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Question one:

The significant differences that have resulted in the current state of affairs? In the long

run, do you feel these differences can be worked out?

Harmonization is the decrease of differences whereas the aim of convergence is a single

global standard set. The significant differences that have resulted from the current state of affairs

are: the first is not necessary and is harmful. Full harmonization is not practical and not valuable.

Global GAAP will not be accomplished given the institutional obstacles in the standard setting

procedure. Besides, healthy global capital markets already exist hence there is no real

requirement to increase reporting needs in the already robust international capital markets.

The second is there are differences in the political, legal, economic and cultural

environments in states as the justification for financial reporting difference. For instance, the

accounting government in developed western countries have a higher likelihood of dominating

global harmonization determinations. Imposing western accounting practices on developing non-

western republics will probably do more harm than good.

The last difference is the one has a rule based while the other has principle-based

accounting standards. These two approaches have proponents and critics. Rule-based proponent

stipulate that preparers require all directions they can get not to run afoul of the authorities in

their standard implementation. A critic of the rule-based standard is that can only do what is

instructed to do. Principle base proponents state that has a higher probability of reflecting the
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transaction economic substance and needs preparers, regulators, and auditors to employ

professional judgment to indicate the commercial content of transactions rather than a checkbox

method. Nonetheless, rules and principles are incompatible, and it’s challenging to converge

rule-based with principle based.

Question two:

Discuss rules-based standards and principals based standards. Describe similarities and

differences that exist between these measures.

Rule-based standards (US GAAP) defines individual events with the use of particular

details. Principle-based standards (IFRS) offers the general directions employed in various

conditions. GAAP and IFRS similarity is that they are found under social, political, legal and

economic aspect. The difference is that principle based is flexible while rule-based is inflexible.

Besides, principle-based record transaction facts while rule-based uses theory notes to record

transactions. Lastly, principle-based standards use control model (Shortridge & Myring, 2015)

while rule-based uses risk and reward model.

Discuss FASB and IFRS as related to these standards. If the rules are not compatible,

what is the compromise standard that the U.S. and the remainder of the world trying to

achieve?

FASB is the institution body responsible for GAAP, and the IASB is responsible for

IFRS. Therefore, FASB is the body responsible for developing rule-based standards while IFRS

has principle-based standards. The FASB take an active part in promoting IFRS, offering input

on IASB projects via the IASB’s accounting standards advisory forum and by other means. The

FASB contribute to the IFRS development through sharing opinions based on its experience such

as analysis, deliberations, stakeholder outreach and due process.

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The standards are not compatible. For instance, rules like the LIFO inventory method are

not permitted under IFRS will not be resolved the accounting bodies responsible for creating this

standard. Thus, there is nothing that can be done to have the same grounds standards.

Question three:

Why may converting all financial statements to IFRS not be the most appropriate action to

take nor be the best standard for measuring operating performance of the possible

investments in those countries?

The IFRS is not the most appropriate but US GAAP also has some gold standard, and

some degree of quality will be lost with full adoption of IFRS. The case of Deutsche bank is

illustrative of some challenges of using non-domestic GAAP. In, 2002 Deutsche bank voluntarily

switched to US GAAP in preparing its financial statements as part of its stock listing on the New

York Stock Exchange. Analysts asserted that the switch to US GAAP was detrimental in that it

confused investors, reduced transparency and increased earnings volatility. They blamed the

switch to US GAAP for making Deutsche bank financial statements more opaque and its earning

more challenging to forecast. Precisely, US GAAP was deemed unsuitable for the bank as a tax

rule forced it to take a synthetic tax charge when it sold industrial shareholdings.

Besides, some U.S. issuers with no substantial customers or operations that are external

from the U.S. might resist IFRS as they might not have a market incentive to prepare IFRS

financial statements. They might consider that the substantial costs linked to accepting IFRS

outweigh the benefits (Jeffers & Askew, 2010). Another reason that makes IFRS not appropriate

action to take is that it relates to the costs associated with the international companies that consist

of changing the internal system to make them compatible with the new reporting standards
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training expenses and many others. Besides, IFRS is complicated and expensive. Its adoption

will be a disadvantage for small business as huge transaction costs will hit them.

Question four:

FASB’s method of foreign currency translation and IASB’s method of foreign currency

translation. Do they differ significantly? Explain.

Foreign currency translation is one in which two parties consent to exchange one

currency for another at a particular exchange rate. FASB Statement No. 8 presents a standard for

foreign currency which is structured to offer data that is compatible with anticipated economic

effects of a rate change on a business cash flows and equity. Second, it should reflect in

consolidated statements the financial results and relationship as quantified in the primary

currency that every entity performs its business known to be functional currency. Hence. FASB

employs functional currency translation approach (Lin, 2013). Under FASB 52, the majority of

foreign US. Subsidiaries are deemed to fit into two categories. One category is whose primary

operating environment is the country where they are located. The second category is that is an

extension of the parent in which their operating, financing and investing decisions are dollar

denominated. Under SFAS No. 52, the functional currency determination is based on the

economic facts of foreign entity and cannot be arbitrary.

IASB required a method for foreign currency is a temporal method. The method applies

the measurement basis of an asset or liability establishes exchange rate used for translation.

Therefore, monetary accounts like receivables, cash and payables are translated at the current

rate while non-monetary items like fixed assets and inventories are translated at the current

exchange rate if they are carried on books at present value and are translated at the current

exchange rate if taken on the books at historical cost.

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The two approach differs significantly as temporal method report the non-monetary

accounts at a historical value while functional currency uses the economic facts of each foreign

entity. That is the foreign currency monetary amounts are stated at the closing rate. Non-

monetary accounts are carried at fair value.

SFAS No.133, accounting for derivative instruments and hedging activities attempts to

standardize the accounting rules for all derivatives. It applies to all entities and to all types of

derivatives and originally aimed at being effective for all physical periods beginning June 15,

1999.
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Work Cited

Jeffers, A.E., & Askew, S. Analyzing financial statements under IFRS: Opportunities &

challenges. Journal of Leadership, Accountability, and Ethics, 2010; 8(1), 45-57

Lin, J. F. International Financial Reporting Standards: are they right for the United States? The

Journal of Global Business Issues, 2013; 7(2), 59-67. Retrieved February 11, 2014

Shortridge, R.T., & Myring, M. (2015). Defining principles-based accounting standards. The

CPA Online Journal, 2015. Retrieved from

http://www.nysscpa.org/cpajournal/2004/804/essentials/p34.htm

FASB No. 8; Accounting for the Translation of Foreign Currency Transaction and Foreign

Currency Statements

SFAS No. 52 and the Functional Foreign Currency; pg. 3-86

SFAS No.133. Accounting for Derivative Instruments and Hedging Activities; pg. 3-89