Accounting is the system that companies use to record and present information. It is a language of sorts that businesses use to communicate to internal and external parties. While the debits and credits of accounting are the same in every country, the set of rules and standards that companies use to record and report specific transactions vary across the globe.
The most prominent set of global accounting standards is the International Financial Reporting Standards (IFRS). There are 120 countries that either require or permit companies to use IFRS or have a national equivalent to IFRS that is different only in name. In the United States, companies are required to use US Generally Accepted Accounting Principles (US GAAP). There are significant differences between IFRS and US GAAP.
Why is this such a big deal? As business dealings become more globalized, it is imperative for users of the financial statements to be able to compare companies across countries. Put simply, companies that report under US GAAP are not speaking the same language as companies that report under IFRS. Since US companies account for a great deal of economic activity, this only makes international business and investment decisions more difficult.
Recognizing this problem, in 2002 the US standard setting body (the Financial Accounting Standards Board, or FASB) and its international counterpart (the International Accounting Standards board, or IASB) issued a joint Memorandum of Understanding that marked the formalization of their commitment to converge the US GAAP and IFRS standards. This began the process of ‘convergence’.
The goal of convergence has been to maintain two separate sets of standards, but to make them the same in principal. In areas with differences, the Boards agreed to adopt the standard they deemed as preferable, whether that was the US GAAP or IFRS standard, or some sort of combination of the two. However, this goal was not achievable in every case. In some cases, the new published standards still have significant differences, and in other cases the boards dropped convergence efforts because they simply could not come to an agreement. While both Boards are still working towards convergence, many think that true convergence will ultimately never be achieved.
About the Author
Jackie is a member of the HBX Course Delivery Team and currently works on the Financial Accounting course for the Credential of Readiness (CORe) program. She also works on the Leading with Finance Course, and is working to design and develop courses in Entrepreneurship for the HBX Platform. Jackie holds a BSB in Accounting in Finance, and a Master’s of Accountancy, all from the University of Minnesota. In her free time she enjoys cheering on her favorite Minnesota sports teams and baking.