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What have IASB and FASB convergence efforts achieved?

For nearly 40 years, the International Accounting Standards Board (IASB) and its predecessor, the International Accounting Standards Committee (IASC), have been working to develop a set of high-quality, understandable, and enforceable International Financial Reporting Standards (IFRS) to serve equity investors, lenders, creditors, and others in globalized capital markets. When the IASB took over from the IASC in 2001, few countries had adopted International Accounting Standards (as IFRS were then called) even for cross-border public sales of securities, let alone for domestic public companies.

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.

EXECUTIVE SUMMARY

* 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 (ppacter@ifrs.org) 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 ktysiac@aicpa.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.

AICPA RESOURCES

JofA articles

* "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.

Publications

* IFRS Compass: IT Systems Implications (#091038)

* 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)

CPE self-study

* 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)

For more information or to make a purchase, go to cpa2biz.com or call the Institute at 888-777-7077.

Websites

* 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
Author:Pacter, Paul
Publication:Journal of Accountancy
Date:Feb 1, 2013
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