Earnings per share FASB project on convergence with the IFRS Essay

Earnings per share FASB project on convergence with the IFRS - Essay Example The Financial Accounting Standards Board (FASB) avers to serve "the investing public through transparent information resulting from high-quality financial reporting standards" (FASB, Home Page)The International Accounting Standards Board (IASB) and the FASB acknowledge that the convergence of International Financial Reporting Standards (IFRS) and the U.S. Generally, Accepted Accounting Principles (GAAP) is the primary objective of both boards. The FASB has taken up several 'projects' to address issues where differences have been found in reporting standards and have successfully concluded many; some are under current scrutiny. One of the current issues is the reporting of 'Earnings per Share' or EPS as it is popularly known.Different tools are available for making financial analysis of stocks and range from the very simple and elegant to the very complex and difficult to understand. The financial performance of the company, and therefore, its future prospects and stock performance, i s better understood through the calculation of some important ratios that assist us in a detailed appraisal. The EPS method looks at the financial performance of the company; focusing on the earnings recorded per ordinary share in a particular accounting period. This number provides a clear picture of the actual profitability of the company and is used to calculate the Price to Earnings (PE) ratio which represents the ratio of the market price of the share compared with EPS. Since the share price changes almost continually this latter ratio also keeps changing and needs to be calculated on real time basis at the time of making investment related decisions. This is the most important ratio used by the market generally to assess the relative rating of a share and the company's prospects and, of course, is the easiest to understand. It identifies the number of years' earnings needed to cover the current market price of the share. This paper presents the results of a detailed study of this project and its immediate and long term implications for the accounting fraternity as well as the users of accounting statements, viz. the management, shareholders and other stakeholders of the company as well as auditors, potential suitors (for takeover bids) and public. The Standards IAS are a set of financial reporting policies that typically require increased disclosure and restrict management's choices of measurement methods relative to the accounting standards of the local GAAP standards (Ashbaugh & Pincus, 2001). With regard to the Earnings per Share the FASB issued a statement (Statement No. 128: Earnings per Share) and the IASB its statement IAS-33. Both boards have been working together to resolve the differences in order to bring convergence in the two statements and plan to make their final recommendations open for public comment in the first quarter of 2008. This draft will be open comment for 120 days and will then be adopted, with modifications, if required through public opinion. This draft will represent the third such 'exposure draft' on the subject, the earlier ones required many changes based on public comment and had to be revised. The earlier drafts were based on the comments on the statement 128 in 2003 and the first exposure draft in 2005. The description of EPS i.e. The basic earnings divided by the average number of ordinary shares outstanding during the period (IAS33-R.10) leads us to the immediate issues involved: a) How are the basic earnings to be calculated, and b) what is the number of shares the earnings must be divided by to arrive at the EPS. We examine how these are considered under the IFRS and GAAP to arrive at the differences between the current practices under the two regulations. Basic Earnings The concept is to arrive at the profit of the company that is attributable to the ordinary shareholders of the company and therefore the basic earnings must be calculated as net profit (or loss) less preference dividends