U.S. GAAP/IFRS: Comparability To Replace Convergence– October 21, 2014

Since 2002, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working on converging U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). There have been successes and failures along the way, but now the convergence effort appears to have run its course. Going forward, U.S. standard setters propose an informal, collaborative model that will minimize differences in financial reporting, in lieu of the IASB’s one-size-fits-all approach. Here’s an overview of global accounting standards — past, present and future.

Rise and stall of global convergence
In 2002, FASB and the IASB agreed to quickly develop a single set of high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. The goal of the Norwalk Agreement was to remove individual differences between U.S. GAAP and IFRS to improve the consistency and comparability of financial statements worldwide.

Convergence proved difficult, however. The standard setters couldn’t agree on what’s best for stakeholders, and the approval process took much longer than anticipated. Eventually, the boards’ efforts focused on four specific joint projects: revenue recognition, insurance, financial instruments and leases.

Mixed results
Of the four projects, revenue recognition stands out as a success story. A major global standard — communicated under U.S. GAAP in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers — goes into effect for reporting periods beginning after December 15, 2016, for public companies. Private companies have a year longer to comply, or they may choose to implement the updated rules at the same time as public companies.

Conversely, convergence projects on insurance and financial assets have failed. The boards have resigned themselves to producing different standards, and FASB plans to release two major amendments on these topics by early 2015.

Final item on the docket
The lease project remains the only outstanding convergence project. Accounting for leases is not only complex, but also inconsistent across the globe.

In 2013, FASB and the IASB issued mostly converged proposals on how to report long-term lease contracts. But the long-term lease proposals have been met by significant opposition, especially from businesses that don’t want to report more debt to stakeholders.

In addition, the boards don’t see eye-to-eye on other major lease issues, including how to report expenses on the income statement and whether to eliminate leveraged leases from U.S. GAAP. Unless the boards can agree on these differences, a fully converged standard — or even acceptance of the joint proposal on long-term lease contracts — is unlikely.

Final lease rules could be released in 2015, if FASB and the IASB can reach a compromise that works for everyone. If not, FASB may instead decide to update its standards independent of the IASB, similar to what’s happened with the insurance and financial asset convergence projects.

Comparability replaces convergence
At this point, FASB and the IASB agree that a one-size-fits-all global financial reporting model is a good idea in theory doesn’t necessarily work in practice. So, where do we go from here?

In September, FASB announced its plans to create an informal, collaborative network of accounting bodies in major capital markets to improve financial reporting and minimize differences in global accounting standards. The network’s goal is comparability, not convergence, of accounting rules that allows for consideration of local cultural, legal and political differences. The collaborative network doesn’t have a name yet, but FASB Chairman Russell Golden would like the group to hold its first meeting before year end — and has invited the IASB to participate.

The network isn’t to be confused with the Accounting Standards Advisory Forum (ASAF) that the IASB started in 2013. FASB and standard-setting organizations in Europe, Asia-Oceania, North and South America, and Africa already belong to ASAF.

Looking toward the future
The convergence fast-track that FASB and the IASB envisioned in 2002 may have been overzealous. After more than a decade, convergence efforts between FASB and the IASB appear to have stalled.

Although a universal set of accounting rules won’t happen anytime soon, the boards are expected to continue to work together toward greater comparability. As more companies engage in foreign operations and more stakeholders invest in global markets, financial standards could gradually align in response to market demands.

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