1), 156–173. https://doi.org/10.1108/par-10-2020-0193 Chen, C.-W., Collins, D. W., Kravet, T. D., & Mergenthaler, R. D. (2017). Financial statement comparability and the efficiency of acquisition decisions. SSRN Electronic Journal , 35 (1), 164–202. JAWARNEH, S. (2021). The difference between IFRS and US GAAP in financial statement presentation. THE ANNALS OF THE UNIVERSITY OF ORADEA. ECONOMIC SCIENCES , 30 (2), 309–317. https://doi.org/10.47535/1991auoes30(2)032 Mert, I. (2022). Normalization, harmonization and convergence of accounting evaluation. Assessment of Accounting Evaluation Practices , 61–86. https://doi.org/10.1007/978-3-030- 98486-1_3 Nurunnabi 1, M. (2021). Implementation of International Financial Reporting Standards (IFRS) in developing countries. International Financial Reporting Standards Implementation: A Global Experience , 11–76. https://doi.org/10.1108/978-1-80117-440-420211002 Nurunnabi 2, M. (2021). The cultural impact of international financial reporting standards (IFRS) implementation. International Financial Reporting Standards Implementation: A Global Experience , 77–125. https://doi.org/10.1108/978-1-80117-440-420211003 Tarca, A. (2020), The IASB and Comparability of International Financial Reporting: Research Evidence and Implications. Australian Accounting Review, 30: 231-242. Waymire, G. B., & Basu, S. (2022). The social value of FASB. SSRN Electronic Journal . https://doi.org/10.2139/ssrn.3889093 9

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