by Glenn Cheney
Norwalk, Conn -- Delivering, in part, on a promise made last year, the Financial Accounting Standards Board has proposed adjusting four of its statements to bring them closer to international standards. The adjustments are relatively minor, but FASB said that they would improve U.S. standards and demonstrate progress toward convergence. And bigger changes are coming up.
Convergence is expected to become more difficult as FASB and the International Accounting Standards Board grapple with issues that are more controversial and complex, or which neither has examined in recent years. Once the boards have agreed on the points they agree on, bigger issues, such as financial instruments, will gain the political attention of such entities as the Securities and Exchange Commission and the European Commission.
The four exposure drafts propose changes to standards on inventory pricing, non-monetary exchanges of productive assets, calculations of earnings per share and voluntary changes to accounting policy.
FASB had not expected much controversy on these EDs, but informal conversations with corporate financial leaders have revealed that the board can expect a few critical comment letters. Returning from a conference with Financial Executives International, FASB chairman Robert Herz said that a few attendees remarked that the proposed standards on accounting changes and assets exchangeswould not be easy to adopt.
IASB member James Leisenring, who serves as the board’s liaison with FASB, said that, in this first phase, both boards are looking for issues that can be readily converged by choosing the better of two standards. Convergence, he said, “is not a one-way street.”
“The scope of this part of the project is to try to find cases where it is fairly obvious that the other standard has a superior answer, so that we don’t spend a significant amount of time debating. I think that objective has been met in both directions. So it’s not humongous progress, but it’s the best that was ever expected of us.”
The IASB has issued an exposure draft on changes to standards on the presentation of non-current assets and discontinued operations to bring them into conformance with the American way of accounting. Another project is in the works to converge with FASB Statement 146, on costs associated with exit or disposal activities.
“Our objectives have been met in both directions,” Leisenring said. “I am pleased that we’ve demonstrated a commitment on both sides.”
On accounting for inventory pricing, FASB and the IASB had issued standards that have the same intent but different wording. After the IASB recently made a few wording changes to International Accounting Standard 2, FASB saw that its Accounting Research Bulletin 43 would be more clearly articulated with similar wording. The new wording makes it clear that abnormal amounts of wasted or spoiled materials require treatment as current period charges rather than as a portion of the inventory cost.
FASB also proposed modifying APB Opinion No. 20, on accounting changes, by adopting provisions of IAS 8. Opinion 20 requires changes in accounting principle to be recognized by including in net income the cumulative effect of the change. The proposed standard would require retroactive application.
FASB also saw an opportunity for improvement to Opinion 29, which holds that the accounting for non-monetary exchanges of productive assets is based on whether the assets exchanged were similar. The intent is to prevent inappropriate gain recognition. IAS 16, on property, plants and equipment, and 38, on intangible assets, focus on each asset’s entity-specific value and cash flows to determine whether a transaction has commercial value.
FASB has also issued an ED proposing changes to Statement 28, on earnings per share. EPS was the first issue that FASB and the IASB’s predecessor, the International Accounting Standards Committee, worked on together to produce very similar standards. The IASB recently saw ways to improve the calculations specified in its Statement 133, and FASB has agreed with the suggested changes.
FASB’s ED proposed eliminating provisions that allow an entity to rebut the presumption that contracts with the option of settling in either cash or stock will be settled in stock. It also would require that shares that will be issued upon conversion of a mandatorily convertible security be included in the weighted-average number of ordinary shares outstanding.
FASB project manager Jeffrey J. Johnson said that, at this stage of the convergence project, the board had the relatively easy job of choosing the highest quality standards that were available. Future projects, however, including revenue recognition and business combinations, involve the writing of new standards that will be developed jointly with the IASB.
“The projects we’re getting into now — things like research and development, financial reporting, and income tax — neither board has looked at in a long time, and the standards are a little dated,” Johnson said. “It’s going to be a little bit more of an effort to come up with a high- quality solution.”
The two boards have divided research efforts so that each can work toward initial decisions that will be subsequently presented to the other board.
Leisenring sees politics as an upcoming obstacle to substantive progress toward convergence. “The biggest single obstacle to convergence is the political activity of the European Commission,” he said. “I think that in Europe there is a significant reluctance to truly account transparently. Certainly they don’t want to account for financial instruments ... and I think far too many in Europe are perfectly happy with that. Statements 32 and 39, both on financial instruments, have been out there for years and we think they ought to be cleared and approved, and without financial instrument standards, international standards will be full of holes.”
FASB requests comments on its drafts by April 13, 2004.
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