This article is the third in a series of articles that takes our readers on a journey through International Financial Reporting Standards (IFRS) with a special focus on the standards’ quintessential feature: they are principles-based. This article provides an overview of the convergence process between IFRS and U.S. generally accepted accounting principles (GAAP).
In October 2002, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued a memorandum of understanding, known as the Norwalk Agreement, in which the two standard setters agreed to start a convergence process. Since that time, the FASB and the IASB have reaffirmed their commitment to the convergence process with two other memorandums of understanding signed in 2005 and in 2007.
Convergence is seen by many as a monumental task. The volume of literature to be converged is overwhelming – approximately 2,500 pages of IASB official literature and 500,000 pages of U.S. GAAP. Also, as discussed in our previous article, “Principles vs. Rules,” the two standard setters use diametrically opposite approaches. On these bases, we should first ask ourselves if and how it is possible to converge a set of principles and a set of rules.
Philosophically, with these two intrinsically antithetical approaches, it can be implied that the purpose of the convergence process is primarily to reduce the distance between the two frameworks rather than getting to a point where the two sets of standards are identical. It is likely that the convergence process may reach a time when the two roads stop converging and can only run parallel to one another. When that happens, a decision may need to be made to choose one of the two approaches over the other. This is possibly the best way to visualize the convergence between IFRS and U.S. GAAP, as well as what kind of goals convergence can reasonably achieve.
Practically, in the convergence process the IASB and the FASB analyze the literature existing in the two sets of standards. In situations where the IASB considers one approach to be superior to the other, the IASB uses the best approach – regardless of whether this is U.S. GAAP or IFRS - as a starting point to develop a new IFRS principles-based standard. For example, International Accounting Standard (IAS) 14, Segment Reporting, was replaced by IFRS 8, Operating Segments, which, with a few minor differences, is a replica of FASB Statement No. 131, Disclosures about Segments of a Business Enterprise. Initially, IFRS 8 was severely criticized by the European Union (E.U.), which feared that this would represent the beginning of the “Americanization” of IFRS. Eventually, IFRS 8 has been endorsed by the E.U.; however, doubts still remain about how an almost identical standard can result in an identical application when it has to be practically applied from two totally different perspectives. Moreover, uncertainty surrounds the specific guidance and interpretations that over time develop under U.S. GAAP and how such guidance has to be considered under IFRS, where it theoretically has no jurisdiction.
Another significant joint project conducted by the IASB and the FASB has been the revision of IFRS 3, Business Combinations, and FASB Statement No. 141, Business Combinations. Interestingly, both standards have an appendix of approximately a dozen pages listing the differences between them.
In general, from the U.S. GAAP perspective, doubts still remain about how principles-based standards are going to be practically applied when incorporated in a rules-based system. One answer may be adding more guidance to IFRS to accommodate the needs of U.S. constituents. This might be a sort of compromise. However, this would mean that the convergence process would stop, and both the FASB and the IASB would then just focus on making IFRS “The” global set of standards.
For further information, please contact Bob Dohrer (robert.dohrer@rsmi.com) or Marco Marcellan (marco.marcellan@rsmi.com) in our International Assurance Services Group. |
