The trend toward convergence of accounting standards seems to be picking up speed after a bumpy start, but there are still plenty of hurdles ahead.
At a conference on convergence last week, Robert Herz, chairman of the Financial Accounting Standards Board, said he favored a single set of standards and rejected the idea of a U.S. version of international financial reporting standards (see FASB Favors Single Accounting Standard).
The Accounting Standards Board of Japan and the International Accounting Standards Board also announced this week an initiative to accelerate convergence between Japanese generally accepted accounting principles and IFRS. Here in the U.S., there seems to be a general desire to move U.S. GAAP and IFRS closer together, but there are also many challenges, including how to account for business combinations, revenue recognition, financial statement presentation, inventory, pensions and leases.
FASB and IASB have been working over the past few years on bringing the standards together. In October 2002, they signed the so-called Norwalk Agreement and later reaffirmed their commitment in February 2006 with a memorandum of understanding.
But the two standards bodies face substantial hurdles in getting constituents like public companies to go along with the changes and helping accountants to make the transition. IFRS is more of a principles-based system, with approximately 2,500 pages of rules and guidance, while GAAP has about 10 times that number, so there are a lot of differences to smooth out. Research projects have been ongoing in areas such as insurance contracts, share-based payments and affiliations between entities.
However, even the international standards have variations that could make pinning down the convergence between GAAP and IFRS even harder. Last week, a group of European companies requested that they be allowed to choose which standards to follow in IFRS. In a letter to the Securities and Exchange Commission, the European Association of Listed Companies asked to be able to use the European Union's version of IFRS when making financial filings with the SEC.
So far, the SEC has only proposed allowing foreign companies to use IASB's version of IFRS in their filings without reconciling the results with GAAP, but using the European Union's version of IFRS could muddy the waters even more. Bringing all these standards together is not going to be easy, but it's looking more and more inevitable.
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