Is Convergence Possible?
Enron’s multibillion dollar collapse in 2001 is considered the greatest corporate scandal in history. In the accounting world, it has been set to become the weapon that the International Accounting Standards setters have been looking for in its battle to convince US to adopt International Financial Reporting Standards (IFRSs).
IASB board members have indicated that Enron’s collapse could not have happened under existing UK or IAS during that time (note that the UK GAAP is closest to IFRS). Enron had a massive investments in off balance sheet special purpose vehicles whose negative positions were only discovered later when the losses could hardly be hidden anymore. IASB says IFRS would probably have got them on the balance sheet as it’s very tough.
The convergence of IFRS and US GAAP would be very helpful to Companies that are reporting both in their local country and in the US. This would save them the cost of reconciling local reporting to US reporting. However, US being the world economic leader is sometimes politically arrogant in terms of world issues and policies. They may not just accept the IFRS as they are claiming that the current US GAAP is more superior than IFRS. There’s even a rumour that it’s IFRS that’s going to adopt US GAAP! Is it for real?
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All I can say is “what a beatiful picture!”
Hey Mr. Wilson, kung saan saan mo n lng pinagkukuha mga picture mo. baka darating ang araw makaka receive n lng tau ng love letter from someone kung san mo kinuha mga picture na yan. You even do hotlinking sometimes.
Yes I heard that rumour too. Anything is possible with the world of accounting!
I agree, convergence of IFRS and US GAAP would be very helpful to companies that are reporting both in their local country and in the US.
I don’t think the rumour is that IFRS will adopt US GAAP, rather that they will converge closer to US GAAP.
If you think in terms of financial gravity, the US is greater, compared to the rest of the world, so the final worldwide position probably should be closer to their current state in fair circumstances.
I’m not sure if it’s correct to term this political arrogance. In reality it may be fairer to say that the rest of the world is arrogant in trying to force the US to change. The US is not just the world economic leader, but the financial leader as well with more investors and more important companies residing there and so their views on the subject are critical.
While UK GAAP or IFRS might have picked up the Enron debacle earlier, they will not be a panacea to end business bankruptcy and sudden collapse.
The creation of IFRS, while a result of good intentions will not solve many of the problems of global accounting. There are still multiple reporting formats and near limitless choices to be made when interpreting and reporting an company’s annual reports.
Regardless of whether we use US GAAP or IFRS, there will still be a strong incentive for company management to evolve new ways to avoid disclosing what they don’t want the public to know.
Also Deuts comments on Love Letters are very true.
At the moment, IASB is trying to eliminate all alternative accounting treatments in most of their accounting standards to avoid companies from cherry picking. This move will at least solve the gray areas of accounting.
But I agree that companies will still have a limitless choices in their reporting creating inconsistencies. They also create complex transactions that may not be captured by the accounting standards. It should be noted that the accounting standards cannot cope with the rapid development of the capital markets. Best example is the derivative transaction which has been in the market for a decade before the first accounting standard for derivative only came out in 1997.
By the way, do you understand tagalog? Can you translate what deuts is saying
I do not know about US law regulations, but according to Swedish law assets are to be valued at “real value” in the balance sheet. And this text is said to be based on IFRS. No, what is “real value”?
Reality is different before and after a crisis, only a matter of weeks.
Where is the old principle of prudence?
I’m not actually aware of “real value”. I’m accustomed to referring to “fair value” or “market value”.
Hey, Mr. Wilson, no more updates? No more new posts? Is that all you got? hehehe
[...] time I posted a topic about whether the United States would adopt the international accounting standards (IFRS) since there have been numerous problems surrounding these issues. Just this week, the US SEC has [...]