convergence for IFRS and US GAAP


Write an essay on convergence.


In this report the concept of convergence is discussed in details. This report also highlights the benefits and limitations of convergences in order to ascertain the requirement of convergence in accounting standards. There is a section in the report that provides the details procedure of adoption of IFRS in Europe. The effects and benefits of such adoption are also discussed. The process of convergence of IFRS and US GAAP is also discussed in details highlights the success and setbacks in the process. In the last section IFRS 15 is discussed along with examples.


In this section, the convergence with the accounting standards along with IFRS will be critically assessed and analyzed in depth. All the benefits and limitations of convergence along with IFRS and US GAAP will be discussed. Also the revenue from contracts with customers which is described in detail in IFRS 15 will be evaluated.


It refers to the process of maintaining accounting standards in a single set of rules so that it all the organization throughout the entire world follows them towards preparation their financial statement (Chen et al. 2014). Convergence has been taking place for a longer period of time from decades and till now efforts are being taken to reduce the difference in accounting standards adopted by various organizations all over the world.  It is driven by many factors including the requirement that adaptation of single set of accounting principles and standards will help the comparison of the financial statements of various organizations throughout the world. It will benefit the stakeholders and other users of financial statement to derive what they want to know by comparing the financial statement of two organizations. The comparison will give misleading outcome unless both the financial statement is based on the same accounting standards (Maddocks et al. 2013). That is why the convergence of accounting standard is much needed in today’s world.

Convergence has also been criticised on certain basis which include pace and cost. The link between the idea of comparability and convergence is also not very strong. Convergence is being adopted by more than 100 countries all over the world and they had made public commitment towards adaptation of IFRS in preparation of their financial standards. In UK IFRS was adopted in the year 2005 and in 2011 all the public companies are required to prepare their financial statement in accordance with the accounting standards as per IFRS (Landsman et al. 2012). However it is not mandatory for the private companies to prepare their financial statement as per the IFRS and they also chose not to do so. They prepare their financial statement as per UK accounting standards which was developed much before 2005. This type of inconsistency made it difficult for the users of financial statement to compare and analyze income statement, balance sheet and even ratios of various companies. In Europe, the parliament passed a petition in 2002 that all the companies are required to prepare their financial statement as per the accounting standard adopted in IFRS. Countries in Europe are allowed to make adaptation of IFRS optional for the unlisted companies and for the holding company which have unconsolidated financial statement. They were also many exceptions for companies from adopting IFRS since 2005 like only companies whose listed securities are debt were made optional to prepare financial statement as per IFRS (Ahmed et al. 2013).

Previously companies of various countries used to adopt their respective accounting standard for preparation of financial statement. So there was a vast difference between the adaptations of financial statement between various companies. It made it difficult for companies of different countries to amalgamate with each other as their policies were different. Even it made difficult for a company in one country to start their business in another country because of the difference in accounting standard in both the countries. To nullify this problem convergence of accounting standard has been adopted by countries all over the world (Gross and Perotti 2016).

Benefits and Limitation of Convergence

Benefits of convergence are as follows:

Comparability: This is the most important benefit of convergence as all the companies all over the world maintain a sole set of accounting standards for preparation of financial statements. This helps the various users of financial statements to compare the accounts of rival companies and decide on which stands a better position in the market so that they can invest in that company in order to earn good return in future.

International Expansion: In today world most of the companies are trying to expand worldwide to gain global advantage. So if the policies and accounting standards are not same they it will be difficult for them to adapt to the policies and standards of other counties. So convergence benefits those companies who are willing to diversify worldwide.

Central Authorities Body: For making a policy which is globally accepted there has to be central body which will make all the rules and regulation for preparation of globally accepted financial statement (Tarca 2012).

Disadvantages of Convergence:

Integration Problems: To consolidate the accounting standard of various counties is a very difficult task. Therefore the central authority faces a lot a problem in harmonizing the accounting standard to be universally adopted. Since 

Negative Effects on small business: As it is not mandatory for all the companies to prepare their financial statement as per IFRS. Therefore the small business still adopt the accounting standard of their respective countries for preparation of financial statements which is harmful from the overall point of view of the small companies as they are not able to match up with the standards of top multinational companies.

