Convergence, Comparison, and Evolution of Standards

Convergence, Comparison, and Evolution of Standards | CFA Level I FSA

Welcome back! In this lesson, we’ll briefly discuss the convergence, comparison, and evolution of financial reporting standards. So, let’s dive in!

Convergence of Financial Reporting Standards

The IASB, FASB, and other standard setters are working together to achieve convergence of financial reporting standards. Over the past decade, many aspects of IFRS and US GAAP have converged, and the SEC no longer requires IFRS reporting firms to reconcile their financial statements to US GAAP.

Despite the progress, there are still differences between the two frameworks in the definition, recognition, and measurement of financial statement elements. Some of these differences include:

  • IASB lists revenue and expenses as elements related to performance, while FASB includes gains, losses, and comprehensive income,
  • IASB defines an asset as a resource from which a future economic benefit is expected to flow, whereas FASB defines it simply as a future economic benefit and uses the term “probable” in its definition of assets and liabilities, and
  • FASB does not allow the upward valuation of most assets.

Barriers to convergence include disagreements between standard-setting bodies and pressures from business groups with disproportionate influence.

Analysts’ Role in Interpreting Financial Statements

Until convergence is achieved, analysts need to interpret financial statements prepared under different standards. In many cases, companies present reconciliation statements, showing what their financial results would have been under alternative reporting systems.

As financial reporting standards evolve, analysts must monitor developments that may affect the financial statements they use. Analysts should be aware of new products, innovations, and transactions that may not fit neatly into existing financial reporting standards. The financial reporting framework can serve as a guide for evaluating the potential effects on financial statements.

To stay up-to-date on evolving standards, analysts can monitor professional journals and the IASB and FASB websites. The CFA Institute also produces position papers on financial reporting issues.

Monitoring Company Disclosures

Analysts must review company disclosures for significant accounting standards and estimates found in footnotes, significant policies, and management judgements addressed in the MD&A.

An analyst should use these disclosures to evaluate if the policies cover all relevant data in the financial statements, which policies require management to make estimates, and whether the disclosures and estimates have changed since the prior period.

Management should also discuss the likely impact of implementing recently issued accounting standards, whether the new standards apply, the material effects on the financial statements, or state that they are still evaluating the effects of the new standards.

And that’s a wrap! We’ve explored the roles of standard-setting bodies and regulatory authorities in financial reporting standards. Up next, we’ll dive deeper into the various financial statements. See you soon!

✨ Visual Learning Unleashed! ✨ [Premium]

Elevate your learning with our captivating animation video—exclusive to Premium members! Watch this lesson in much more detail with vivid visuals that enhance understanding and make lessons truly come alive. 🎬

Unlock the power of visual learning—upgrade to Premium and click the link NOW! 🌟