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Harmonization of Accounting Standards

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Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) signed an agreement in year 2002 which known as Norwalk Agreement and both agreed to cooperate with the aim of reducing the level of differentiation between General Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) through the convergence (IFRS 2011 & AICPA 2011). In year 2006, the agreement was renamed as 'FASB-IASB Memorandum Understanding' and termed that both standard boards will need to tolerance and compromise for the harmonization process (TB).

Furthermore, harmonization process is to minimize the level of dissimilarities between both standards to the accepted level (Bonham et al. 2008). Unlike harmonization, standardization is less flexible because it aims to provide a uniform accounting rules to suit variety companies in different countries (tb).

Purpose of convergence project

In year 2001, the most remarkable event happened in United States, the collapse of Enron and follow by, Worldcom in 2002. This facilitates the cooperation of FASB and IASB (Hussey & Ong 2005). Before this happened, FASB believed that 'rules-based' is more superior than 'principle-based' however the collapse of these two companies had make United States to review the standard setting of United States (tb & Hussey & Ong 2005).

FASB Chairman stated that qualification of good reporting and guidelines would be provided under 'principle-based' accounting to explain purpose of reporting and linked to common scenarios that accountants might face (Hussey & Ong 2005). He then admitted that 'rules-based' accounting cannot cover all possible circumstances and this creates loopholes for companies like Enron to 'window-dress' its reports (Hussey & Ong 2005).

In additional, preparers and users were confused by the different accounting treatments stated by both boards prior convergence project (tb). Therefore convergence project is also to clarify doubts of preparers and users about the uncertainty of accounting treatments (tb).

Companies need to prepare financial reports that fit the local regulations then only it can be listed in the country in the past (tb). This is because if companies use different standards will lead to interpretation difficulties, incomparable with local companies and investors confusions (Gowthorpe 2005). However, United States make a move that allowed companies listed in New York Securities Exchange with financial reports that comply with IFRS (AICPA 2011 & Gowthorpe 2005). This is more cost saving as companies do not need to prepare multiple set of financial reports hence companies can have more resources to allocate (tb).

Conceptual framework is fundamental of accounting standards therefore accounting standards construct on the base of conceptual framework in order to successfully achieve harmonization will need to minimize the differences in both conceptual frameworks (tb). Due to this, the boards start making adjustments and improvements on existing frameworks (IFRS 2011).

Limitation in Conceptual Framework

Bonham et al. (2008) believed that although conceptual framework is theoretical however it can be applicable widely in practical. Moreover, FASB defined 'conceptual framework as a coherent system of interrelated objectives and fundamentals that is expected to lead to consistent standards' (tb). Basically, the frameworks had similarities on certain areas because IASB framework was came from FASB framework originally (Bonham et al. 2008).

Firstly, FASB and IASB have same determination in reporting entity which is the existence of users (tb). Thus, they would need to prepare GPFR if there are users rely on GPFR as their sole reference when they make an economic decision (tb). However, FASB and IASB have different perspective on users of GPFR (Bonham et al. 2008). According to FASB's conceptual framework, "present and potential equity investors and creditors" are main users for GPFR and public criticized FASB ignores the needs of other intender users (FASB 1978 & tb). Although IASB's conceptual framework included plenty of users such as 'investors, employees, customers, suppliers, creditors and government' but there is issue rose, whether a single set of GFPR can really satisfy needs of all these users (Hussey & Ong 2005).

Due to different perspectives of user, objectives of GPFR are slightly different for the boards. The FASB provides information to users that have direct 'financial interest in the reporting entity' while IASB provides useful information for users that rely on GPFR as their major source in making economic decisions (tb).

Besides, SFAC 1 defined financial reports as mean of correspond the 'financial and non-financial information' instead of the financial reports itself, it should include everything that able to affect user's decisions (FASB 1978). Non-financial information is hardly to determine accuracy because is not easy to analyze qualitative data. IASB framework stated companies are not necessary to report all information and non-financial information that assist users in making economic decisions in their GPFR (IFRS Foundation 1989). If the companies do not fully disclose then this might mislead the users. In brief, supply of information might really need to rely on information market which lets demand and supply forces to determine how much information should disclose by companies (tb).

Additionally, most of the qualitative characteristics of accounting information are same for both frameworks except for the expectation of reliability. According to SFAC 2, reliability defines as 'representational faithfulness, verifiability and neutrality' while IASB Framework perceives reliability as 'faithful representation, substance over form, neutrality, prudence and completeness' (FASB 1978 & IFRS Foundation 1989). The different is IASB framework emphasized on the economic impact of the accounting events rather than the legal form because the 'substance



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