Integration of Sovereignty issue: Various countries have different types of securities laws that govern the business of the companies situated in their country. So to integrate all the securities law of different countries as per IFRS is a difficult job to perform.

Enforcement and Licensing: All the accountants, CPA and Chartered Accountants all over the world need to obtain a license from a universally accepted accounting standard board to do their licensing job like signing the financial statement which needs higher authority. However, if the authority is not well equipment enough then all the professional will face huge problem in their licensing activities (Crawford et al. 2014).

Adaptation of IFRS in Europe

Process of Adaption

Accounting is the process of providing financial information of a company to its investors, regulators and other interested parties. The financial statements prepared by the company follows a set of standard rules and regulation which is referred to as accounting standards. International Financial Reporting Standard (IFRS) are developed and maintained by International accounting Standard Board (IASB). IFRS are set of accounting standards developed with the aim to be implemented across the globe so that investors could compare the financial statements of companies of different countries. The IFRS is currently mandated in more than 100 countries including Europe (Walton 2016). 

The IFRS are applicable from the year 2005 for the preparation of consolidated financial statements of European companies. In Europe IFRS are adopted in the form of regulation which are published at official journal of European Union. The regulations published are automatically adopted by the member states (Pasko 2016). The focus in this report is on the adaption of IFRS by European Union because most of the countries in Europe are included in the union. The European parliament in 2002 passed a resolution that all the member states are required to prepare financial statement on the basis of IFRS. As a result of this resolution most of the companies of the member countries has to change their process of financial reporting which resulted a shifting change in the financial reporting standard across Europe. It is estimated that around 7000 companies of 25 member states has shifted from national GAAP to IFS in 2005. The decision of Europe to adopt the international standard has act as a catalyst for spreading IFRS across the globe. IFRS has been around 10 years in Europe but there are still disagreements regarding the impact and benefit it had on Europe (Maddocks et al. 2013). 

Scope of First time adoption of IFRS (IFRS1)

IFRS 1 lays down the procedures that an entity must follow so that it can adapt IFRS for the first time. The IFRS 1 is applicable only to first IFRS financial statement and for interim reports in which IFRS1 is already applicable. Then for the subsequent years this standard is not applicable (Wilson and Adler 2013).  

 Impact of IFRS adaption

In the 10th anniversary of mandatory IFRS reporting the European commission has undertaken a review for assessing the impact it had across Europe. The aim of the review was to assess the economic affect and to find out whether IFRS has able to achieve its stated objectives.  The result of the assessment indicates that the adoption of IFRS has improved the consistency and quality of the financial reporting across Europe. The significance of the study conducted by the commission is immense because it is for the first time that such a detailed post implementation study was conducted across the globe (Christensen et al. 2015). 

Benefits of IFRS adaption 

The IFRS is a universal financial language that offers numerous benefits to its users. There are plenty of researches that have been conducted to show that benefits are real and not only theoretical (Cotter 2012).  In this section benefits for adopting IFRS in Europe is given below:

The IFRS adaption makes it easier to understand the financial position of the companies. There has been increased transparency on financial reporting across Europe after adoption of IFRS.

There has been many research conducted which claimed that account quality across Europe has improved after the adaption of IFRS. The term account quality refers to the reporting issues that affect the income and asset of the company.

The adoption of IFRs and convergence to it has increased the comparability of financial information across different business of the Europe and the globe. 

It is not conclusively established but many studies have shown that adoption of IFRS reduces the cost of equity of the company. 

It is also suggested by many that adaption of IFRS has increased the liquidity in the equity market of the Europe taken as a whole.

There are also many incidental benefits that accrue on adapting IFRS across Europe. For example the implementation of IFRS has improved the quality of audit service which is an incidental benefit (Yip et al. 2012). 

Limitations of IFRS

The primary limitation of the IFRS is the cost associated with the implementation of the system. The associated benefit for adoption of IFRS much out numbers its cost so it is worth adopting IFRS across Europe (Szychta and Kabalski 2016).

