What have IASB and FASB convergence efforts achieved?
That all changed--and quite dramatically --with two events. First, in 2000, the International Organization of Securities Commissions (IOSCO) endorsed IFRS for cross-border securities offerings in the world's capital markets. Then, in 2002, the European Union made the bold decision to require IFRS for all companies listed on a regulated European stock exchange starting in 2005. Those events started a snowball rolling, to the point where today roughly 100 countries require IFRS or a national word-for-word equivalent for all or most listed companies.
Almost from the outset, a key goal of the IASB and the IFRS Foundation, under which the IASB operates, has been to bring the United States on board. In a plenary address at the World Congress of Accountants in 2002, Paul Volcker, the first chairman of the Foundation's trustees, said: "I do not think it reasonable today, if it ever was, to take the position that U.S. GAAP should, de facto, be the standards for the entire world. Rather, the International Accounting Standards Board, whose oversight trustees I chair, is now working closely with national standard setters throughout the world to develop common solutions to the accounting challenges of the day. The aim is to find a consensus on clearly defined principles, and I am delighted that the American authorities appear sympathetic to that objective."
In October 2002, the IASB and FASB signed a memorandum of understanding that has come to be known as the "Norwalk Agreement." The two boards pledged to use their best efforts to (a) make their existing financial reporting standards "fully compatible as soon as is practicable" and (b) "to coordinate their future work programs to ensure that once achieved, compatibility is maintained." "Fully compatible" was generally understood to mean that compliance with U.S. GAAP would also result in compliance with IFRS. That is, the standards would be aligned though not identical.
With the Norwalk Agreement, the boards launched a series of both short term and longer-term convergence projects aimed at eliminating differences in the two sets of standards. The two boards agreed that where either IFRS or U.S. GAAP had the clearly preferable standard, the other board would adopt that standard. And where both boards' standards needed improvement, the boards would work jointly on an improved standard.
The Norwalk Agreement has been updated several times since 2002, but always with the objective of two sets of standards that were converged in principle if not in words. The IFRS-U.S. GAAP convergence approach has been repeatedly endorsed by global financial leaders such as the G-20 as an important step on the path toward a single set of global accounting standards.
In November 2007 an important milestone was achieved toward use of IFRS in the United States when the SEC eliminated the requirement that a foreign issuer using IFRS must present a reconciliation of IFRS measures of profit or loss and owner's equity to amounts that would have been reported under U.S. GAAP. In their comment letter on the SEC proposal that led to removal of the reconciliation, FASB and the Financial Accounting Foundation wrote:
Investors would be better served if all U.S. public companies used accounting standards promulgated by a single global standard setter as the basis for preparing their financial reports. This would be best accomplished by moving U.S. public companies to an improved version of International Financial Reporting Standards (IFRS).
So, where are we today after 10 years of convergence work? Some convergence projects have been completed successfully as envisioned--aligned principles even if the words differed. Others have been completed with partial success--some progress toward converged standards, but some differences remain. And some convergence projects either were discontinued or resulted in different IASB and FASB standards because, in the end, the two boards just could not agree. Some convergence projects continue to this day, including such major projects as revenue recognition, leases, and financial instruments.
At this point, it is reasonable to sit back and ask two fundamental questions about each of those convergence projects:
1. Have IFRS and U.S. GAAP been converged?
2. Even if convergence was not successfully achieved, has IFRS been improved?
The accompanying table, "Results of Convergence," sets out my admittedly subjective views about the success of convergence and the resulting improvements to IFRS for each of the projects listed in the various agreements between the IASB and FASB. As a final thought, I would add that convergence may have been the most realistic way to initiate the use of IFRS in the United States, but such an arrangement is not sustainable in the long term. Rather, the best approach for any jurisdiction is outright adoption of IFRS. As the trustees of the IFRS Foundation said recently in the report of their 2011 Strategy Review:
As the body tasked with achieving a single set of improved and globally accepted high quality accounting standards, the IFRS Foundation must remain committed to the long-term goal of the global adoption of IFRSs as developed by the IASB, in their entirety and without modification. Convergence may be an appropriate short-term strategy for a particular jurisdiction and may facilitate adoption over a transitional period. Convergence, however, is not a substitute for adoption. Adoption mechanisms may differ among countries and may require an appropriate period of time to implement but, whatever the mechanism, it should enable and require relevant entities to state that their financial statements are in full compliance with IFRSs as issued by the IASB.
