Government policy on Accounting Conversion of GAAP to FRS The government of USA, through the IFRS revised the reporting standards in the USA from the GAAP to FRS. This replaces the all accounting reporting standards of the GAAP with the provisions of the three classes of IFRS. This will have a significant impact on financial reporting in USA. There are both negative and positive effects of the new policy. One of the positive effects that will be realised from the new policy is the treatment of off balance sheet derivatives.
According to the new FRS, derivatives will be recognised on balance sheet at fair value with changes in profit and loss (IFRS, 2014). Even though this change will cause an increase in the volatility of profit and loss, it is likely to reduce risky investments in derivatives and increase accountability among managers and accountants. Treating some derivatives as off-balance sheet derivatives has in the past caused some managers and accountants not to display some derivative trading activities, especially if they are faced with high speculative risks. Highly risky investments cause a business to collapse.
One example of a failed company due to risky investments is Barings Bank which collapsed due to highly risky derivative trading. The company’s manager of the Singapore branch engaged in highly risky derivative trading and kept them off balance sheet, and manipulating the accounts to show positive profits (Reserve Bank of Australia, 1995). However, the reality was that the company was making losses. The company was then declared bankrupt and collapsed. In this case, the manager was not accountable because the GAAP provided loopholes for managers to do so. The new approach allows derivatives to be reported on the balance sheet as fair value, and the changes are included in the profit and loss.
If the derivatives are included in the profit and loss, then losses from highly risky investments on derivatives will be identified. Recognizing derivatives on the balance sheet and trading profit and loss accounts allow for transparency in financial reporting of derivatives (PWC, 2013). As a result, risky investments will be avoided. This is because losses that results from derivative trading can be seen by auditors if such financial instruments are reported in the balance sheet and the trading profit and loss accounts of the company.
Valuation requirements will also be enhanced if the derivatives are reported in the balance sheet. As a result, accountants will be forced to become more accountable in relation to the reporting of derivatives. Furthermore, recognition of Derivatives in the balance sheet and their inclusion in profit and loss leads to increased disclosure requirements for accountants (PWC, 2013). This also leads to higher accountability among accountants and finance officers in organisations. Disclosure is a key element in the life of an accountant.
It is highly required to enable the company to become accountable to its stakeholders. A company, through its accounting department, should disclose its accounting elements in order through their financial reports in order to enhance accountability. This is a central role of the accounting department. Therefore, recognition of derivatives enhances its disclosure to the major stakeholders of the organisation through financial reports prepared by the organisation’s accountants. This is a key element of accountability in any organisation. One negative effect of the conversion of GAAP to IFRS is that it leads to complex accounting requirements (PWC, 2013).
Accountants who are used to the old GAAP standards will find it difficult to switch from the old to the new system of accounting. The accountants are not the only ones who will find it difficult to switch, but also the organisation. The new IFRS accounting system requires updates that may be too complicated for the members of the accountancy department to comprehend (PWC, 2013). Furthermore, new technical software or any other accounting infrastructure may need to be installed.
Accountants who have never used such new facilities will face a great deal of difficulties in adapting, and may make errors sin their accounting activities through the process. Moreover, new complex accounting requirements may require new technical skills that the current accountants may not posses. In this case, the company may dismiss the current accountants and hire new ones with the required skills, or train the existing ones. Training of accountants affects the accounting practice because it will increase the costs of running the accounting department.
In either case, the accountancy practice will become costly and complicated for to the organisation. Changes in the accounting department are inevitable under the conversion of GAAP to IFRS. Such changes affect the accounting practice greatly through such issues as skills, accountability, disclosure, facilities and job security for accountants. References list IFRS (2014). International Financial Reporting Standards: Questions and Answers. Accessed March 30, 2014 from http: //www. ifrs. com/updates/aicpa/ifrs_faq. html#q5 PWC (2013). IFRS and US GAAP: similarities and differences. Accessed March 30, 2014 from http: //www. pwc. com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap- similarities-and-differences. jhtml. Reserve Bank of Australia 1995. Implications of the Barings Collapse for Bank Supervisors.
Reserve Bank of Australia Bulletin.