International Convergence of Accounting Standards—
The FASB’s mission is to improve U.S. financial accounting standards for the benefit of present and potential investors, lenders, donors, creditors, and other users of financial statements. The FASB believes that pursuing convergence – making global accounting standards as similar as possible – is fully consistent with that mission. Investors, companies, auditors, and other participants in the U.S. financial reporting system should benefit from the increased comparability that would result from internationally converged accounting standards. More comparable standards would reduce costs to both users and preparers of financial statements and make worldwide capital markets more efficient.
What Does “International Convergence of Accounting Standards” Mean?
The phrase international convergence of accounting standards refers to both a goal and the path taken to reach it.
- The FASB believes that, over time, the ultimate goal of convergence is the development of a unified set of high-quality, international accounting standards that companies worldwide would use for both domestic and cross-border financial reporting.
- Until that ultimate goal is achieved, the FASB is committed to working with other standard setting bodies to develop accounting standards that are as converged as possible without forgoing the quality demanded by U.S. investors and other users of financial statements.
- Historically, the path toward convergence has been the collaborative efforts of the FASB and the International Accounting Standards Board (IASB) to both improve U.S. Generally Accepted Accounting Principles (U. S. GAAP) and International Financial Reporting Standards (IFRS) and eliminate or minimize the differences between them.
- As the FASB and the IASB complete their work on the last of their joint standard-setting projects initially undertaken under the 2006 Memorandum of Understanding (MoU), that process will evolve to include cooperation and collaboration among a wider range of standard-setters around the world.
- Moving forward, the FASB will continue to work on global accounting issues with the IASB through its membership in the Accounting Standards Advisory Forum (ASAF), a newly established advisory body comprising twelve standard setters from across the globe.
- For issues of primary interest to stakeholders in U. S. capital markets, the FASB will set its own agenda. As the FASB initiates its own new projects based on feedback from its stakeholders, it will reach out to all who have an interest in improving financial reporting for companies and investors that participate in U.S. capital markets, including U.S. capital market stakeholders who live and work outside the United States.
As early as 1999, the FASB outlined its support for the dual goals of converging global accounting standards while continuing to improve U.S. GAAP.
The FASB and the IASB have been working together formally toward convergence since 2002. The two Boards have described what convergence means and their tactics to achieve it in two different documents—the Norwalk Agreement issued in 2002 and the Memorandum of Understanding (MoU) between the IASB and the FASB, originally issued in 2006 and updated in 2008 and 2010. The Boards have completed several major converged accounting standards, including those on business combinations, non-controlling interests, and fair value measurement.
More recently, in early 2013, the IFRS Foundation, which oversees the IASB, created a new Accounting Standards Advisory Forum (ASAF) to broaden the scope of the IASB’s collaborative efforts. The FASB will participate in the ASAF as one of its 12 members.
During the past ten years, the FASB and IASB collaborated through joint projects to develop common standards. The FASB has issued those standards as U.S. GAAP and the IASB has issued them as IFRS. Over time, the two sets of standards are expected to both improve in quality and become increasingly similar, if not identical. The four remaining joint projects are: revenue recognition; financial instruments; leases; and insurance. (For detailed information about the current status and plans for the FASB’s and IASB’s joint standard-setting activities, please refer to the FASB’s Technical Plan and Project Updates.)
Revenue is an important indicator for users of financial reports in assessing a company’s performance and prospects. However, revenue recognition guidance differs in U.S. GAAP and IFRS, and many believe both are in need of improvement. The revenue recognition project seeks to improve financial reporting by developing a single, principle-based revenue standard for U.S. GAAP and IFRS. The Boards are expected to issue a final standard in 2013.
Leases are an important source of financing for many companies that lease assets. However, many lease transactions currently are recognized off-balance sheet. The objective of the leases project is to increase transparency and comparability among organizations that lease assets by recognizing assets and liabilities that arise from lease transactions on a lessee’s balance sheet. The Boards are expected to issue for public comment a revised Exposure Draft on Leases in 2013.
