Global convergence - progress report

The leaders of Canada, France, Korea, United Kingdom and United States have sent a joint letter to the other leaders of the G20 countries highlighting the need for continued co-operation on the regulatory reform agenda to strengthen the international financial system. At their summit meeting in September 2009, the G20 leaders agreed to this agenda which set out as one of its many goals the complete convergence of accounting standards across the G20 countries by June 2011. The letter commented that 'there can be no let up in our commitment to implementing international standards and agreeing to undergo periodic peer reviews to evaluate our adherence to these standards'.

Achieving the objective

The spread of International Financial Reporting Standards (IFRS) has grown widely over the past decade and many major countries have already adopted IFRS with many others currently in the throes of doing so, and even the U.S. laying tentative plans with a view towards the possibility of moving to IFRS in the middle part of this decade. The publication of IFRS for SMEs by the IASB in 2009 has been responded to with enthusiasm in most parts of the world meaning that IFRS is no longer seen as being only for the 'big players' but is also becoming the financial reporting language for all entities on a global basis.

For the many of us that support international standards the portents are positive towards achieving global comparability of financial information with improved transparency and consistency. This has to be good news!

Much work to do

The two major standard-setting bodies in the world are the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB).

The first major joint initiative of the IASB and the FASB towards convergence was their Memorandum of Understanding (MoU) in 2002 which was redrawn in 2006 and updated again in 2008. The MoU outlines the main objectives with regard to improvement and convergence of standards in all the key areas. In November 2009 the two Boards released a joint statement reaffirming their commitment to this objective with the aim of completing each major project by June 2011. The Boards also committed to developing outreach programmes to provide potential respondents with enhanced opportunities to engage with them to help them consider the proposals.

The Boards have changed their work methods to enhance the likelihood of completing the major MoU projects by the June 2011 timeline and to ensure that the resulting standards will improve both IFRSs and US GAAP and reduce the differences between them. To this end, the Boards are meeting with far more regularity, with 22 meeting days since last November and a further seven sessions on specific issues; are making the record of their considerations more publicly available; and are developing extensive outreach programmes. The Boards will also be publishing a separate discussion paper to seek views on ways to implement the improved standards so as to minimise the disruption and cost to the financial reporting system.

Are milestones being achieved?

The IASB and FASB published their quarterly progress report on 31 March 2010 outlining the progress being achieved in relation to the eight specific areas identified in their November statement and also under the headings of 'Other MoU Projects' and 'Other Joint Projects'.

The Appendix to the report sets out the timetable for document publication indicating a very busy few months ahead with exposure drafts on seven of the eight specific areas expected in Q2 2010, which include from an IASB perspective:

• Financial instruments
  • Liability classification and measurement
  • Hedging
• Consolidation
  • Disclosures about securitisation and investment vehicles (with early release of standard expected in June 2010)
  • ED of proposed standard
• Fair value measurement
• Revenue recognition
• Leasing
• Financial instruments with characteristics of equity
• Financial statement presentation
  • Reporting comprehensive income
  • Disclosures about discontinued operations
  • Main standard: replacement of IAS 1 and IAS 7

The IASB is also proposing to release a standard on joint ventures in June together with an ED on insurance accounting and has already released an ED on pension accounting in April.

Two areas on which the timing of publication has yet to be determined by both Boards are derecognition, which is one of the eight specifically identified topics, and emissions trading.

The FASB has a generally consistent publication programme on the areas outlined above.

The sheer volume of material to be assimilated and digested will once again place considerable strain on companies, and their accounting departments, to come to terms with the proposed new requirements and many will need support from their advisors.

All in agreement?

One of the more controversial accounting topics over recent years has been financial instruments giving rise to great complexity which, while in part conceptual, was perhaps even more a reflection of the underlying markets and intricacies of various financial services products. This has been the focus of much comment and debate over the past couple of years with a global demand for greater simplicity and transparency and earlier recognition of loan impairment losses.

Difficulties continue with financial instruments standing out as the area where the Boards are having difficulty with developing a common approach. The IASB has been replacing its financial instruments requirements in a phased approach, whereas the FASB has been developing a comprehensive proposal. Those differing approaches have contributed to the Boards reaching different conclusions on a number of important technical issues, which include:

• The measurement model, with FASB proposing fair value for all financial instruments
• The approach to the calculation of credit impairment provisions

The Boards expect to commence joint discussions in the third quarter of 2010 but sound a warning signal in their March 2010 progress report - 'although our recent experiences with joint meetings show that we have been able to resolve differences on several projects, there is no guarantee that we will be able to resolve all, or any, of our differences on this project'.

This clearly raises the concern that if one of the building blocks to achieving global convergence is missing, does this cause the overall structure to tumble and it presumably must undermine the prospects of the U.S. coming on board the IFRS juggernaut.

As commented in the recent G20 letter 'an agreement to act is just a start, it is acting on the agreement that matters'. The work which the IASB and the FASB are currently undertaking can yield major benefits in the form of a globally accepted financial reporting language. It is a fervent wish of all involved that this major initiative succeeds and is not taken off the rails by one of its constituents.

First published in Finance Dublin online