Case Study

Convergence of International Financial Reporting Standards with U.S. Generally Accepted Accounting Principles

  1. With the adoption of FAS 14IR and FAS, The key financial ratios that will be affected will reflect as the issue of cost when it comes to combining the business (Barth, 2015). Initially, the direct costs were used as capital in the acquisition cost. However, after the inception of the new rules, the direct costs are put in the expenses in the year of acquisition. During the stages part, there will be effects based on the fact that in the past the measurement was based on values during individual equity acquisition (James, 2010). However, there was re-measurements when acquiring FAS 141R.
  2. Mergers and acquisitions make sense in various situations. Take, for instance, there are opportunities that comes and require fast, decisive actions and there are times when a competitive threat requires a company to take a defensive move to expand as soon as possible. The adoption of FAS 141Rand FAS 160 is most likely to cause changes in acquisition because of technical complexity of changes (Barth, 2015).  As such, they will require an analysis of the number of tasks that need the company needs to work on. Since the FAS 141 and FAS 160 are new systems, there might be lack of expertise among the house managers. As such, it is difficult for one manger to maintain a grasp of the transaction (James, 2010). However, top most executives are aware that acquisition needs strategy like the problem of incorporating a number of overspecialized as well as fragmented views on the deal. 
  3. FASB’s primary reasons for issuing FAS 141R and FAS 160 was to improve on reporting  while at the same time, try to eliminate the source of the most significant and pervasive differences between Financial Reporting Standards and U.S (James, 2010). Accepted Accounting Principles. There is a plan by the IASB to provide IFRS, IAS 27, Business Combinations, and separate Financial Statements, in the beginning of the year. The FAS 141R helps to improve reporting by creating a platform for consistency in both accounting and financial reporting when it comes to business merges. As a result, this creates complete, relevant, and comparable information that investors can use as well as other stakeholders who use financial statements (Barth, 2015). This goal is achievable if the new standard acquires the entity in the business mergers to identify all the assets needed and the liabilities that arise during the transaction (Warren, Moffitt & Byrnes, 2015). There is also the need to establish the acquisition date as a fair value measurement objective for all assets needs and liabilities. 
  4. The qualifying SPEs are those that isolate financial risk of a business and provide a less costly financing. According to accounting theory, SPEs do not take part in business transactions except for those created for them and sponsors back their activities (Warren, Moffitt & Byrnes, 2015). They are also able to raise funds and reduce interest rates as opposed to those available to their sponsors. If the off-balance sheet arrangements meet the requirements of the SFAS 140, they are qualifying special purpose entities (QSPE). They may also be variable interest entities as per the definition and the requirements put in the interpretation of FASB. In general, parties create the off-balance sheet entity by either a transferor or the sponsor by shifting assets to another party, the SPE to assume a specific purpose, a series of transactions, or activity.
  5. By adopting IFSR, a business can put its financial statements on the same margin as its foreign competitors and this makes it easier to compare. If the company adopts IFSR, the managers should be aware that IFSR does not allow for Last, First out (Barth, 2015). It employs a single step method to check for write-downs as opposed to two-step method in the U.S GAAP. Another significant aspect of the IFSR is that it does not allow debt where there is a covenant violation to be put as non-current unless there is a lender waiver before the balance sheet date.
  6. The principle differences between IFRS and U.S. GAAP are due to shares. In the US, GAAP’s only considered rights are those that are existing.  For example, in IFRS there are excisable shares to consider. Another difference is the Goodwill impairment test between the IFRS and the U.S GAAP (Warren, Moffitt & Byrnes, 2015). There are two steps in the US GAAP that comprise of comparing book value of the reporting unit to their market value goodwill. IFRS has only one step which compares book value to large cash generating units. IFSR does not allow last in, First Out while FASB allows it. IFSR applies the single step method for write downs while FASB uses the two-step method (Warren, Moffitt & Byrnes, 2015). IFSR does not allow debts for a covenant violate that has taken place unless there is a waiver before balance sheet date, but GAAP has waiver provisions. GAAP functions on rules whereas the IFSR derives from principles (Warren, Moffitt & Byrnes, 2015). A principle-based framework has a potential for different interpretations even in similar transactions, leading to disclosures in the financial statements.


Barth, M. E. (2015). Commentary on prospects for global financial reporting. Accounting 

Perspectives14(3), 154-167.

James, M. L. (2010). Accounting for businesscombinations and the convergence of 

International Financial ReportingStandards with U.S. Generally Accepted Accounting Principles: A casestudy. Journal of the International Academy for Case Studies, 16(1),95-108.

Warren Jr, J. D., Moffitt, K. C., & Byrnes, P. (2015). How Big Data will change 

accounting. Accounting Horizons29(2), 397-407.

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