Question

Hi! I have to do only the question 4. Please, do only question 4.

Group Project #1:  GAAP and IFRS convergence

Recently, the FASB and International Accounting Standards Board (IASB) have been working on several projects in order to harmonize the accounting rules between GAAP and IFRS. This project requires you to select an accounting area where there are differences between U.S. and International accounting standards. Your presentation should address the issues listed below.

Required:

1. Pick an accounting area where there currently are differences between US GAAP and IFRS and explain the nature of the differences. (Hint: there are plenty of resources online. I provide several readings for your reference)

2. First, provide an overview on the philosophy behind IFRS and US GAAP

3. Discuss pros and cons for the method of accounting under US GAAP and IFRS, respectively.  Based on your discussion, under what circumstances (e.g., what types of firms, market conditions, etc) are the US GAAP standards is better and under what circumstances are the IFRS standards is superior? (Hint:you are free to compare the two standards in any perspective.  In addition, you were introduced to the concept of relevance, reliability, consistency and comparability as four desirable attributes of accounting information along with other attributes (e.g. conservatism) in Chapter 2.  To some degree, these perspectives may help you identify pros and cons and facilitate your discussion.)

4.  Do you agree with convergence or not?  Explain why?  What are the costs and benefits? Consider the issue broadly from the perspective of financial statement users, preparers, and auditors. Are there any problems created by convergence/harmonization? Explain in detail.

5.  Give us an update on what the IASB and FASB plan to do to converge the standards in the accounting area you picked. What is their proposal and timeline?  Do you have your own proposal? Why is it better?

Hi! I have to do only the question 4. Please, do only question 4.

4.  Do you agree with convergence or not?  Explain why?  What are the costs and benefits? Consider the issue broadly from the perspective of financial statement users, preparers, and auditors. Are there any problems created by convergence/harmonization? Explain in detail.

Answer 1

I agree with convergence.

When countries with lower levels of GDP per capita catch up to countries with higher levels of GDP per capita, the process is called convergence. Convergence can occur even when both high- and low-income countries increase investment in physical and human capital with the objective of growing GDP. This is because the impact of new investment in physical and human capital on a low-income country may result in huge gains as new skills or equipment are combined with the labor force. In higher-income countries, however, a level of investment equal to that of the low income country is not likely to have as big an impact, because the more developed country most likely has high levels of capital investment. Therefore, the marginal gain from this additional investment tends to be successively less and less. Higher income countries are more likely to have diminishing returns to their investments and must continually invent new technologies; this allows lower-income economies to have a chance for convergent growth. However, many high-income economies have developed economic and political institutions that provide a healthy economic climate for an ongoing stream of technological innovations. Continuous technological innovation can counterbalance diminishing returns to investments in human and physical capital.

The Costs of Convergence

To be sure, convergence has costs. Many however, such as the move to 10-Gigabit Ethernet, can be absorbed as part of the natural evolution of networking technology, over several years. As well, organizations should not rip and replace existing server network adapter cards with CNAs. Rather they should ensure that new servers can support CNAs and begin conducting low-cost pilots and proof-of-concept (POC) efforts to test the viability of convergence and gain experience.

A key issue for ITOs is does network convergence generally and FCoE specifically add more complexity to the IT operation. The answer in the near term is unquestionably, yes. The main issue here is getting from point A (where you are today) to convergence. Organizations will have to tip-toe through a minefield of complexity in order to achieve nirvana, and a key sticking point will be interoperability of servers, switches, and end-point devices.

In particular, current network infrastructure, particularly SAN infrastructure, is complex. There are equal levels of complexity in LAN infrastructures with completely different processes and operational procedures from SANs. By introducing new technologies such as FCoE and converging SAN and LAN networks, ITOs will introduce cascading dependencies throughout the network that, in the near-to-mid term, will make managing the network trickier. For example, an upgrade to the SAN may now have a direct dependency on components of the LAN that the network team just can’t deal with in near real time.

While these issues can be addressed over time, in the near term, ITOs must carefully consider these complexities and specifically interoperability issues, which have not been fully vetted by the industry.

Benefits:

1. The Investors. Convergence with IFRS makes accounting information more reliable, relevant, timely and comparable across different legal frameworks and requirements as it would then be prepared using a common set of accounting standards thus facilitating those who want to invest outside India. Convergence with IFRS also develops better understanding of financial statements globally and also develops increased confidence among the investors

2. The Industry. The other important set of beneficiary as the researchers perceive is the industry which in the event of convergence with IFRS will be benefited because of, one, increased confidence in the minds of the foreign investors, two, decreased burden of financial reporting, three, it would simplify the process of preparing the individual and group financial statements, four, it leads to lower cost of preparing the financial statements using different sets of accounting standards.

3. Accounting Professionals. Although there would be initial teething problems, convergence with IFRS would definitely benefit the accounting professionals as the later would then be able to sell their expertise in various parts of the world.

4. The corporate world. Convergence with IFRS would raise the reputation and relationship of the Indian corporate world with the international financial community. Moreover, the corporate houses back in India would be benefited because of ,one, achievement of higher level of consistency between the internal and external reporting, two, because of better access to international market, three, convergence with IFRS improves the risk rating and makes the corporate world more competitive globally as their comparability with the international competitors increases.

