The program of converging accounting standards between the Financial Accounting Standards Board and the International Accounting Standards Board is nearing an end after more than a decade.
The effort started in 2002 with the Norwalk Agreement under which the two boards committed to work together to make their standards “compatible “ and from 2006 onwards has continued pursuant to a memorandum of understanding that focused the boards on jointly developing improved and converged standards in various major accounting areas.
Along the way there have been some bumps and differences in view between FASB and IASB, but this unique standard-setting partnership has resulted in converged or substantially converged standards on a number of major subjects, including accounting for business combinations, employee stock compensation, fair-value measurements, and segment reporting. The boards will also soon issue converged standards on the very important topic of revenue recognition.
The convergence program has also narrowed the differences between U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards in various other areas. The boards continue to work on three remaining projects: accounting for leases, financial instruments, and insurance contracts. While issuing improved and converged standards on each of these will be challenging, Russell Golden, FASB's new chairman, has stated that this is a priority.
The completion of these projects will mark the end of the FASB and IASB convergence program as we have known it. Many differences remain, however, between U.S. GAAP and IFRS and there are still, in my view, many areas that need improvement in both sets of standards.
While convergence has improved both sets of standards, I believe that the program (along with other factors) also facilitated the acceptance and spread of IFRS around the world by enhancing the credibility and standard-setting resources available to IASB in its early years and by helping to convince the Securities and Exchange Commission in 2007 to permit foreign registrants to use full IFRS to file their financial statements without reconciling them to U.S. GAAP. That decision effectively made IFRS a passport for international capital raising and led many countries to require or permit the use of IFRS by their listed companies.
I believe that geo-economic and geo-political forces, coupled with the growing acceptance of IFRS around the world as the recognized set of international accounting standards, will continue to exert pressure on the United States.
Along with the growth around the world in the number of jurisdictions and companies using IFRS, there also came increasing demands for IASB to be more attentive to these constituents and for it to end its focus on convergence with FASB in favor of a broader, multilateral standard-setting mechanism. In response, the trustees of the IFRS Foundation recently established an Accounting Standards Advisory Forum as a formal mechanism for national and regional accounting standard-setting bodies to provide technical advice and feedback to IASB. The initial membership of ASAF is comprised of twelve bodies from around the world , including FASB and bodies representing the European Union, Latin America, China, Japan, and others.
As I see it, the end to the convergence program will present some interesting opportunities and some challenges for the U.S. financial reporting system. It should free up time and resources for FASB to devote to the implementation of the new major standards on revenue recognition and (assuming their completion) lease accounting, financial instruments, and insurance contracts, and to other projects and activities.
The end of formal joint projects with IASB may also lessen pressure from certain quarters for FASB to arrive at converged solutions with IASB. No doubt many in the United States would welcome such an outcome, believing that FASB should focus on improving U.S. GAAP without any commitment or pressure to continue to pursue convergence between our accounting standards and IFRS. Others favoring continued convergence and movement toward a single set of global standards, however, may be concerned that, in the absence of a systematic program to achieve these goals, divergence between U.S. GAAP and IFRS is likely to grow over time.
Still Working Together
In any event, I do not believe that FASB can or will ignore international convergence in its future activities. One reason is that the provisions of the Sarbanes-Oxley Act governing the activities of FASB as the designated U.S. accounting standard setter explicitly require that in adopting accounting principles it consider “the extent to which international convergence on high-quality accounting standards is necessary or appropriate in the public interest and for the protection of investors." But beyond the legal requirements, and as I discuss in my recent book Accounting Changes: Chronicles of Convergence, Crisis, and Complexity in Financial Reporting, I believe that geo-economic and geo-political forces, coupled with the growing acceptance of IFRS around the world as the recognized set of international accounting standards, will continue to exert pressure on the United States (and other countries) to either adopt IFRS or to continue to move their standards closer to IFRS.
This is evidenced by the recurring calls by the G-20 leaders for timely international convergence of accounting standards. There are certainly also powerful counter forces and pressures in the United States, however, including important concerns over the overall cost and benefit to the U.S. of adopting IFRS and a potential loss of sovereignty over setting accounting standards.
I do not have a crystal ball to see how these important issues will play out over time. Many twists and turns are possible. The SEC could provide greater clarity on these important matters and on a path forward on, using its language, “whether, when, and how” IFRS is to be “incorporated” into the reporting system for U.S. issuers. For a number of years, the SEC had indicated that it would decide on these matters in 2011. That did not occur and in mid-2012 the Commission made it clear in an SEC staff report on incorporating IFRS into the U.S. reporting system that additional analysis and consideration would be necessary before making any decisions. But at this point it is not clear when and, even whether, the SEC will make any decisions in this area.
So, with the formal program of joint projects with IASB coming to an end and in the absence of further clarity from the SEC on this subject, how might FASB proceed in continuing to fulfill the requirement of Sarbanes-Oxley that it consider the merits of international convergence in its activities? At a minimum, I would hope and expect FASB to be an active and important contributor to the ASAF. I would also hope and expect IASB to carefully consider the input it receives from FASB in developing new standards. One of the very important projects that IASB has undertaken is to improve its framework and has committed to work with the ASAF on this effort, the result of which is intended to provide an improved conceptual framework that will help guide IASB's future standard-setting decisions.
I feel that it is particularly important that FASB, as the standard setter for the world's largest capital market and whose investors have been increasingly investing in securities from around the globe remain a very active and important contributor to this effort that I hope might also lead to needed improvements in FASB's conceptual framework. I also believe that FASB can and should continue to seek convergence between U.S. GAAP and IFRS by exposing for comment to U.S. stakeholders major new standards proposed by IASB, explaining how the IASB standard would differ from U.S.GAAP and specifically requesting input from respondents on whether FASB should consider adopting or converging with the new IASB standard.
With respect to standards that are already converged, I would expect the two boards to continue to try to coordinate implementation and interpretative efforts, as well as the conduct of any post implementation reviews on such standards. Additionally, and consistent with the “U.S. Incorporation Commitment “proposed in a November 2011 letter to the SEC from the Trustees of the Financial Accounting Foundation who oversee FASB, FASB could develop and undertake a process to systematically address substantial differences that remain between U.S. GAAP and IFRS. There may be areas where U.S. GAAP could be improved by adopting or moving closer to IFRS. For example, the accounting for pensions and other postretirement benefits has been cited by some investors as an area where they believe IFRS is superior to U.S. GAAP.
The forthcoming end to the convergence program and IASB's new ASAF usher in a new era for international accounting standard setting and for FASB as it considers how best to improve U.S. GAAP while also continuing to fulfill the requirement to consider convergence to international standards. And the SEC may still weigh in on all of this. How it all develops will be very important to both the United States and the international capital markets.