Adoption is the only way to achieve a single set of global financial reporting standards an objective that both the IASB and FASB have publicly endorsed on many occasions.
* In this opinion piece, former International Accounting Standards Board (IASB) member Paul Pacter describes the accomplishments of the convergence project undertaken in 2002 by the IASB and FASB. He says many standards have converged, and IFRS have been improved as a result of the process.
* On a standard-by-standard basis, results of convergence have been mixed, Pacter says. Some standards have been improved. Some have not changed because the boards couldn't agree on a converged solution. And a few--revenue recognition, leases, and financial instruments--remain under development.
* According to Pacter, although progress has been made through convergence, adoption of IFRS for U.S. financial reporting is the ultimate goal. He says adoption is the best approach for any jurisdiction.
Paul Pacter (email@example.com) is a former member of the International Accounting Standards Board.
To comment on this article or to suggest an idea for another article, contact Ken Tysiac, senior editor, at firstname.lastname@example.org or 919-402-2112.
Editor's note: Paul Pacter served as a member of the International Accounting Standards Board (IASB) from July 2010 to December 2012. This analysis and table represent Pacter's opinions and do not necessarily reflect the views of other current or former IASB members, or official positions of the IASB or the IFRS Foundation.
* "Still in Flux: Future of IFRS in U.S. Remains Unclear After SEC Report," Sept. 2012, page 28
* "A New System for Recognizing Revenue," Jan. 2012, page 30
* "New IASB Leader Embraces Challenges," Sept. 2011, page 30
* "Beyond Convergence" Aug. 2011, page 46
Use journalofaccountancy.com to find past articles. In the search box, click "Open Advanced Search" and then search by title.
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* IFRS Financial Statements--Best Practices in Presentation and Disclosure 2012/2013 (#ATTIFRS12P, paperback; and #WIF-XX, online subscription)
* IFRS Policies and Procedures (#WI699586)
* Wiley IFRS: Practical Implementation Guide and Workbook, Third Edition (#WI647912)
* AICPA's Annual Accounting and Auditing Update Workshop (2012-2013 Edition) (#187196, DVD/manual; and #736188, text)
* IFRS Certificate Program (#159770, on-demand)
* International Versus U.S. Accounting: What in the World Is the Difference? (#181663)
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* AICPA advocacy, tinyurl.com/d91dxqf
* IFRS Resources, ifrs.com
RESULTS OF CONVERGENCE A Look at the Outcome of Key Joint IASB/FASB Projects Topic IASB/FASB Action Borrowing In January 2009 the IASB amended Cost IAS 23 to require capitalization (the U.S. principle). Business New standards issued by both boards. Combinations Combinations No action by the IASB. U.S. GAAP of Entities already requires "pooling of interests." Under Common Control Conceptual In September 2010, the IASB and Framework FASB published virtually identical chapters on "Objectives and Qualitative Characteristics" of the new Conceptual Framework. No other sections finished. Consolidation The IASB completed I FRS 10 in May (including 2011. FASB did not agree with special- effective control as the basic principle purpose and did not join the IASB in the entities) project. Corrections of The IASB amended IAS 8 to require Errors restatement, but the IASB added an impracticability exception that does not exist in U.S. GAAP. Derecognition Despite a joint exposure draft, in the of Financial end, the boards could not agree on Assets and derecognition principles for removing Liabilities financial assets from the balance sheet. The boards agreed on broadly aligned disclosures in October 2010. Discontinued The IASB adopted IFRS 5. FASB Operations adopted Statement No. 144. Converged on timing for classifying an operation as discontinued. Not converged on definition of discontinued operation or on whether to present discontinued operations on the face of the income statement. Earnings per In August 2008 the IASB issued an Share ED proposing amendments to IAS 33. This was never finalized. Nor did FASB propose similar amendments to U.S. GAAP Emissions In November 2010 the IASB and Trading FASB decided to defer work on this project. Extractive In April 2010 the IASB published a Industries Discussion Paper. No action since. FASB already has an oil and gas standard. Fair Value IASB issued IFRS 13 as a virtually Measurement word-for-word equivalent to FASB Statement No. 157. Fair Value FASB has added a fair value option to Option for its financial instruments standards Financial similar to what the IASB had. Assets Financial Currently, IAS 39 and U.S. GAAP are Instruments- substantially converged on hedge Hedge accounting (other than macro Accounting hedging). The IASB will soon issue a new general hedge accounting standard that will result in