5. The Economy. All the discussions made above explains how convergence with IFRS would help industry grow and is advantageous to the corporate houses in the country as this would bring higher level of consistency between the internal and external reporting along with improving the risk rating among the international investors. Moreover the international comparability also improves benefiting the industrial and capital markets in the country.

Arguments That Convergence Is neither Inevitable nor Likely:

1. Along this aggregate production function, the level of technology is being held constant, so the line shows only the relationship between capital deepening and output. As capital deepens from C₁ to C₂ to C₃ and the economy moves from R to U to W, per capita output does increase—but the way in which the line starts out steeper on the left but then flattens as it moves to the right shows the diminishing marginal returns, as additional marginal amounts of capital deepening increase output by ever-smaller amounts. The shape of the aggregate production line (Technology 1) shows that the ability of capital deepening, by itself, to generate sustained economic growth is limited, since diminishing returns will eventually set in.

Figure 1. Capital Deepening and New Technology. Imagine that the economy starts at point R, with the level of physical and human capital C₁ and the output per capita at G₁. If the economy relies only on capital deepening, while remaining at the technology level shown by the Technology 1 line, then it would face diminishing marginal returns as it moved from point R to point U to point W. However, now imagine that capital deepening is combined with improvements in technology. Then, as capital deepens from C₁ to C₂, technology improves from Technology 1 to Technology 2, and the economy moves from R to S. Similarly, as capital deepens from C₂ to C₃, technology increases from Technology 2 to Technology 3, and the economy moves from S to T. With improvements in technology, there is no longer any reason that economic growth must necessarily slow down.

  

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CONTENTS

PRINCIPLES OF ECONOMICS

Chapter 20. Economic Growth

20.4 Economic Convergence

Learning Objectives

By the end of this section, you will be able to:

• Explain economic convergence
• Analyze various arguments for and against economic convergence
• Evaluate the speed of economic convergence between high-income countries and the rest of the world

Some low-income and middle-income economies around the world have shown a pattern of convergence, in which their economies grow faster than those of high-income countries. GDP increased by an average rate of 2.7% per year in the 1990s and 2.3% per year from 2000 to 2008 in the high-income countries of the world, which include the United States, Canada, the countries of the European Union, Japan, Australia, and New Zealand.

Table 5 lists 10 countries of the world that belong to an informal “fast growth club.” These countries averaged GDP growth (after adjusting for inflation) of at least 5% per year in both the time periods from 1990 to 2000 and from 2000 to 2008. Since economic growth in these countries has exceeded the average of the world’s high-income economies, these countries may converge with the high-income countries. The second part of Table 5 lists the “slow growth club,” which consists of countries that averaged GDP growth of 2% per year or less (after adjusting for inflation) during the same time periods. The final portion of Table 5 shows GDP growth rates for the countries of the world divided by income.

Country	Average Growth Rate of GDP 1990–2000	Average Growth Rate of GDP 2000–2008
Fast Growth Club (5% or more per year in both time periods)
Cambodia	7.1%	9.1%
China	10.6%	9.9%
India	6.0%	7.1%
Ireland	7.5%	5.1%
Jordan	5.0%	6.3%
Laos	6.5%	6.8 %
Mozambique	6.4%	7.3%
Sudan	5.4%	7.3%
Uganda	7.1%	7.3%
Vietnam	7.9%	7.3%
Slow Growth Club (2% or less per year in both time periods)
Central African Republic	2.0%	0.8%
France	2.0%	1.8%
Germany	1.8%	1.3%
Guinea-Bissau	1.2%	0.2%
Haiti	–1.5%	0.3%
Italy	1.6%	1.2%
Jamaica	0.9%	1.4%
Japan	1.3%	1.3%
Switzerland	1.0%	2.0%
United States	3.2%	2.2%
World Overview
High income	2.7%	2.3%
Low income	3.8%	5.6%
Middle income	4.7%	6.1%
Table 5. Economic Growth around the World. (Source: http://databank.worldbank.org/data/views/variableSelection/selectvariables.aspx?source=world-development-indicators#c_u)

Each of the countries in Table 5 has its own unique story of investments in human and physical capital, technological gains, market forces, government policies, and even lucky events, but an overall pattern of convergence is clear. The low-income countries have GDP growth that is faster than that of the middle-income countries, which in turn have GDP growth that is faster than that of the high-income countries. Two prominent members of the fast-growth club are China and India, which between them have nearly 40% of the world’s population. Some prominent members of the slow-growth club are high-income countries like the United States, France, Germany, Italy, and Japan.

Will this pattern of economic convergence persist into the future? This is a controversial question among economists that we will consider by looking at some of the main arguments on both sides.

Arguments Favoring Convergence

Several arguments suggest that low-income countries might have an advantage in achieving greater worker productivity and economic growth in the future.