Convergence of IFRS and US GAAP

Convergence process

In 2002, there was an agreement signed between International Accounting Standard Board (IASB) and Financial Accounting Standard Board (FASB) of US in agreeing to converge their respective standards. It was agreed by both the bodies that they are committed to develop high quality and compatible accounting standard that are suitable for domestic and international reporting. The primary objectives of the convergence were to make existing accounting standards compatible and to maintain the compatibility after achieving convergence (Hasanen et al. 2014). The two boards got involved in a joint project and developed some common standards in few critical areas.

Need for Convergence

The convergence between the IFRS and US GAAP offers the following benefits:

The convergence of both the standards will renew the clarity of financial statement presentation;

The convergence will simplify the process;

It will improve transparency of financial information;

It will help in comparing the financial statement of different countries.  

The convergence will have a positive effect on the investment as capital inflow will increase due to increased investments. It will lead to economic growth and prosperity of the country and also of different nations across the globe (Nicoleta and Victor 2014). 

Success and setbacks so far

The drive to converge reporting standards has already leaded to the elimination of historical differences that existed between IFRS and US GAAP (Murphy and O’Connell 2013). The differences still remain but they are not as significant as it once were 20 years ago. After the journey of 10 years of convergence few of the projects undertaken has been successfully implemented in principle even if the words are slightly different (Sy et al. 2012). There are few convergence projects that have been discontinued because there was a lack of agreement between two boards. There are few convergence projects that are still continuing like revenue recognition, financial instruments, leases and etc. The convergence is an appropriate short term strategy but in long term the full compliance with IFRS is more acceptable (Rivera et al. 2014). 

IFRS 15 – Revenue from contracts with customer

 Overview of the standard

IFRS 15 provides the guidance regarding accounting of revenue from contracts with customers. It was a joint project between IASB and FASB and it will be effective from the year 2018.  The main objective of the standard was to establish principles that an organisation is required to include in the financial statement so that nature, timing, amount are adequately reflected in the report (Mrša 2014).  The revenue model of IFRS 15 has five steps:

Identification of the contract with the customer;

Identifications of the obligations that are included within the contract;

Determining the price of transaction;

Allocation of price to the performance obligations;

Recognition of revenue as the performance obligations is fulfilled. 

Difference between IFRS15 and IAS 18

The biggest difference between revenue recognition and US GAAP is in the point of revenue recognition. As per IAS 18 the definition of revenue is quiet broad as a result many companies are required to apply their judgement in specific situations. There are companies that developed its own IFRS policies based on the GAP rules. The guidance prescribed by US GAAP for revenue recognitions are more detailed than IAS. In order to breach this gap a new standard for revenue recognition were issued that is IFRS15. 

As per IFRS 15, transaction price are to be allocated to the individual performance obligation and it is to be recognised when the obligations are fulfilled or delivered. As per IAS 18, revenue is defined as the inflow of economic activity arising from the operating activity of the business.

An example of the difference between IAS 18 and IFRS 15 is given in this section to clarify the topic in more details. Tony enters into an agreement with local mobile phone operator DEF for 12 month telecom plan. The terms of the plan were that Tony’s fixed monthly fee is £100.   He also received a handset at beginning of the plan. DEF sales the same hand set at £ 300 and offers the same plan without handset at £80 per month.  The question is how the revenues are to be recognised under IAS18 and IFRS15. 

As per IAS 18 revenue recognition criteria should be applied to separately identified component within a single transaction. In IAS 18 there are no specific guidance relating to identification of components within a single transaction as a result different company can apply different practices. In this example it is assumed that DEF does not recognise revenue from handset as it was given for free. The costs of the handset are recognised in the profit and loss account as expenses for acquiring new customers. The revenue from the plan is recognised on monthly basis.

Under IFRS the first step is to identify the contract, in this case it is 12 monthly plans with Tony. The second step is that the company DEF is required to perform all the obligations under the contract. In this case the obligation is to deliver the handset and provide network service for one year. The third step is to calculate the total transaction price. In this case it comes to £1200. The fourth step is allocating the transaction price based on the performance obligations under the contract.  