significant divergence from U.S. GAAP. Financial Still in process. Instruments- Impairment of Assets Carried at Amortized Cost Financial The two boards went different ways: Instruments- The IASB issued IFRS 9 in November Classification 2009 (for assets) and October 2010 and (for liabilities). Some financial assets Measurement amortized cost and some fair value through profit or loss (FVTPL), (and some equity instruments at fair value through other comprehensive income, or FVOCI). Most liabilities at amortized cost, but with fair value option (FVO) and other comprehensive income (OCI) option for own credit. FASB proposed a full fair value model, but is now moving to a mixed measurement model different from the IASB's. Government No action. Grants Impairment of In 2008 the boards decided to defer Nonfinancial pending completion of "other work." Assets Income Tax In March 2009 the IASB issued an ED (not with FASB) proposing amendments to IAS 12 basically to eliminate exemptions from recognizing deferred taxes. Responses were generally not supportive. The IASB did not finalize the ED. Small amendments to IAS 12 were made later. Insurance Still in process. Investment In this joint project, the IASB has Entities adopted a new definition of investment entity and requires such entities to account for subsidiaries at FVTPL. FASB has not finished its revised definition but already requires FVTPL. Investment The IASB has a standard, IAS 40. Property FASB has been working on one, but work is deferred. Joint Ventures The IASB completed IFRS 11 in May 2011. Proportionate consolidation is used in the United States in the real estate and extractive industries. U.S. GAAP on joint ventures differs from IFRS 11. Leasing Still in process. Liabilities and In November 2010 the IASB and Equity FASB decided to defer work on this (distinction project. between) Also called Financial Instruments With Characteristics of Equity (FICE) Liabilities- In November 2010 the IASB and Measurement FASB decided to defer work on this of project. Nonmandated In its 2003 improvements project that Change in was not part of convergence, the IASB Accounting amended IAS 8 to require restatement. Policy Subsequently, as part of convergence, FASB amended U.S. GAAP to require restatement. Offsetting of The two boards issued a joint ED Financial along the lines of the gross Assets and presentation in ]AS 32. But after Financial reviewing comments, FASB decided Liabilities not to pursue requiring a gross presentation. Joint disclosure standards were issued, though FASB now plans to defer part of it. Post- Both boards made some changes, but Retirement not a converged standard: Benefits 1. Past service cost treatment unchanged by either board. 2. FASB has eliminated the corridor for balance sheet purposes, but has retained it for income statement purposes. The IASB has eliminated the corridor for both income statement and balance sheet purposes. However, when eliminating the corridor, the IASB changed the rate that is used to calculate the return on plan assets whereas FASB continues to use an expected return (previously converged). 3. Termination benefits are broadly converged. 4. Neither board has fixed cash balance plans. Reclassification The IASB amended IAS 39 to permit of Financial reclassification, which U.S. GAAP had Assets allowed. Reporting In November 2010 the IASB and Financial FASB decided to defer work on this Performance project. (morphed into Financial Statement Presentation) Research and The IASB added intangible assets to Development its research agenda, but it has not become an active project. Revenue Joint ED June 2010 proposing joint Recognition standard including nearly identical wording. Revised joint ED November 2011 with some wording differences, but substantively same accounting. Segment The IASB adopted FASB Statement Reporting No. 131 as IFRS 8 with some minor changes. Share-Based Both the IASB and FASB issued Payment standards requiring accrual of SBP (SBP) expense. Similar but not identical measurement. Single In May 2010 the two boards jointly Performance proposed to require a single Statement performance statement (a single statement of comprehensive income (SOCO). Both boards received mixed views but more negative in the United States. The IASB was willing to finalize the ED, but FASB was not. In June 2011 FASB amended its standards to require a SOCI and to allow an option of a single performance statement or two (income statement and SOCI). These were already IFRS requirements. The IASB made some changes to converge its SOCI format with FASB's. Subsequent FASB adopted U.S. guidance on Events subsequent events that had been in the U.S. auditing standards. Some of Also called that guidance was consistent with Events After IFRS. But FASB did not amend the Balance Sheet U.S. guidance to conform to IFRS on Date (a) classification of liabilities refinanced after balance sheet date or (b) date through which subsequent events must be