Accounting rulemakers are putting the finishing touches on a report that will update capital markets on their efforts to converge U.S. and international accounting standards.

The Financial Accounting Standards Board and the International Accounting Standards Board are expected to publish the first of what will become a series of quarterly reports to document their progress in making U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards more consistent with one another. The two boards announced in November they would provide quarterly updates on their convergence progress given the implications on some important policy fronts.

For one, the Securities and Exchange Commission has hinged its plan for moving U.S. capital markets to IFRS on the ability of the two boards to eliminate substantial differences between GAAP and IFRS. The SEC published a work plan this week updating where it stands on adopting IFRS in the United States, and the plan focuses on the convergence movement as a key criteria for when and how the Commission ultimately will transition U.S. registrants over to IFRS.

Even further, the Group of Twenty nations are watching the convergence effort, hoping it will eliminate differences in accounting standards that it believes may have played a role in the economic crisis.

A spokesman for IASB said the two boards are expected to issue their first joint quarterly progress report very soon. A spokesman for FASB said the various project updates posted by the two boards demonstrates “quite a bit of progress” in recent months.

“We remain committed to working with IASB,” said spokesman Chris Klimek. “(We) appreciate the SEC’s leadership and additional guidance on this important matter, and like everyone, we will be studying the work plan carefully in the days ahead and discussing what it means for us.”

Facing a tidal wave of new accounting requirements that are coming on board, a committee of Financial Executives International is appealing to rulemakers to think carefully about when and how a host of new standards will take effect.

Arnold Hanish, chairman of FEI’s Committee on Corporate Reporting and chief accounting officer at Eli Lilly, wrote to the chairmen of the Financial Accounting Standards Board and the International Accounting Standards Board to ask them to consider the big picture as they set effective dates for some substantial new accounting requirements.

Hanish was referring specifically to FASB’s and IASB’s projects on financial statement presentation, leases, pensions, revenue recognition, financial instruments, and liability and equity, all of which are key to the two boards’ efforts to converge U.S. Generally Accepted Accounting Standards with International Financial Reporting Standards.

The boards are acting under a tight timeline to seek convergence on some key areas in the two accounting rulebooks by mid-2011, in part to satisfy the Group of Twenty nations that identified differences in accounting standards as at least a contributing factor to the economic crisis.

Hanish called on FASB and IASB to “deliberate the effective dates and transition of the major convergence standards holistically, rather than on a standard-by-standard basis,” he wrote, to reflect how significant the transition will be for companies adopting the new standards and how interrelated some of the new requirements will be.

In his letter, Hanish described some of the interdependencies among the new requirements that will impact how companies will implement them. New requirements for financial statement presentation, for example, will impact what information must be gathered, which will have an impact on other convergence standards. Likewise, a new definition for a liability will impact what types of assets and liabilities would be accounted for under a new standard for financial instruments, he wrote.

As such, Hanish called on the boards to consider an aggregated effective date for the final converged standards with a three-year implementation period, giving companies the option to adopt early if they’re prepared to do so. “Providing adequate time for the body of converged standards will allow companies to thoughtfully identify the impacts, develop approaches that respond to the change, implement and test solutions, and conduct the necessary training to impacted internal and external individuals specific to their company and industry needs,” he wrote.

FASB and IASB continue to make substantial progress on the core convergence standards, meeting monthly in extensive sessions to reach dozens of preliminary decisions. The boards expect to issue an exposure draft on a new method of financial statement presentation in April 2010.

They’re also identifying areas, however, where they can’t agree and will issue standards that differ. In the financial statement presentation project, for example, FASB plans to require entities to disclose operating assets, liabilities, and cash flows by reportable segment while IASB will not require such a breakdown. IASB meanwhile plans to require the presentation of net debt information as part of the analysis of change and will include minimum line item requirements for the statement of financial position while FASB will not.

The Financial Accounting Standards Board and the International Accounting Standards Board reached some key agreements this week to finalize a proposed new approach for explaining income information to investors.

The two boards reached some verbal agreements in their joint project on how companies would be required—or in some cases allowed—to present information in a “statement of comprehensive income,” a new financial statement that would replace the existing income statement.

The idea is to provide a more comprehensive view of an entity’s income, in part to scuttle the almighty reliance currently placed on the “net income” figure that becomes the bottom line on existing income statements. The new statement is aimed at giving a more balanced view of not only profit-and-loss figures but also other comprehensive income, which reflects gains and losses that have not yet been realized. That often includes things like gains or losses on securities or derivatives, pension costs, or foreign investments and currency hedges.

