IFRS and U.S. GAAP Convergence — Delays Upon Delays
Can the delays announced on several of the FASB and IASB joint projects be considered indicative of a general decline in appetite for convergence?
August 22, 2011
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have now been working together for many years to achieve convergence between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The foundation step in this convergence process was created in 2002 with the Memorandum of Understanding (MoU) between the Boards, known simply as the Norwalk Agreement. Since then there have been pledges of support by both Boards of their commitment to that Agreement and to initially setting specific milestones to be reached by 2008 (A roadmap for convergence 2006 – 2008). In 2008, both the Boards updated the MoU, identifying a series of priorities and milestones necessary to complete the remaining major joint projects by 2011 and emphasizing the goal of joint projects to produce common, principle-based standards.
However, there have no doubt been a number of setbacks following such early positive moves by both two Boards.
The first came in late 2010 when the FASB and the IASB realized that they were not going to make the deadline of 2011 and decided to amend the timetable for projects that we are important, but considered less urgent. The projects affected were “Financial statement presentation”; “Financial instruments with characteristics of equity”; “Liabilities”; and “Income taxes,” leaving the Boards to focus attention on the more urgent projects, such as “Financial instruments”; “Leases” and “Revenue recognition” with the target completion date of June 2011. Even these urgent projects have subsequently fallen behind schedule.
These recent delays have largely resulted from the quantum and nature of responses that the FASB and the IASB have received in response to the exposure drafts (EDs). In June 2011, both Boards agreed unanimously to re-expose their revised proposals for a revenue standard. This was swiftly followed in July 2011 with the announcement that the leases project was also to be re-exposed. Now these two proposed accounting standards are not expected to be published before 2012, so the Boards have tentatively suggested that based on their current timetable, the effective date of the revenue standard not be earlier than annual periods beginning on or after January 1, 2015. Nothing has been announced about the effective date of the proposed leases accounting standard.
The general tone is that despite the best efforts of both Boards, the timetable has seen considerable slippage from what was originally put in place.
The FASB and IASB Burden
It is generally agreed that all of these projects are significant to the future of accounting. However, the feeling of many accounting practitioners, in the U.K. at least, is that perhaps the FASB and the IASB have taken on too much and that due process is being hurried in an attempt to meet a deadline that was perhaps always a little optimistic.
On the whole most people would accept a certain element of delay to ensure we get accounting standards “fit for purpose.” However, now the problem appears to be more around the uncertainty that delays inevitably create. It is this uncertainty that is seemingly impacting the appetite for convergence that companies currently have.
Furthermore, given the delays that have already occurred, while the IASB removed all other technical projects from its work-plan other joint projects (with the exception of the annual improvements project), the FASB is still undertaking a significant amount of other independent projects, not least the recent revised accounting standard on ‘Goodwill impairment assessments’. Of perhaps greater concern is that the revised ‘Goodwill impairment assessment’ requirements see a shift in the current model to something that is quite different from the IFRS impairment testing model. Divergence, particularly at the current time, opens up a whole raft of different issues.
What Happens If Convergence Slips?
Missed deadlines in issuing new accounting standards, together with the ever-increasing burden of the FASB by undertaking additional projects, indicates that regardless of whether or not the appetite for convergence is slipping, the reality of it certainly is.
One should not forget the current target date of 2011 for the U.S. Securities and Exchange Commission (SEC) to make its decision on conversion to IFRS. The effect of FASB/IASB deferrals on key projects may well impact the timing of the SEC’s decision regarding the adoption of IFRS and the resultant timeline.
An awareness of the delays and the changes to the timetable is essential for preparers and users of financial information in ensuring that they are ready for the conversion to IFRS and that appropriate accounting policy and first-time adoption choices are made when that day finally happens.
Now, more than ever, it is important to monitor and participate in the standard-setting process and be prepared for any rapid changes. Regardless of the speed and direction of the SEC and no matter when the changes occur through convergence or IFRS adoption, the effects on U.S. businesses will be tremendous. Companies will be well-served by investing time understanding the scope of these changes and how exactly they will affect their companies.
Steven Brice who is a technical partner in the financial reporting advisory group for WeiserMazars LLP UK and provides his views on international convergence of GAAP and whether progress is really being made in light of recent developments. For U.S. IFRS, you can contact Remi Forgeas, CPA, is an audit and assurance partner for WeiserMazars LLP US and provides his views on international convergence of GAAP and whether progress is really being made in light of recent developments.
* 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™.