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IASB, FASB Spar Over Unified Accounting

Tammy Whitehouse | April 29, 2008

The Financial Accounting Standards Board and its international counterpart have set a mid-2011 target date to eliminate major differences between U.S. and global accounting standards, but they still face a minefield of complexities and disagreements on the path to convergence.

FASB and the International Accounting Standards Board met in London last week to firm up a strategy and a timeline for how to eliminate the myriad accounting differences that still obstruct a single, global accounting rulebook. The list is long and fraught with contentious issues—including how to answer global regulators’ and political leaders’ demands for accounting answers to the lingering credit crisis.

The boards did compare notes on how they plan to plug holes in accounting rules that contributed to the current turmoil in credit markets. But FASB Chairman Bob Herz made it clear that accounting rules alone are not to blame for the collapse of complicated, layered securitizations of credit obligations. “We’re not an inspection or enforcement agency, but as best we can … we’re trying to discern which reporting issues were related to the standards themselves or compliance issues,” he said. “Our analysis at FASB is it’s probably a combination of both.”

FASB is working on revisions to Financial Accounting Standard No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and Financial Interpretation No. 46R, Consolidation of Variable Interest Entities, to eliminate the use of qualified special purpose entities. Such vehicles originally were intended to let companies give preferred sale treatment to securitized assets held in trust, off the balance sheet. FASB agreed recently to carve QSPEs out of U.S. Generally Accepted Accounting Principles because the concept has been improperly stretched to hide risky investments off the balance sheet, out of investors’ and analysts’ view.


Herz acknowledged that FASB is under fire from the Securities and Exchange Commission, the U.S. Treasury Department, and the Federal Reserve to get new rules in effect by the end this year. He said the elimination of QSPEs puts new pressure on the Board to revisit accounting rules on consolidation, or the reporting on the balance sheet of entities in which a company has a controlling interest.

IASB, meanwhile, is working on revisions to International Accounting Standard No. 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries, and a guidance document called SIC 12, which specifies when a special-purpose entity should be consolidated into the financial statements. IASB plans an exposure draft during this summer.

FASB and IASB concede that given their tight deadlines, they may need to sacrifice the convergence objective in favor of short-term improvements to U.S. and international rules.


The following recommendations for fair value and revenue recognition were made by FASB and IASB at the April 21, 2008, board meeting.

Revenue Recognition Recommendations:

The Boards should move expeditiously to address the following areas:

A. The definition of a performance obligation

B. When/how performance obligations are satisfied/extinguished

C. When, if ever, the initial amount assigned to a performance obligation should
change for reasons other than performance (for example, the accounting for
arrangements with variable consideration such as volume or milestone-based

D. The accounting for conditional obligations such as rights of return

E. Disclosure

F. Testing the conclusions reached against existing practice problems. A new
revenue recognition model that does not resolve the practice problems recently
raised for EITF or IFRIC consideration would not, in our view, represent an
improvement in practice. The FASB staff, with its greater experience in
topics considered by the EITF, is probably better positioned to perform this
part of the work.

20. In our view, the items above (especially items a and b) must be resolved before the Boards issue a discussion document.

21. Given the number of significant issues outstanding, completing a revised revenue
recognition standard by mid-2011 represents a major challenge. Focused effort is required
to achieve it.

Fair-Value Recommendations

26. The Group thinks this project should be completed by mid-2011 by limiting its objective to the following:

A. Amending existing IFRS to replace the various measurement terms used with
either entry price or exit price based on the intent of the existing standard

B. Defining exit price identically to Statement 157

C. Defining a comparable entry price, and providing disclosures about entry and
exit price measurements.

27. In our view, this project cannot be completed by 2011 if the IASB seeks to reconsider
fundamental features of the FASB standard. Those include, for example, the idea of a
market participant view, highest and best use, and principal market.

28. Board discussions of fair value easily and often migrate into conceptual discussions of
matters such as:

A. Which measurement attribute should be used, rather than what existing
standards require

B. Whether gains on initial recognition are ever appropriate

C. Is an entity-specific measure an attribute—what does an entity-specific
measurement mean?

29. Completing a fair value measurement standard by 2011 requires that the Boards leave
those conceptual discussions for the Conceptual Framework or other standards-level


FASB/IASB (April 21, 2008).


“In the gray areas, maybe we are not going to have an absolute, perfect converged solution by the end of this year,” FASB member Leslie Seidman said. “But I don’t know why we can’t have disclosures that require consistent information in these gray areas.”

That sentiment annoyed IASB Director of Research Wayne Upton. “We’ve got a package of disclosures [that will take effect] at the end of the year,” he said. “I’ve heard FASB members say that package is inadequate. It would be helpful if you want to pursue that to first see how it works, and second … come forward with suggestions.”

Herz said the problem in the United States won’t be fixed solely by requiring new accounting disclosures. “We put out reminders, but until things went downhill it didn’t always elicit the kind of disclosures intended,” he said. Many viewed the risks around securitized assets as remote, he said, and FASB has heard of reverse engineering around the risk-reward calculations of risky investments. “So we need to update the standards for things like that,” he said.

And Still More Confusion

Beyond the immediate crisis to fix rules that allowed the mistreatment of credit instruments, the boards also face major differences in complex areas such as revenue recognition, fair-value measurement, consolidation and derecognition, liabilities and equity, financial instruments, and the presentation of information in financial statements. Then there are areas where the two boards generally agree on desired improvements—leasing and post-retirement benefits, for example—but the two panels are mired in procedural minutiae that cause projects to drag on.

Revenue recognition, for example, is a straightforward standard with little guidance in international rules, but a complex standard with numerous interpretations in U.S. GAAP. The boards have sparred over how to define a performance obligation and how a performance obligation is satisfied, not to mention whether a performance obligation should be re-measured while it is carried as a liability.

Even as they discussed how to achieve convergence in revenue recognition within the three-year timeline, board members on both sides broke into debate over what a converged standard should say and how it should be achieved.

According to a joint working group of IASB and FASB that helped map out the convergence strategy, the boards must work through some tough choices if they truly want to achieve the three-year goal. As one agenda paper for last week’s meeting put it: “A mid-2011 completion date goal requires that the boards work more efficiently than they ever have.”

The working group outlined several reasons that projects take so long to complete, including differences over the agenda, the scope of rulemaking projects, the changes to accounting rules that should be made, and the method by which changes should be made. The working group said the boards will need to reach some agreements as to project objectives if they are to achieve the three-year convergence goal.

“Board members and staff on the losing end of those debates need to be willing to work hard to achieve an objective with which they don’t fully agree,” the working group said. “We simply do not have time for ‘do-overs.’”