Financial executives need to know about the potential accounting changes that have been proposed by the International Accounting Standards Board. The proposed changes towards the convergence of accounting standards have increased the importance of understanding both technical details and a broad spectrum of the implementation of what can be an unprecedented amount of accounting change. Whether a person is employed in an organization or in the community, the individual’s job will be influenced by the imminent modifications of the US GAAP. Three major areas have been proposed by the International Accounting Standards Board and Financial Accounting Standard Board as the main changes to GAAP that have significant impacts on most entities including nonprofit-making organizations. They include revenue recognition, leases, and financial instruments (Bengtsson, 2011).
Generally, accounting requires adjustments to systems, internal controls, processes, and business practices. Financial administrators need to consider all factors when examining the effects of accounting changes (Kilpatrick & Wilburn, 2011). Therefore, they should ensure that the company has a good radar that can consider how the proposed changes might affect their reported financial results and the manner in which the business should be conducted.
In the previous year, the Financial Accounting Standard Board and International Accounting Standards issued a single standard for revenue recognition, which was meant to merge the US GAAP and IFRS in an effort to apply the same in all industries and transactions. The standard got the potential to affect each entity in its day-to-day accounting as well as the way the business is executed through contracts with its clients (Tarca, 2004).
The two bodies established that all unrestricted businesses must implement the mandatory change of income acknowledgment standard in the wake of 2017 for their yearly and provisional reporting. However, for classified businesses, income acknowledgment standards on their reporting times will be implemented at the dawn of 2018. Further, the new revenue recognition standard will require entities to begin gathering and examining additional information concerning the selling prices to allow management to estimate performance within each arrangement. Besides, it will require more disclosures than essentially required by the US GAAP (Raghavan, 2009)
The project’s sole purpose is to ensure that leases are recorded in the financial statements such as balance sheets. Initially, the FASB and IASB had established the need to have the charters incorporated in the balance sheets. Subsequently, the two bodies went on to talk about the categorization and design of operating costs in the income statement. The proposed lease standard requires more information concerning the agreement terms of the lease to be revealed in relation to the existing standard. In addition, once embraced, the company will need a process for getting additional lease data (Kilpatrick & Wilburn, 2011).
During the economic crisis of 2007-2008, financial instruments played a major role in terms of helping banks handle people’s monetary records. Such instruments were given the highest priority by IASB and FASB. Finance is a composite area that requires up-to-date tools that can ease the process of forecasting the course of action that an organization or country can take once it faces a financial dilemma. Companies that hold financial instruments will be impressed by the proposed criteria (Tarca, 2004).
Effects of the Projected Changes
Conversely, the projected changes have numerous effects on the entities. They will have an impact on budgeting, planning, and performance monitoring. For instance, the proposed revenue recognition may considerably affect the reported outcome of entities within the industries. It will influence other expressions of financial statements, which include the timing of commissions and income tax payments. Organizations will need to review the changes to their ongoing reporting processes. Fresh standards call for a retrospective application. For instance, the new revenue recognition standard proposes retrospective application to all historical periods. This requirement will necessitate management departments to recast financial statements as if the new revenue recognition standard had always been applied.
In terms of leases, the proposed changes may influence behavioral and structural changes while providing incentives in an effort to achieve the desired accounting outcomes such as structuring leases as service contracts and making lease payments in an attempt to recognize smaller lease liabilities. The projections recognize the assets and liabilities for all leases over a year. IASB upheld the outcome that the projections might have on the cost of borrowing leases since organizations would report higher financial obligations under the proposals.
Lastly, the new standards will influence contractual terms within revenue arrangements such as payment terms, purchase options, future product discounts, rights of return among other factors. They will cause changes in the future due to the impact that the aforementioned clauses will have on the timing or amount of revenue in future periods under the new standards (Tarca, 2004).
In conclusion, based on the existing and ever-evolving accounting and regulatory environment, it is important for executives to ensure that their entities have appropriate processes and controls in place to identify, manage, and implement accounting amendments proficiently and successfully (Bengtsson, 2011). Executives should take this opportunity to re-evaluate the existing processes and controls to ensure that cross-functional teams are involved to minimize the impact that the accounting changes will have on their organizations in the future.
Bengtsson, E. (2011). Repoliticalization of accounting standard setting-The IASB, the EU and the global financial crisis. Critical Perspectives on Accounting, 22(6), 567-580.
Kilpatrick, B. G., & Wilburn, N. L. (2011). Convergence On A Global Accounting Standard For Leases – Impacts Of The FASB/IASB Project On Lessee Financial Statements. The International Business & Economics Research Journal, 10(10), 55-59.
Raghavan, K. R. (2009). Global Accounting Convergence and U.S. Financial Institutions. Bank Accounting & Finance, 1(1), 14-20.
Tarca, A. (2004). International convergence of accounting practices: Choosing between IAS and US GAAP. Journal of International Financial Management & Accounting, 15(1), 60-91.