Convergence – a reality?

The leaders of the G20 group of nations issued a declaration following their recent summit meeting, reaffirming their support for a single set of global accounting standards as a means for strengthening the global financial market infrastructure.

How achievable is this? The answer to this question will shape the future development of the global accounting framework.

With the majority of the world’s major economies either using IFRS or, in the case of such countries as Canada, China and others, coming on board in the next year or so, the one major part of the jigsaw that is missing is the United States of America.

U.S. Commitment to IFRS?

In February 2010 the Securities and Exchange Commission (SEC) put forward a work plan to gather information that will aid it in evaluating whether, when and how IFRS should be incorporated into the U.S. financial reporting system.

The work plan addresses six key areas:-

• Significant development and application of IFRS for the U.S. domestic reporting system
• The independence of standard setting for the benefit of investors
• Investor understanding and education regarding IFRS
• Examination of the U.S. regulatory environment that would be affected by a change in accounting standards
• The impact on issuers both large and small, including changes in accounting systems, changes to contractual arrangements, corporate governance considerations and litigation contingencies
• Human resource readiness

The first two areas of concern primarily address the SEC’s consideration of whether to incorporate IFRSs into the U.S. financial reporting system. The remaining, four areas address transitional considerations.

The SEC has indicated that it will make a decision in 2011 after completion of the work plan and the convergence projects of the two major accounting boards – the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB).

Progress Being Achieved?

In late October the SEC published its first periodic progress report on achievement of its plan.
Some of the preliminary observations in the first progress report are:-

• There are different approaches between jurisdictions as to how IFRS is incorporated into the financial reporting system, ranging from direct adoption of IFRSs as issued by the IASB to a convergence or, as in the EU, an endorsement approach.
• The manner in which the IFRS Foundation is funded, and thereby the independence of the global standard-setting structure may be impacted, can range widely between jurisdictions with perhaps more concern where funds are raised from the private sector or made directly by listed companies.
• Concerns with potentially incurring significant costs to modify systems; having two sets of GAAP if private companies may not report under IFRSs
• Extent and significance of differences in applicable accounting requirements and their effect on internal processes will vary among issuers.

As noted in the progress report, many of the SEC’s efforts are currently in process and are not expected to be completed until 2011, particularly as they relate to consideration of the sufficient development and application of IFRS for the U.S. domestic reporting system and the independence of standard setting for the benefit of investors. The SEC will be continuing to report periodically on the status of the Work Plan.

Convergence of Standards

In November a second progress report was published, this time on the commitment of the IASB and the FASB to convergence of accounting standards and a single set of high quality global accounting standards.
The priority projects remain substantially the same, and include:-

• Joint projects on financial statements, revenue recognition, leases, the presentation of other comprehensive income and fair value measurement
• For the IASB, improved disclosures about derecognised assets and other off-balance sheet risks (aligning with recently issued U.S. GAAP requirements), consolidations (particularly in relation to structured entities) and its project on insurance contracts.

The target complete date for these priority projects remains June 2011 or earlier.

A number of other projects were substantially deferred for further consideration until after June 2011. These include the broader financial statement presentation project, financial instruments with characteristics of equity, emissions trading schemes, the reporting entity phase of the conceptual framework and developments in relation to provisions and contingencies.

Without doubt substantial progress is being made on the convergence and overall improvement of accounting standards. However, there remain many areas where there are fundamental differences between the approaches adopted by the IASB and the FASB. The elimination or, at least, the mitigation of such differences is fundamental to the achievement of the ultimate objective.

While the majority are in support of a single set of high-quality, globally accepted accounting standards, the manner in which this is achieved particularly from a U.S. perspective remains unclear.

The possibility of the SEC ultimately giving the thumbs down to IFRS adoption cannot be ruled out which raises the question of what the outcome would be, with at least two possible scenarios:-

• First, the coalition of nations supporting IFRS could break apart, with a return to fragmented accounting frameworks and consequent undermining of transparency and comparability
• Second, the IFRS coalition could hold and the U.S. would become increasingly isolated, no longer playing the substantial and constructive role it currently plays in IFRS development and oversight.

The potential consequences of a ‘no vote’ by the SEC on IFRS adoption would almost definitely sound the death knell of achieving global convergence of accounting standards. This is a major concern of all and therefore all involved must work to achieving the common purpose.

First published in Finance Dublin online