evaluated. Topic Convergence Outcome Borrowing Converged on the broad principle of Cost capitalization of borrowing costs. Differences in how borrowing costs eligible for capitalization are defined and calculated and on which assets are eligible. Business Partial convergence. Differences Combinations remain, including: * Measurement of goodwill (the IASB allows either 100% of goodwill or only the parent's share. FASB is 100% only). * The level at which the goodwill impairment test is imposed. Combinations Not converged. of Entities Under Common Control Conceptual Converged on objective and Framework qualitative characteristics. Other parts of the Framework were already broadly converged. Consolidation Convergence broadly achieved for (including off-balance-sheet activities and special- disclosures about unconsolidated purpose structured entities. Not converged with entities) respect to control and de facto control as the basis for consolidation. Corrections of Broadly converged. Errors Derecognition No success in convergence of of Financial derecognition principles. Substantial Assets and success on converged disclosures. Liabilities Discontinued Substantial success. Operations Earnings per IAS 33 and U.S. GAAP were broadly Share converged in the project. Nothing has changed. Emissions Not converged. Neither the IASB nor Trading FASB has standards directly on point. Extractive Not converged. Industries Fair Value Substantial success. Measurement Fair Value Converged regarding fair value option. Option for But the issue is under reconsideration Financial in the broader joint project on Assets classification and measurement of financial instruments. Financial Not converged. Instruments- Hedge Accounting Financial Both boards have agreed to adopt an Instruments- expected loss approach rather than Impairment of today's incurred loss approach. Assets Carried However, the two boards are currently at Amortized heading toward different ways of Cost implementing that approach. Financial Limited success in convergence. Instruments- Classification and Measurement Government Not converged. Grants Impairment of Not converged. Nonfinancial Assets Income Tax Even before convergence work began, IFRS and U.S. GAAP were converged on the principle of the temporary difference method, although not converged on how that method is implemented. There has been no success in eliminating the differences. Insurance Joint project offers a prospect for partial success in convergence. Investment Prospect for partial success. Entities Investment Not converged, and prospects are not Property good in the near term. Joint Ventures Not converged. Leasing Both boards expect to ballot a revised ED in the first half of 2013. Whether their final standards will be converged is hard to predict at this point. Note that ]AS 17 and FASB Statement No. 13 were broadly converged before the joint project started. Liabilities and Not converged. The United States has Equity not adopted the IAS 32 principle that (distinction an instrument is a liability if the issuer between) does not have the unilateral right to Also called avoid paying cash. Also the United Financial States has not adopted the "split Instruments accounting" for the equity component With of convertible debt issued. The United Characteristics States did not finalize its narrow view of Equity of equity proposed in November 2007 (FICE) Liabilities- Not converged. Measurement of Nonmandated Converged. Change in Accounting Policy Offsetting of Not converged on offsetting, but Financial converged on disclosure. Assets and Financial Liabilities Post- Not converged. The resulting Retirement differences in the rates used to Benefits calculate return on plan assets are significant. Reclassification Substantially converged. of Financial Assets Reporting Not converged. Financial Performance (morphed into Financial Statement Presentation) Research and Not converged. All R&D expensed Development under U.S. GAAP. Some development costs capitalized under ]AS 38. Revenue Both boards expect to ballot Recognition converged standards in the first half of 2013. Segment Converged. Reporting Share-Based Converged. Payment (SBP) Single Converged, but the outcome was Performance different from the joint EDs. Statement Subsequent Not converged, but closer. Events Also called Events After Balance Sheet Date Topic Was IFRS Improved? Borrowing IFRS were improved because a Cost free-choice option was removed. Whether capitalization or expensing is the better principle is debatable. Business Yes, particularly in eliminating pooling Combinations of-interests accounting. Some argue that IFRS 3 would have been further improved if the result had been a single measure for goodwill, rather than two. However, there was only limited support among IFRS preparers and users for the 100% goodwill approach. Combinations There was no standard, hence no of Entities improvement. Under Common Control Conceptual Readability was improved, but many