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What Is IFRS and GAAP Convergence?

Jim B.
Jim B.

IFRS and GAAP convergence is the process by which the system of accounting standards in the United States will be merged with the standards used by the rest of the world. In this way, there will be no separation between the US system of Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) used in all other parts of the world. This process of IFRS and GAAP convergence is necessary to help standardize reporting procedures in the global economy. A melding of the two sets of standards requires an understanding of the subtle differences between them.

Companies all over the world are required to accurately report all of their financial activity. This type of transparency is necessary to engender confidence in investors worldwide. The United States is one of the biggest economies in the world and is the center of much financial activity. As such, it is important that the companies within the US prepare their financial reporting in the same manner as companies elsewhere. For this reason, the process of IFRS and GAAP convergence is an extremely important one.

Woman with hand on her hip
Woman with hand on her hip

When IFRS and GAAP convergence takes place, the two systems of financial reporting will ideally be brought in unison with each other. The US system of generally accepted accounting principles has its own unique rules and regulations, as does the international financial reporting standards found in the rest of the world. Ideally, a convergence will eliminate any differences.

There are several different reasons that IFRS and GAAP convergence is necessary, most of which have to do with the globalization of the economy. Since many US corporations own subsidiary companies from other countries, it is necessary that the consolidated statements they prepare have some basis in both international and US regulations. It is also important that investors know that what they read on income statements and balance sheets from various companies mean exactly the same thing no matter the country of origin.

For companies that will be affected by the IFRS and GAAP convergence, it is likely that a period of transition will be necessary. Although there are many similarities between the two sets of standards, the places where they diverge is what concerns corporations the most. The IFRS tends to be based on certain principles that must be upheld in certain situations. This is a deviation from the GAAP's more concrete set of standards.

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