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The advent of global businesses that thrive on environments that have different accounting frameworks is the main motivating factor towards the changes in International Financial Reporting Standards (IFRS). In the current business world, IFRS is used by more than 100 countries. In the United States, the Financial Accounting Standards Board (FASB) has outlined General Accepted Accounting Practices (GAAP) as the benchmark for financial reporting.
Therefore, anyone who seeks to do business on an international scale should also be familiar with the International Accounting Standards Board (IASB) and the organization’s guide on fair value measurement. A deeper understanding of IFRS requires one to compare its fair value measurement standards with those of GAAP. This paper outlines the efforts that have been made by both the FASB and the IASB in the movement towards uniform fair value measurement for financial instruments and the differences between the two organizations’ approaches.
The movement towards a uniform fair value measurement of financial instruments began forty years ago. During this period, both the IASB and FASB have made concerted efforts towards achieving uniform measuring instruments. By the year 2001, only a few countries around the world had incorporated the IFRS into their financial systems. However, the IFRS systems received a major boost in popularity when they were endorsed by the International Organization of Securities Commission (IOSCO) in matters concerning international trading.
Soon after, the IASB received another boost when its system became a requirement for all companies that were listed in the European Union’s exchange market. Meanwhile, both the IASB and the FASB pledged to harmonize their systems as stipulated in the Norwalk Agreement of 2002. The agreement sought to make sure that both systems remained compatible even after they had been harmonized.
In 2006, the two organizations signed a Memorandum of Understanding (MoU) that sought to illuminate the roadmap towards uniform financial measurements. The MoU was meant to cater to both long-term and short-term hindrances towards the unification of accounting practices. The joint efforts by the FASB and the IASB sought to address three main issues namely; eliminating existing differences between standards, the concerns of investors, and convergence.
Some of the good things that came from this early convergence include the induction of a managerial approach when harmonizing the measurement of financial instruments. IFRS 8 utilizes reportable segments as opposed to risks and returns measurement. Furthermore, the 2006 MoU standardized the calculation of goodwill in piecemeal acquisitions.
Striking differences in approach between IASB and FASB still exist and the current GAAP and IFRS regulations are proof of these divisions. For example, the stipulation on accounting for alternative investments is different for the two standards. Under GAAP, “practical expedient allows the measurement of certain alternative as net asset value while this stipulation does not exist under the IFRS” (Kimmel, Weygandt, & Kieso, 2013). Another difference in approach between the IASB and the FASB lies in the manner in which disclosure exemptions are handled. Consequently, under the current financial regime, IFRS non-public firms are exempted from making certain disclosures while GAAP does not offer any exemptions.
The journey towards a fair value measurement for financial instruments is a joint effort between the IASB and the FASB. In the course of this journey, agreements have been signed but differences still exist between the two accounting regimes. Consequently, it has become clear that favoring one fair value measurement system is easier than harmonizing the existing ones.
Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2013). Financial accounting: Tools for business decision making (7th ed). Hoboken, NJ: John Wiley & Sons.