Is the Convergence of US GAAP with IFRS Still Underway?

10/8/2009

By Kent TeKrony, CPA

Current guidance requires large accelerated filers to begin including International Financial Reporting Standards (IFRS) comparable data in fiscal year 2014 within their operating statements for 2012, 2013 and 2014 disclosures. By 2016, current regulation calls for all public companies to report financial results under international accounting standards assuming IASB requirements are adopted by 2011. However, these timeframes are almost certain to be extended given the recent financial crisis and other issues encountered by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IABS) in their attempts to close the differences between United States Generally Accepted Accounting Principles (US GAAP) and IFRS reporting requirements. Once the larger public organizations are required to adopt IFRS, similar requirements will soon follow for smaller nonpublic organizations such as typical community banks.

While the timeline for US companies to move from US GAAP to IFRS is likely to be extended, the transition continues to move inexorably forward. Thus far, more than 100 countries worldwide require or permit IFRS. Also, the differences between US GAAP and IFRS are decreasing due to the efforts of the FASB and IASB to unify these two different sets of standards.

Conversion vs. Convergence

Two primary conceptual approaches have emerged for moving from US GAAP to IFRS. These are the conversion and convergence approaches.

Initially, the move from US GAAP to IFRS was envisioned primarily as a nearly monolithic or wholesale move from one set of accounting rules and principles to another over a relatively short period of time. This approach is typically referred to as the conversion approach. This approach generally requires rapid resolution of reporting differences. This approach also requires the various stakeholders and authoritative bodies to quickly develop consensus around unified resolutions of current reporting differences across a broad range of issues.

In an attempt to facilitate this rapid fire conversion approach, the FASB and IASB attempted to identify low-hanging fruit where both parties believed reporting differences could be identified and resolved rather quickly and easily. Unfortunately, reaching consensus on many of these apparently straightforward issues proved surprisingly difficult. The difficulties in reaching consensus between these two standards setters expands exponentially as issues became more and more complex and the number of stakeholders and their degree of vested interests increased.
The conceptual nature of US GAAP and IFRS is also quite different. US GAAP is conceptually a patchwork of individual rules applicable to specific situations which have been developed over a relatively long period of time and under varying citations and circumstances. Also, US GAAP is not supported by an overarching well conceived and integrated conceptual framework of accounting principles. IFRS is a more principles-based approach. This approach often requires reflection on the specific facts and circumstances to properly apply reporting requirements in an attempt to adhere to the intent of standards. The divergent nature of US GAAP and IFRS tends to create issues as the two standards setters attempt to resolve differences.

The recent financial crisis which began in September 2008 has all but put the efforts on hold to unify US GAAP with an international account standard. Recently, the resources of both the FASB and IASB have been consumed by the fallout from the financial crisis and the resulting explosion of concerns raised by each of these body’s own political constituents. This crisis has diverted the focus, energy and resources needed by both standards setters to march forward with the process of unifying US GAAP and IFRS.

The numerous difficulties experienced in reaching consensus quickly and easily as the standards setting bodies attempt to close the divergent reporting requirements have caused a shift from focusing on a broad based conversion approach to that of a slower paced convergence approach. In this approach, the FASB and IASB attempt to resolve reporting requirements over time. As each of the standards setting bodies address issues according to their own priorities and timelines, they attempt to bring reporting requirements closer together and resolve more and more differences though a collaborative process. This process allows for the development of more sophisticated resolutions for more complicated issues over time.

FABS and IASB Joint Projects

Another process is at work simultaneously with the more organic convergence approach discussed above. In 2008 the FASB and IASB outlined 11 major joint projects in their Memorandum of Understanding (MOU) as indicated below:

• Business combinations
• Financial instruments
• Financial statement presentation
• Intangible assets
• Leases
• Liability and equity distinctions
• Revenue recognition
• Consolidation
• Derecognition
• Fair value measurement
• Postemployment benefits

Most of these projects are scheduled for completion by 2011.

The first of these projects resulted in significant new US GAAP guidance related to business combinations effective for fiscal years beginning after December 15, 2008. This new guidance resulted in significant changes related to the accounting and reporting for business acquisitions and noncontrolling interests in subsidiaries. This new guidance also requires companies to record restructuring and transaction costs associated with acquisitions as period expenses rather than as an increase in the capitalized purchase price.

Accounting for leases is another area that will likely result in significant changes to US GAAP as a result of the MOU. The standards setters recently issued a discussion paper outlining preliminary positions for consideration regarding the future of lease accounting. This proposal would eliminate the operating lease accounting model. Under this approach all rights and obligations would be accounted for as assets and liabilities. There are also other aspects of US GAAP which will likely change as a result of the efforts to converge US GAAP and IFRS such as compensation and bonus arrangements.

As we emerge from the fallout from the recent financial crisis, the standards setters will once again focus their efforts on these joint efforts outlined within this MOU. It appears this focus is returning as we enter the fourth quarter of 2009. In addition to the efforts driven primary by the FASB’s and IASB’s joint projects resulting from the MOU, these standards setters will continue to consult with each other as they consider new and revised accounting guidance reflecting each body’s own priorities and timelines.