Performance obligations Stand alone selling Price % on Total Revenue (=relative selling price=1200X %)

The fifth step is to recognise revenue after DEF satisfies the obligation under the contract. In this case DEF gave handset to Tony therefore it needs to recognise the revenue of £285.60 at that time. In the case of monthly plan it needs to recognise total revenue of £914.40. On analysing the above example it can be seen that biggest impact of the change is on the profit reporting pattern of the company.     


It can be concluded that convergence of accounting standards are short term solutions to the problem. In order to solve the problem in the long run it is desirable that all countries accept the IFRS in its fullness. Then only can the true benefit of a common standard be gained by all the nations.


Ahmed, A.S., Neel, M. and Wang, D., 2013. Does mandatory adoption of IFRS improve accounting quality? Preliminary evidence. Contemporary Accounting Research, 30(4), pp.1344-1372.

Chen, C.J., Ding, Y. and Xu, B., 2014. Convergence of accounting standards and foreign direct investment. The International Journal of Accounting, 49(1), pp.53-86.

Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), pp.31-61.

Cotter, D., 2012. Advanced financial reporting: A complete guide to IFRS. Financial Times/Prentice Hall.

Crawford, L., Ferguson, J., Helliar, C.V. and Power, D.M., 2014. Control over accounting standards within the European Union: the political controversy surrounding the adoption of IFRS 8. Critical Perspectives on Accounting,25(4), pp.304-318.

Gross, C. and Perotti, P., 2016. Output-Based Measurement of Financial Statement Comparability: A Survey of Empirical Proxies and Existent Literature. Available at SSRN 2747413.


Landsman, W.R., Maydew, E.L. and Thornock, J.R., 2012. The information content of annual earnings announcements and mandatory adoption of IFRS.Journal of Accounting and Economics, 53(1), pp.34-54.

Maddocks, J., Hicks, E., Robb, A.J. and Webb, T., 2013. Minding the GAAP: Co-operative responses to the global convergence of accounting standards and practice. The Hidden Alternative, pp.288-305.

Mrša, J., 2014. IFRS 15-Revenue recognition. Računovodstvo, revizija i financije, 24, pp.136-140.

Murphy, T. and O’Connell, V., 2013. Discourses surrounding the evolution of the IASB/FASB conceptual framework: what they reveal about the “living law” of accounting. Accounting, Organizations and Society, 38(1), pp.72-91.

Nicoleta, G.C. and Victor, M., 2014. Comparative Study Regarding Financial Communication by Means of Annual Financial Statements–IASB/FASB.Ovidius University Annals, Economic Sciences Series, 14(1), pp.617-621.

Pasko, O., 2016. Due Process of the International Accounting Standard Board. Accounting and Finance, (2), pp.50-56.

Rivera, A.R.L., Arbelo, H.J.R., Ruiz, A.D.Á., Rodríguez, J.L.V., García, W.C., Clemente, K.A.B., Pérez, C.J.C., Toledo, S.J.F., Martínez, J., Batista, D.C. and Aponte, A.N.R., 2014, January. IASB AND FASB CONVERGENCE PROJECT: WHERE ARE THEY NOW?. In Global Conference on Business & Finance Proceedings (Vol. 9, No. 1, p. 665). Institute for Business & Finance Research.

Sy, A., Tinker, T. and Okcabol, F., 2012. IFRS and the FASB: a marriage not made in heaven. African Journal of Economic and Sustainable Development,1(4), pp.329-336.

Szychta, A. and Kabalski, P., 2016. Poland. Implementation of IFRS in Poland: Main Effects and Problems. In IFRS in a Global World (pp. 373-391). Springer International Publishing.

Tarca, A., 2012. The case for global accounting standards: Arguments and evidence. Available at SSRN 2204889.

Walton, P., 2016. Aiming for Global Accounting Standards–The International Accounting Standards Board 2001–2011. Accounting in Europe, 13(1), pp.121-123.

Wilson, R.M. and Adler, R.W., 2013. Teaching IFRS. Routledge.

Yip, R.W. and Young, D., 2012. Does mandatory IFRS adoption improve information comparability?. The Accounting Review, 87(5), pp.1767-1789. is
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