A first argument is based on diminishing marginal returns. Even though deepening human and physical capital will tend to increase GDP per capita, the law of diminishing returns suggests that as an economy continues to increase its human and physical capital, the marginal gains to economic growth will diminish. For example, raising the average education level of the population by two years from a tenth-grade level to a high school diploma (while holding all other inputs constant) would produce a certain increase in output. An additional two-year increase, so that the average person had a two-year college degree, would increase output further, but the marginal gain would be smaller. Yet another additional two-year increase in the level of education, so that the average person would have a four-year-college bachelor’s degree, would increase output still further, but the marginal increase would again be smaller. A similar lesson holds for physical capital. If the quantity of physical capital available to the average worker increases, by, say, $5,000 to $10,000 (again, while holding all other inputs constant), it will increase the level of output. An additional increase from $10,000 to $15,000 will increase output further, but the marginal increase will be smaller.

Low-income countries like China and India tend to have lower levels of human capital and physical capital, so an investment in capital deepening should have a larger marginal effect in these countries than in high-income countries, where levels of human and physical capital are already relatively high. Diminishing returns implies that low-income economies could converge to the levels achieved by the high-income countries.

A second argument is that low-income countries may find it easier to improve their technologies than high-income countries. High-income countries must continually invent new technologies, whereas low-income countries can often find ways of applying technology that has already been invented and is well understood. The economist Alexander Gerschenkron (1904–1978) gave this phenomenon a memorable name: “the advantages of backwardness.” Of course, he did not literally mean that it is an advantage to have a lower standard of living. He was pointing out that a country that is behind has some extra potential for catching up.

Finally, optimists argue that many countries have observed the experience of those that have grown more quickly and have learned from it. Moreover, once the people of a country begin to enjoy the benefits of a higher standard of living, they may be more likely to build and support the market-friendly institutions that will help provide this standard of living.

View this video to learn about economic growth across the world.

Arguments That Convergence Is neither Inevitable nor Likely

If the growth of an economy depended only on the deepening of human capital and physical capital, then the growth rate of that economy would be expected to slow down over the long run because of diminishing marginal returns. However, there is another crucial factor in the aggregate production function: technology.

The development of new technology can provide a way for an economy to sidestep the diminishing marginal returns of capital deepening. Figure 1 shows how. The horizontal axis of the figure measures the amount of capital deepening, which on this figure is an overall measure that includes deepening of both physical and human capital. The amount of human and physical capital per worker increases as you move from left to right, from C₁ to C₂ to C₃. The vertical axis of the diagram measures per capita output. Start by considering the lowest line in this diagram, labeled Technology 1. Along this aggregate production function, the level of technology is being held constant, so the line shows only the relationship between capital deepening and output. As capital deepens from C₁ to C₂ to C₃ and the economy moves from R to U to W, per capita output does increase—but the way in which the line starts out steeper on the left but then flattens as it moves to the right shows the diminishing marginal returns, as additional marginal amounts of capital deepening increase output by ever-smaller amounts. The shape of the aggregate production line (Technology 1) shows that the ability of capital deepening, by itself, to generate sustained economic growth is limited, since diminishing returns will eventually set in.

Figure 1. Capital Deepening and New Technology. Imagine that the economy starts at point R, with the level of physical and human capital C₁ and the output per capita at G₁. If the economy relies only on capital deepening, while remaining at the technology level shown by the Technology 1 line, then it would face diminishing marginal returns as it moved from point R to point U to point W. However, now imagine that capital deepening is combined with improvements in technology. Then, as capital deepens from C₁ to C₂, technology improves from Technology 1 to Technology 2, and the economy moves from R to S. Similarly, as capital deepens from C₂ to C₃, technology increases from Technology 2 to Technology 3, and the economy moves from S to T. With improvements in technology, there is no longer any reason that economic growth must necessarily slow down.

The argument that it is easier for a low-income country to copy and adapt existing technology than it is for a high-income country to invent new technology is not necessarily true, either. When it comes to adapting and using new technology, a society’s performance is not necessarily guaranteed, but is the result of whether the economic, educational, and public policy institutions of the country are supportive. In theory, perhaps, low-income countries have many opportunities to copy and adapt technology, but if they lack the appropriate supportive economic infrastructure and institutions, the theoretical possibility that backwardness might have certain advantages is of little practical relevance.

Arguments Favoring Convergence:

  

Low-income countries like China and India tend to have lower levels of human capital and physical capital, so an investment in capital deepening should have a larger marginal effect in these countries than in high-income countries, where levels of human and physical capital are already relatively high. Diminishing returns implies that low-income economies could converge to the levels achieved by the high-income countries.

A second argument is that low-income countries may find it easier to improve their technologies than high-income countries. High-income countries must continually invent new technologies, whereas low-income countries can often find ways of applying technology that has already been invented and is well understood. The economist Alexander Gerschenkron (1904–1978) gave this phenomenon a memorable name: “the advantages of backwardness.” Of course, he did not literally mean that it is an advantage to have a lower standard of living. He was pointing out that a country that is behind has some extra potential for catching up.

Finally, optimists argue that many countries have observed the experience of those that have grown more quickly and have learned from it. Moreover, once the people of a country begin to enjoy the benefits of a higher standard of living, they may be more likely to build and support the market-friendly institutions that will help provide this standard of living.