At a joint meeting, the two boards agreed that an entity would be required to display total comprehensive income and its components in the new statement of comprehensive income, but it will have some flexibility to name the two key sections. One section has to display profit-or-loss figures, and the other has to display other comprehensive income as it is defined in current accounting standards.

The boards agreed they’ll retain existing requirements that give entities an option to display components of other comprehensive income before or after related income tax expense has been factored in, but they have to provide one amount for the aggregate income tax effects on the face of the statement. Entities can decide if they will link income tax effects related to each component of other comprehensive income on the face of the statement or in the footnotes.

The new standard will not redefine what goes into other comprehensive income or what goes into each of its components, the boards determined. Staff at FASB and IASB are preparing the draft standard that will be voted on by both boards. The boards are projecting an exposure draft to be published at the end of the first quarter.

As they promised, accounting standard setters are stepping up the pace and length of dialogue on some of the most vexing accounting issues in hope of achieving common approaches to U.S. and international rules sooner rather than later.

The Financial Accounting Standards Board and the International Accounting Standards Board met in London for an all-day and two half-day sessions this week to wade deeper into how to get converged standards on fair value measurement, leasing, revenue recognition, financial instruments, consolidation, derecognition, and financial statement presentation. They also worked through issues related to hedge accounting, discontinued operations, insurance contracts and post-employment benefits.

The two boards promised the Group of Twenty leaders they will pick up the pace of standard setting to narrow the differences between International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles. The Financial Crisis Advisory Group reported to the G20 that weaknesses and differences in accounting standards were at least a contributing factor to the financial crisis that brought chaos to the global economy.

With respect to fair value, the boards decided to retain a notion that fair value is the same as an exit price in a hypothetical transaction, but they didn’t discuss or decide how to address gains or losses that might arise when a live transaction is different from the fair value of the transaction. They agreed that the fair value of a liability includes the effect of nonperformance risk, and that they will provide clarification on what that might include besides just credit risk.

As for revenue recognition, the boards tentatively decided they will require entities to disclose the nature of contracts and related accounting policies, the principal judgments involved, a reconciliation of beginning and ending net contract positions, a total amount of outstanding performance obligations as well as the expected timing for their resolution, and information about onerous contracts.

The two boards will meet jointly again five times in February via videoconfernce.

by Melissa Klein Aguilar

U.S. and international accounting standard setters are still hashing out their differences with hopes of reaching a converged standard on accounting for financial instruments, according to officials speaking at a financial reporting conference this week.

While their current approaches differ markedly, with the United States supporting more use of fair value, leaders of the Financial Accounting Standards Board and the International Accounting Standards Board said they’re continuing to work toward a converged answer.

“We’re going to expose our views, and hopefully … reconcile those differences to arrive at a comparable solution,” Russell Golden, FASB Technical Director, said during a panel discussion at a conference sponsored by Financial Executives International. “What that might mean is that both numbers—both costs and fair value—are relevant and both may be presented on statement of performance as well as the statement of financial position, or maybe that a comparable solution will be arrived at though disclosure.”

IASB released its revised financial instruments standard, IFRS 9, last week, notably without the endorsement of the European Commission.

“In some respects I consider that a silver lining in that it will allow us to work closely with FASB and finish this time next year with a standard that’s more likely to be … more converged,” IASB member Patrick Finnegan told reporters during a press Q&A.

Finnegan said the EC’s concern relates to the classification conditions in the standard for determining whether an instrument is eligible for using fair value or amortized cost.

“That’s something they want the board to continue focusing on,” he said. “They also want to have the benefit of seeing the three phrases of the project finished and evaluate the standards as a package.”
During the panel discussion, Finnegan said based on what he heard while gathering feedback on IFRS 9, “It’s clear to me from talking to people … in Asia and Europe that they want see a single standard … the same words with respect to accounting for financial instruments, particularly as it applies to banks. “

Asked later about the likelihood of a converged answer, FASB Chairman Robert Herz told reporters, “I’ve found that in standard setting, you never know where you’re going until you completely get there and go through the process.”

Finnegan said he’s supportive of having both fair value and amortized costs presented on the balance sheet.

“It’s my personal view that one measurement attribute can’t have primacy over the other in terms of information that’s provided to users,” he said. “If you’re going to measure financial instruments using amortized costs, other users may feel fair value is more decision-useful. That should be made available to them and it shouldn’t be somewhere where they have to go hunt for it.”

