The Transition to IFRS
Can the convergence project replace it?
January 25, 2010
In 2008, the U.S. Securities and Exchange Commission (SEC) pushed forward the possibility of adoption of International Financial Reporting Standards (IFRS) by the U.S. for public companies. In the same year AICPA to issued their financial statements in accordance with IFRS for private companies.
On the contrary, 2009 saw a significant loss in the momentum to IFRS in the U.S. One idea that gained traction during this period was that the current convergence project between the two sets of standards should suffice to ensure the achievement of objectives set with regards to comparability and high quality of standards.
The joint efforts deployed by Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to complete their convergence project signal that the two sets of standards will be very close to each other very soon. Consequently, some people question the need of investing money and time to actually adopt IFRS in the U.S. especially at a time of financial crisis. We believe that the convergence project helps to smooth the transition process instead of being a substitute to it.
Why Adopt IFRS, Convergence May Be Enough
The adoption of IFRS has lost momentum. 2007 and 2008 were important years for the adoption of IFRS in the U.S. This movement culminated with AICPA’s recognition of the IASB as a designated standard-setter (May 2008) and the SEC’s release of the Proposed roadmap for adoption of IFRS (PDF) (November 2008). On the other hand, 2009 seemed to be the year of the loss of interest in IFRS in the U.S.
Several explanations can be found from the changes at the SEC following the presidential election to the financial and economic crisis. A simpler reason may be that the final determination by the SEC on the adoption of the IFRS is scheduled for 2011; therefore, there was no need to maintain this project on the front burner, especially considering all other urgent and critical matters.
Even if the SEC had very valid reasons to shift its focus to more immediate and urgent matters, significant voices raised issues with regards to the transition to IFRS:
As a result one idea emerged: Since both FASB and IASB work together on the convergence project why not stop there? Two fully converged accounting standards of high quality would address the problem of comparability and this would be obtained at a much lower cost.
2011 Completion of Convergence Project
During their joint meeting in October 2009, the IASB and the FASB reaffirmed their commitment to continue the improvement of the two standards and to complete their convergence, as described in the 2006 Memorandum of Understanding (updated in 2008). Following their joint meeting in October, the two boards issued a joint statement, wherein each major joint project was presented along with milestones (see table.)
Once the joint projects are complete in 2011, one could argue there is no real need to actually adopt IFRS in the U.S.
Convergence Is a Not a Substitute for Adoption
In the declaration of the G-20 meeting at Washington, DC in November 2008, the objective of one set of standards was clearly set:
“The key global accounting standards bodies should work intensively toward the objective of creating a single high-quality global standard.”
This objective was reiterated in the final Declaration at the G-20 meeting in Pittsburgh, PA, in September 2009:
“We call on our international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process and complete their convergence project by June 2011.”
Besides the strong political support to one set of accounting standards, there was the realization that converged standards do not achieve the objective of comparability.
Similar Is Different From Identical
U.S. Generally Accepted Accounting Principles (GAAP) and IFRS will be very similar once the convergence project is completed. However, differences in the day-to-day application will still exist and will impair the comparability. These differences result from small details such as variances in definitions or implementation guidance.
For example, the term “probable” in the context of recognizing provisions for contingent liabilities is understood as more likely than not under IFRS (i.e. over 50%), whereas it is viewed as likely under GAAP, which is considered a higher threshold for recognition. CPA Insider™ readers should note that GAAP says that virtual certainty is not required before a loss is recognized. However, the threshold is considered higher than 50 percent, but the percentage is not defined in the standard.
Is the State of Convergence Stable?
Another concern is the sustainability of the convergence. Assuming the two boards meet their deadline and the convergence projects are completed by mid-2011, what will happen going forward?
The traditional opposition of GAAP as rules based and IFRS as principles based is obvious with regards to the number of interpretations issued: since 2003, International Financial Reporting Interpretations Committee (IFRIC) issued 19 interpretations on IFRS whereas the Emerging Issues Task Force (EITF) issued approximately 75 interpretations on GAAP. It can therefore be anticipated that after 2011, the two standards will diverge again, at least as a result of the interpretations. Moreover, the U.S.’s role in the IASB will probably be reduced if they do not adopt IFRS and the cooperation between the two boards may suffer because of it.
The Convergence Project Reduces the Cost of the Transition
The adoption of IFRS represents a significant cost for companies, especially when local standards are significantly different from IFRS. On the contrary, when local GAAP are very close to IFRS, the cost of the transition will be considerably lower. Therefore, one embedded effect of the convergence project is to facilitate the adoption of IFRS, by reducing its costs.
Besides analysts point to the cost of the transition omit that companies already bear costs similar in nature in the current GAAP. Every time a new standard is issued, there are costs related to its adoption. How much was disbursed by companies to implement the standard on uncertain tax positions (FIN 48) or the one on variable interest entities (FIN 46)?
The convergence project allows companies to reduce the cost of implementation by spreading it over a longer period of time or by just adopting GAAP concepts in IFRS (see the recent exposure draft on rate-regulated activities). Going forward a more stable accounting environment (e.g. less frequent interpretations) should enable companies to dedicate fewer resources to these adoption matters.
There is a similar by-side effect on the training effort and on this concern, as well. Transition efforts should be reduced once the two standards are more converged.
Overall, one of the results of the convergence project and of its completion is to make the adoption of IFRS in the U.S. easier than it was in most of countries that already accepted to move to IFRS.
Remi Forgeas, CPA, is an audit and assurance partner for Mazars in the U.S. For U.K. IFRS, you can contact Steven Brice, is a technical partner in the financial reporting advisory group for Mazars UK.
* 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™.