Framework question replacement of prudence with neutrality. Consolidation There is a more clearly articulated (including effective control principle, clearer special- guidance for consolidating special purpose purpose vehicles, and much-improved entities) disclosures. Corrections of Yes, though some question the need Errors for an impracticability exception. Derecognition Improved disclosures, but no of Financial improvement to the principles for Assets and derecognition. Liabilities Discontinued Yes, IFRS were improved. (And many Operations prefer the IASB's answer to FASB's). Earnings per Because no action was taken, there Share was no improvement. Emissions There was no standard, hence no Trading improvement. Extractive There was no standard, hence no Industries improvement. Fair Value Yes, the guidance on fair value in IFRS Measurement is much improved and made consistent across standards, plus disclosures were enhanced significantly. Fair Value There was no change to IFRS, which Option for already had a fair value option. Financial Assets Financial Despite lack of convergence, the Instruments- IASB's new general hedge accounting Hedge standard is a significant improvement Accounting to IFRS. Financial Moving to an expected loss approach Instruments- is an improvement in principle. The Impairment of specifics have not yet been decided. Assets Carried at Amortized Cost Financial Many thought IFRS 9 was an Instruments- improvement over IAS 39. But those Classification improvements are being eroded in the and interest of convergence because of Measurement additional categories of financial assets, greater use of OCI, recycling, and inconsistent treatment of "available for sale" debt and equity instruments. Government There was no change in IFRS. Grants Impairment of There was no change in IFRS. Nonfinancial Assets Income Tax Even though there was no convergence, the process did result in a few amendments to IFRS 12 that are considered improvements. Insurance This will be a significant improvement to IFRS when the project is finished (even if not converged with U.S. GAAP) because currently there is no IFRS and a wide range of practices are acceptable. Investment Most people would regard replacing Entities consolidation with FVTPL for an investment entity as an improvement. Investment This project would have involved Property FASB adopting IAS 40 in some way rather than the IASB changing IAS 40. No improvement to IFRS. Joint Ventures Yes, distinguishing between different types of joint ventures was an improvement. However, many analysts will miss the information provided by proportionate consolidation, which remains available in the United States for real estate and extractive industries. Leasing This project is not yet complete. Putting right-of-use assets and lease obligations on the balance sheet would be an improvement of ]FIRS. However, the goal of a single accounting model for all leases does not seem to be achievable. Liabilities and There were no changes to IFRS, Equity hence no improvement. (distinction between) Also called Financial Instruments With Characteristics of Equity (FICE) Liabilities- The IASB's proposed measurement of Measurement all liabilities on an expected value of basis would have been an improvement. Nonmandated Yes, this was a significant Change in improvement. Accounting Policy Offsetting of Significant improvement in disclosure. Financial Some improvements. Also the IASB Assets and improved the gross presentation Financial approach in [AS 32. Liabilities Post- Yes, there were significant Retirement improvements to IFRS. Benefits Reclassification Most would say this was not an of Financial improvement to IFRS, but they Assets acknowledge that this was a necessary move during the financial crisis. Reporting There were no changes to IFRS, Financial hence no improvement. Performance (morphed into Financial Statement Presentation) Research and There was no change to IFRS, hence Development no improvement. Revenue Yes, this project will lead to a Recognition significant improvement in revenue recognition and measurement when completed. Segment Some would say yes, but others Reporting (including many research analysts) would say no. A post-implementation review is under way. Share-Based Yes, IFRS 2 was a major improvement Payment to IFRS. (SBP) Single From an IFRS perspective, the only Performance change was to require segregation Statement and disclosures relating to recyclable items. This was a modest improvement. The proposed significant improvement of a single performance statement was not achieved. Subsequent No change to IFRS, which most Events believe has the better answer. Also called Events After Balance Sheet Date Source: Former IASB member Paul Pacter.
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|Title Annotation:||International Accounting Standards Board|
|Publication:||Journal of Accountancy|
|Date:||Feb 1, 2013|
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