Finnegan said he’s “optimistic that will be an element of the converged solution.”

“I don’t think ultimately it’s a very challenging thing to implement,” he said. However, he said an objection he’s heard to the idea heard is “a belief that by displaying fair value prominently, you create unnecessary volatility.”

However, he refuted that objection, saying, “That’s the reality. Financial instruments fluctuate … and to hide that information isn’t serving anybody’s needs.”

The two boards published an updated version of their Memorandum of Understanding this month in response to calls from the G-20 to redouble their convergence efforts. Under the agreement, Golden noted that the two boards have agreed to meet monthly.

It was “inefficient” for both boards to meet separately and conclude and then reconcile their differences, he said. Particularly on controversial issues, he said the boards will meet face-to-face so their respective members can understand what each board is thinking.

“In times past, one board has leap frogged the other,” he said. “We agreed that the leading board will reconsider its conclusions as the lagging board gets up to speed.”

The Financial Accounting Standards Board and the International Accounting Standards Board have said they’ll step up the rulemaking pace and stick to their original timeline of converging major accounting rules by mid-2011.

The two-boards published a 23-page update to their convergence plan, promising to meet monthly to assure the job gets done on time and provide quarterly updates on their continued progress. They acknowledged the concerns expressed by the Group of 20 nations that a globally accepted single set of accounting standards would resolve a lot of problems in global capital markets. “We are redoubling our efforts to achieve a single set of high-quality standards within the context of our respective independent standard-setting processes,” the boards wrote.

The boards originally set a June 2011 target date to resolve major differences between U.S. Generally Accepted Accounting Standards and International Financial Reporting Standards to facilitate the adoption of IFRS in a number of countries in 2011. They also acknowledge convergence and continued improvement in accounting standards is a big consideration in the United States as the Securities and Exchange Commission considers whether, when, and how to require U.S. companies to begin switching over the IFRS.

The two boards have plenty of work ahead of them to meet the mid-2011 target date. They need to wrap up major standard-setting projects on financial instruments, consolidations, derecognition, fair-value measurement, revenue recognition, leases, financial instruments with the characteristics of equity, financial statement presentation, and a handful of other individual and joint projects outlined in their original agreements.

In their joint statement, FASB and IASB said their work on financial instruments in particular has been difficult because each board had “differing project timetables” to respond to their respective constituents. The boards say they plan to issue final standards by the end of 2010 “that represent a comprehensive and improved solution to this complex and contentious area and that provide international comparability.”

U.S. and international accounting rule makers spent three days this week making progress on a number of outstanding projects on the road to a unified accounting rule book, most notably trying to iron out their different ideas about how to improve accounting for financial instruments.

The economic meltdown exposed big problems in U.S. and international requirements for how fair value is measured and applied to complex financial instruments. It also spotlighted where there are differences between the two approaches and punctuated the need for a more consistent approach to assure comparability of entities around the globe.

The two boards are working on new standards for International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles that would dramatically alter how financial instruments are accounted for currently. Most notably, both boards want to require much more use of fair value, though they’re not entirely in agreement on just how much and how values should be presented in financial statements.

In a series of joint meetings, the boards agreed on a set of core principles for how to end up with a converged standard. According to a Deloitte account of the discussion, the boards agreed that the new requirements should enhance comparability, provide transparency to risk and strategy, and give prominent and timely fair-value information for instruments that have highly variable cash flows or are held for trading.

The boards also agreed amortized cost and fair value, rather than settlement with a third party, is relevant for instruments where principal amounts are held for collection or payment, though board members had concern about how an entity’s own credit worthiness affects fair value of liabilities. They agreed they want a consistent impairment approach for financial assets held for collection of contractual cash flows.

Currently, FASB is considering an impairment model that IASB hasn’t fully endorsed. The boards are forming an expert advisory panel to consider the operational aspects of what FASB has developed to help both boards sort through the ultimate solution.

The boards also compared notes on how to measure fair value, where FASB has had a standard in place since 2007, now contained in the Accounting Standards Codification under Topic 820, and IASB is still working on an exposure draft. The boards agreed they want to end up with a converged standard, but IASB has expressed reservations about FASB’s approach.

FASB has stood its ground on its definition of fair value and its approach to measuring it, but the board told IASB it will take a look at comments IASB has received on its exposure draft and consider whether U.S. GAAP should be changed as a result.

In other business, the boards picked away at ongoing projects to revise rules on revenue recognition, discontinued operations, financial statement presentation, insurance, leases, income taxes, and financial instruments with characteristics of equity.

