Finance and Accounting GAAP

Finance and Accounting

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Institutional Affiliation

The proposals made by IASB will definitely have a great effect on the U.S. GAAP especially on corporate management, investors, and accounting professionals. Convergence of accounting standards will have a broad based implications on the U.S GAAP especially on areas such as financial instruments, revenue and leasing (Jeffers, Mengyu & Askew, 2010). Currently, most U.S companies use the new accounting standards in their foreign subsidiaries. Introducing the new proposals may require system upgrade depending on the final method or process used in incorporating the proposals into the U.S accounting framework because the most important thing is to delivering the necessary information in an efficient and timely manner. It is therefore apparent that IASB proposals will have a great impact on US GAAP therefore forcing accountants to seek modifications to their activities.

Upcoming changes to U.S GAAP intend to have significant effect on revenue recognition, leases and financial instruments. Even though the standard has not been made final, the three major changes to U.S. GAAP are significant and therefore understanding how they affect one’s profession and entities operations (Gallagher, 2010). When revenue recognition, financial instruments and leases standards are finalized, they will definitely become part of U.S. GAAP and affect both private, not for profit and public entities that were previously using the U.S GAAP standards. The revenue recognition proposal will have a great influence on the way revenues will be recognized and disclosed, transactions will be accounted for, and finally the way contractual arrangements will be made as a way of improving comparability across companies, industries and capital markets.

A single standard for revenue recognition that converges U.S GAAP and IFRS applicable across all industries and in all transactions is vital in eliminating the transaction and industry specific revenue recognition guidance associated with U.S GAAP (Munter, 2011). The resulting standard will be a principle based approach that will determine revenue recognition because of its ability to affect every entity’s every day accounting and transactions. Standardized revenue recognition standard for both annual and interim reporting will be applied retrospectively including any practical expedients discussed. However, transition to the new revenue recognition standard as well as the potential impacts on financial statements and introduction of new systems may take some time due to challenges of familiarity among the U.S professionals (Gallagher, 2010).

Accounting for financial instruments has been treated with great significance in the proposal made by the IASB because of the vital role it played in the just concluded financial crisis even though it is a very sophisticated area to deal with. In financial instruments, it is not easy to predict what may happen and when because of the high level of uncertainty associated with crises. Financial instruments topic has been divided into impairment, classification, and measurement, hedging, and all the organizations having financial instruments would definitely be affected by the proposed standards (Arnold, Blisard & Duggan, 2012).

Financial instruments project is intended to advance the decisive usefulness of financial statements by making it simple and standardizing accounting practices amongst all the entities and across industries. Initially, the IASB proposal included accounting for all the financial instruments but has since been lessened to specific instruments as well as provision of new guidance on fair value measurement. Fair value measurements will focus on building a steady measurement and eventually disclosure of fair value relating to financial instruments. The proposed standard would replace the unconditional fair value option and eliminate the fair value option for hybrid nonfinancial instruments in current U.S GAAP (Jeffers, Mengyu & Askew, 2010). A joint project on financial instruments involves classification and measurement of financial instruments and impairment of financial assets to avoid differences that may occur in the final standards.

Leases proposal would make many lease obligations not recorded on the balance sheet and that the current account for leases is not a reflection of all lease transactions as well as classification and pattern of expenses in the income statement. The proposal involves a dual approach to the recognition, measurement, and presentation of expenses and cash flows associated with lease; it includes reporting a straight line lease expenses in income statement for real estate leases by lessee and reporting amortization of the right of use asset separately from interest on the lease liability (Jeffers, Mengyu & Askew, 2010). It is however important to note that lease industry is always subjected to political pressures that may sometimes change the standard by raising questions on the proposed direction. Provision and understanding of the leases applications would require more insight that can lead to final standard being issued with less political interference.

Proposals made by IASB would improve the relevance of information and comparability of the information across different businesses in certain areas such as revenue recognition, leases, and financial instruments (Arnold, Blisard & Duggan, 2012). Moreover, the proposed measures would minimize alternative accounting methods and simplify accounting processes thus making it easier for professional accountants to carry out their accounting activities.

References

Arnold, J., Blisard, B., & Duggan, J. (2012). Dealing with the Implications of Accounting Change. Financial Executive, 28(9), 36-41. Retrieved from http://eds.a.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=820d3ff0-d559-4a94-890f-d906b362c6ad%40sessionmgr4003&vid=2&hid=4110

Gallagher, M. J. (2010). Get Ready for Sweeping Changes in Accounting Rules. Financial Executive, 26(6), 18-22. Retrieved from http://eds.a.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=e2aea631-00e5-4722-945b-d07d209adae8%40sessionmgr4003&vid=2&hid=4110

Jeffers, A. E., Mengyu, W., & Askew, S. (2010). The Switch from US GAAP to IFRS – Implications for Analysis Involving Inventories. Proceedings of the Northeast Business & Economics Association, 48-54. Retrieved from http://eds.b.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=1f9481ae-1c95-448e-aca7-c9db56796dd2%40sessionmgr111&vid=2&hid=101

Munter, P. (2011). Accounting Standard-Setting: CONVERGENCE Drives More Change. (cover story). Financial Executive, 27(1), 22-25. Retrieved from http://eds.a.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=06e2870f-33d5-4a08-91b2-f8c0aad92b09%40sessionmgr4003&vid=2&hid=4110