The objective of the joint project on accounting for financial instruments is to provide financial statement users with a more timely and representative depiction of a company, institution, or not-for-profit organization’s involvement in financial instruments, while reducing the complexity in accounting for those instruments. The Boards are conducting this project in three phases, and both have issued proposed standards on the first two phases: accounting for credit losses and recognition and measurement of financial instruments. Both Boards have proposed expected credit loss models to replace the current incurred loss model, but their proposed models differ on when those losses should be recognized. Following the conclusion of the comment period on credit losses, the Boards will determine if there is common ground in developing a converged standard. On the issue of classification and measurement, the Boards are converged on the major decisions, and expect to deliberate during the second half of 2013. The third phase of the accounting for financial instruments project looks at hedging. The IASB issued its proposal on hedging in September 2012. The FASB is expected to begin its deliberations on hedging during the second half of 2013.
Existing U.S. GAAP comprehensively addresses insurance accounting. However, IFRS currently lacks specific accounting requirements for insurance contracts. The Boards undertook the Insurance Contracts project to develop common, high-quality guidance that will address recognition, measurement, presentation, and disclosure requirements for insurance contracts (including reinsurance), even if the contracts are not issued by an insurance company. In general, the Boards are developing a model that would reflect current estimates of the amount necessary to fulfill an insurance obligation. However, they have not reached consistent conclusions about some elements of the model. The FASB plans to publish an Exposure Draft in 2013.
What is the Role of the SEC and What is its Current Policy on Convergence?
The SEC has directed the FASB to consider international convergence as it develops new accounting standards. In its 2003 policy statement reaffirming the FASB as the designated private-sector standard setter for the U.S., the SEC said that it expects the FASB to consider, in adopting accounting principles, the extent to which international convergence on high-quality standards is necessary or appropriate in the public interest and for the protection of investors. The FASB believes that working cooperatively with the IASB to develop common standards that improve financial reporting in the U.S. and internationally and that foster global comparability fulfills that expectation.
Sometimes, as in the case of responding to the financial reporting crisis that began in late 2008, the FASB has taken timely actions to improve U.S. GAAP while also working with the IASB on longer term global solutions in the same area. Unless and until a decision is made to adopt IFRS in the U.S., or until we have achieved substantial convergence between U.S. GAAP and IFRS, the FASB will need to continuously manage the challenging task of balancing the demand for improved U.S GAAP with the desire to eliminate differences between it and IFRS.
In July 2012, the SEC staff issued its final staff report on the “Work Plan for Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers.” The report was the final phase of a work plan, initiated in February 2010, to consider specific issues relevant to the Commission’s determination as to where, when and how the current financial reporting system for U.S. issuers should be transitioned to a system incorporating IFRS. The 2010 work plan followed the release by the Commission in November 2008 of a proposed rule, Roadmap for the Potential Use of Financial Statements Prepared In Accordance With International Financial Reporting Standards (IFRS) by U.S. Issuers.
The 2012 staff report summarized the staff’s findings regarding key issues surrounding the potential incorporation of IFRS into U.S. financial reporting, but did not make any recommendation to the Commission. “Additional analysis and consideration of this threshold policy question is necessary before any decision by the Commission concerning the incorporation of IFRS into the financial reporting system for the U.S. issuers can occur,” the report said.
In the report, the SEC staff examined a number of unresolved issues relating to the potential incorporation of IFRS into the U.S. financial reporting system. These issues include, among others, the diversity in how accounting standards, including IFRS, are interpreted, applied and enforced in various jurisdictions around the world; the potential cost to U.S issuers of adopting or incorporating IFRS; investor education; and governance.
The FASB and IASB remain committed to improving US GAAP and IFRS and achieving their convergence.
Toward those ends, the FASB encourages its constituents to participate in the IASB’s standard-setting activities, including projects that the IASB is undertaking independently of the FASB. Please see the IASB Work Plan on the IASB’s website for a description of and timetable for all active IASB projects. Please refer to the Open to Comment portion of the IASB’s website to review or submit a comment on a particular IASB proposal.
For more information about the history of the convergence effort, please refer to International Convergence of Accounting Standards—A Brief History, which describes the major events in the evolution and development of international accounting standards.
IASB-FASB Update Report to the Financial Stability Board Plenary on Accounting Convergence [April 5, 2012]