If you’re full of ideas about how credit impairments should be determined based on expected cash flows, here’s your chance to pipe up and help shape future accounting rules.

The International Accounting Standards Board and the Financial Accounting Standards Board are looking for candidates to serve on an expert advisory panel to help sort through the operational issues companies might encounter in following an expected cash flow approach to determine credit losses. The panel will help the boards determine what to do as they consider new requirements around the recognition and measurement of financial instruments more broadly.

FASB has already tentatively decided that entities should be required at the end of each period to measure an impairment loss as the present value of management’s current estimate of cash flows that are not expected to be collected. That estimate would take into consideration all available information relating to past events and existing conditions that might suggest a particular item is collectible, such as remaining payment terms, financial condition of the issuer, expected defaults, collateral values, and other environmental factors. It would not, however, take into account possible future scenarios.

The boards are not looking for experts who want to debate what’s been decided, but to explore the operational or implementation challenges that might arise with such an approach and to suggest solutions and guidance that might be necessary to address those. Panel members might also be called on to help with field testing.

FASB and IASB made it clear that they’re not looking for representatives of experts who will act as messengers and attend meetings, nor are they looking for panelists who will be bound by their employers to express specific views. Instead, the boards are looking for panelists with relevant hands-on experience with backgrounds in risk management, systems development or operations, product development, control and audit.

The boards hope to have final standards adopted by the end of 2010.

Accounting rule makers are under new pressure, this time from the G-20 (Group of Twenty industrialized nations), to wrap up their major convergence efforts by June 2011.

The G-20 issued a statement from its recent Pittsburgh summit calling on the Financial Accounting Standards Board and the International Accounting Standards Board to “redouble their efforts” to achieve a single set of accounting standards by June 2011. The call came in the context of a long wish list of achievements that would help rejuvenate global economic activity.

FASB and IASB are operating under a timeline to converge a number of important accounting standards, but not all of them, by 2011. The goal is to reduce the differences between U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards to make financial reports more comparable and ease a transition to IFRS adoption for GAAP-reporting companies.

In addition to accounting standards, the G-20 also is focusing on how to restructure banking regulation to reduce the incentives for banks to take excessive risks and enable them to hold up under significant pressure. Those include measures such as meatier capital requirements, capital buffers, stronger liquidity risk requirements, and forward-looking provisioning to cushion against prospective losses.

The banking sector has exerted pressure on GAAP and IFRS accounting rule making based on the unique needs of financial-sector companies, but FASB and IASB have pleaded with the banking sector to acknowledge that accounting rules are meant to serve investor rather than banking regulatory objectives.

The G-20 statement also calls on countries to develop standards on executive compensation that align compensation with long-term creation of value rather than risk taking, better oversight for over-the-counter derivatives, and a call for financial firms that are important to the financial system to develop contingency and resolution plans as well as a cross-border regulatory framework to intervene when a crisis erupts.

The American Bankers Association is appealing to the U.S. Treasury and the Federal Reserve to stoke the fire over accounting issues at the upcoming G-20 meeting in Pittsburgh Sept. 24-25, especially regarding proposals to require more use of fair value on bank balance sheets.

Edward Yingling, ABA president and CEO, sent a 41-page packet to Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke pointing out how the International Accounting Standards Board and the Financial Accounting Standards Board are developing different proposals for requiring more use of fair value for measuring financial instruments. Yingling says the proposals are not consistent with G-20 recommendations and are not consistent with the overarching objective to converge U.S. and international accounting rules.

The IASB is developing a plan to require all financial instruments to be reported at either fair value or amortized cost, depending on complex criteria for what should get recognized how. The IASB has already published an exposure draft and hopes to finalize its rule in time for option year-end adoption. The FASB’s tentative plan also includes a mixture of fair value and amortized cost with changes flowing to net income or other comprehensive income, but with OCI more prominently displayed.

The ABA says both proposals will cause accounting to become more procyclical after the G-20 recommended standard setters work toward accounting rules that are less procyclical. Yingling also says the proposals undermine the relevance of the business model typically followed by banks, which will make it harder for investors and regulators to understand the banking business.

If rules move in the direction IASB and FASB propose, the result will be reduced lending, changes in the types of products available to customers, increases in the cost of capital to the banking system and increases in the cost of credit to borrowers, Yingling says. “These results would contradict the overall G-20 program, which focuses on stabilizing, rather than dramatically changing, the traditional business of banking,” Yingling wrote.