In a handshake across the sea, the Financial Accounting Standards Board and the International Accounting Standards Board have agreed to continue their efforts to converge American and international standards.And if all goes well, at some point in the next few years, the Securities and Exchange Commission may decide that the international and American standards are close enough to allow companies reporting under international standards to register on U.S. stock markets without reconciling their financial statements to U.S. standards.
SEC chair Christopher Cox indicated the commission's support for the roadmap, which was laid out in the FASB-IASB agreement and issued as a memorandum of understanding. The commission's acting chief accountant, Scott A. Taub, expressed optimism about the long-term benefits of the plan. "The work plan communicates a continued commitment to improving financial information for investors," Taub said. "Having the IASB and FASB address these issues jointly should further the efforts to converge accounting standards. Investors in the U.S. and around the world will be the long-term beneficiaries."
FASB's Michael Crooch reiterated the board's excitement with the new prospects of international cooperation.
"I think this is a big deal, particularly for companies outside the United States having the ability to register here and not have to reconcile," Crooch said. "Assuming the roadmap works and the SEC gets comfortable, this will be very important."
Previously, it had been assumed that reconciliation could be dispensed with only after the world and the U.S. had agreed on a single set of standards. Now that widely awaited day is probably a lot closer, though no one can say how close.
The SEC will begin to compare and assess statements prepared under FASB and IASB standards, and reconciliations between the two, as the 2005 financial statements begin to be issued. Once that process is underway, the commission may be able to indicate how soon the two sets of standards will be sufficiently converged.
Working for the long term
The MOU grew out of the so-called Norwalk Agreement of 2002, which set the boards working toward "short-term convergence." At that stage, the objective was to modify existing standards that were similar enough to nudge into harmonious compatibility, if not identical wording.
Short-term convergence continues, but the boards have now agreed that trying to eliminate differences between standards that are in need of significant improvement is not the best use of resources. Rather, the boards have decided that, in many cases, new common standards should be developed from the ground up.
Toward that end, the two boards will pursue convergence on two tracks. On one, the boards will decide whether major differences in focused areas should be eliminated through short-term projects. If so, the goal is to complete or substantially complete work in those areas by 2008.
On the other track, the two boards will work toward new and stronger standards where both American generally accepted accounting principles and international financial reporting standards are regarded as candidates for improvement.
The MOU refers to itself as a "roadmap" that shows the way to a point where the SEC will no longer require reconciliation. FASB's goal is to make significant progress by 2008, perhaps enough progress to relegate reconciliation to history, even as work on convergence continues.
The boards already agree on one thing: Moving beyond reconciliation will depend on more than accounting standards.
"The memo indicates that we are going to need cooperation from other parts of the system," Crooch said. "One of them is going to be the auditors. Obviously, the SEC is going to make some judgments about the quality of audits they're seeing in statements that are being submitted. They're going to look at the quality of the application of the international standards."
Crooch reiterated that the boards are not converging only for the sake of convergence. Rather, they are identifying standards that need to be rewritten as higher-quality standards. He cites the standards on leasing as an example. "Why should we move their standard to ours or ours to theirs when what we ought to do is start over?" he said.
The memorandum of understanding specifies six projects at each board that are candidates for convergence by 2008. FASB will work on a project on the fair value option for financial instruments, under which the project on investment properties is included, and projects on research and development and on subsequent events. It will work jointly with the IASB on projects on impairment and income tax.
At the same time, the IASB will work on modifying projects on borrowing costs, government grants, joint ventures and segment reporting. The boards agreed that limiting projects to these two handfuls would help them complete the projects by 2008.
The boards also agreed that several joint projects were not likely to be completed by 2008, given the need to conduct preliminary research, subsequent deliberation and joint efforts toward a single conceptual frameworks, all exposed and discussed in accordance with their respective due processes.
The boards consulted with both the SEC staff and the European Commission to determine priorities for these longer-term projects.
Seven projects are already on, or about to be on, both boards' agendas. The boards are currently discussing comments received on exposure drafts of a project on business combinations, and a final statement is expected next year.
On fair value measurement guidance, which aims to provide consistency in the application of existing fair value requirements, FASB hopes to issue a completed standard in the first half of 2006, while the IASB continues its deliberations.
Both boards have added to their agendas a project on the distinctions between equities and liabilities. The IASB is following FASB's lead, though the latter has yet to publish a document. The boards hope to issue one or more process documents by 2008.
FASB has performance reporting on its agenda, but has not yet issued a process document, while the IASB has an exposure draft out for the first phase of the project.
FASB is already deliberating post-retirement benefits (including pensions), but the IASB has not yet added the project to its agenda. Each is also deliberating revenue recognition, with one or more process documents expected by 2008.
The boards are also researching, or expect to research soon, projects on de-recognition, intangible assets and the possibility of replacing existing standards on financial instruments.
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