IFRS Convergence — We’re Back on Track!
Recent events signal that the U.S. GAAP and IFRS convergence process has been re-invigorated.
December 14, 2009
In 2002, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) began a process of greater cooperation in the development of high-quality accounting standards with the issuance of the Norwalk Agreement. This was followed up in 2006, with the issuance of a Memorandum of Understanding (MoU), which set forth relative priorities within the FASB-IASB joint work program with the objectives of improving accounting standards and obtaining substantial convergence between International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP). In 2008, the Boards again affirmed their commitment to development of common, high quality standards and agreed on a pathway to completing the MoU projects, included projected completion dates. The completion of the MoU convergence project is scheduled for 2011. In addition to the FASB-IASB convergence programme following the MoU, the SEC late in 2008 released a long-awaited roadmap for the transition by U.S. public companies to using IFRS.
However, the appointment of Mary Schapiro to the position of U.S. Securities and Exchange Commission (SEC) chairman in early 2009 soon created some concern for the roadmap as in her inauguration speech, on the subject of the IFRS roadmap, she stated:
“I will take a big deep breath and look at this entire area again carefully and will not necessarily feel bound by the existing road map that’s out for comment.”
Following the FASB and IASB reaffirmation of their commitment to the MoU in November 2009, and their commitment to intensify their efforts to complete the major joint projects, Schapiro subsequently released another statement:
“I am greatly encouraged by the commitment of the IASB and the FASB to provide greater transparency to the standard setting process and their convergence efforts. I believe that these efforts will result in improved financial information provided to investors.”
It should be remembered that the SEC is not scheduled to ultimately decide whether U.S. companies will be required to file financial reports using IFRS instead of GAAP until 2011. The door — has always been left ajar by the SEC to potentially not go the IFRS route by having this crucial vote built into the proposed roadmap. Schapiro’s recent comments following the FASB-IASB reaffirmation of their commitment to the MoU, is one of the first positive steps that we have seen in recent times to suggest the original timetable is still potentially viable. Nevertheless some more clarity on the SEC’s proposed roadmap for the adoption of IFRS by U.S. public companies is still needed. Hopefully we should not have too long to wait as the SEC’s Chief Accountant James Kroeker recently reconfirmed the SEC’s commitment to provide clarity on the IFRS roadmap this fall.
IASB and FASB Reaffirm Commitment to MoU
The 2006 MoU — updated in 2008 — considered a number of major joint projects across a breadth of financial statement areas.
Following varying degrees of success on the convergence of certain of the joint projects identified in 2006 and 2008, the FASB and IASB have issued a joint statement describing their plans and milestone targets for completing the major MoU projects in 2011.
Based upon recent experience concerning the issuance of new accounting standards, even though standards being issued are broadly similar — there are still certain instances in which one accounting board has issued slightly revised requirements when compared with the other accounting board’s new standard. For example IFRS 3R on “Business Combinations” allows a choice of accounting treatment regarding measurement of goodwill, whereas under GAAP the non-controlling interest must be measured at fair value, and full goodwill is always recognised.
One would hope that as a result of the reaffirmation of the commitment to the MoU that future projects will be aligned both in timing and in detail to smooth the convergence process.
Convergence or Adoption
Despite or perhaps owing to the length of time involved to converge the major joint projects in the MoU, and the fact that the SEC will not decide on adoption of IFRS until 2011, there has been much public debate on whether gradual convergence of GAAP and IFRS or adoption of IFRS is the best stratagem for future accounting in the U.S.
The problem with convergence is that it is time-consuming, and from past joint projects, it is evident that it does not always result in mirrored accounting standards. However, the fear of the costs and time involved in the adoption of IFRS by individual U.S. filers does mean that many are not welcoming an outright IFRS adoption strategy.
As a word of caution, especially for all large accelerated filers: if the SEC decides in 2011 to adopt IFRS, then according to the current, proposed roadmap the first year of preparation under IFRS will be 2014, i.e. for those companies with a calendar-financial year, the date of transition to IFRS will be January 1, 2012 (the beginning of the earliest comparative period). Therefore a certain amount of reticence is understandable based on the SEC not having yet made the decision to adopt IFRS, delays in the planning may end up being costly.
Small Companies Boldly Go Where Larger Ones Fear to Tread
A final word, or potentially the first word: The AICPA has recognized the IASB as a standard-setting body, which means that nonpublic companies have another accounting framework option in addition to full IFRS — the IFRS for Small- and Medium-Sized Entities (IFRS for SMEs). Thus the U.S. may appear to be moving towards a bottom-up approach in its adoption of IFRS. However, the take-up of the IFRS for SMEs is in practice only likely to be limited until the SEC-listed companies take the plunge and convert over to IFRS.
Perhaps then, instead of fearing the unknown, U.S. companies can look either to Europe to see how the conversion process to full IFRS was managed, or alternatively to the experiences of the few smaller U.S. companies that boldly chose to adopt IFRS for SMEs.
Steven Brice, is a technical partner in the financial reporting advisory group for Mazars in the U.K For U.S. IFRS, you can contact Remi Forgeas, CPA, who is an audit and assurance partner for Mazars in the U.S.
* The views expressed in this article are the author’s own and do not necessarily reflect the views of the AICPA or AICPA CPA Insider™.