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US and international accounting standard setters rekindle their vows

Finance Blogger: Anthony Harrington Anthony Harrington

On June 2, the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) agreed to sharpen up their efforts to achieve convergence between international accounting standards and US GAAP (generally agreed accounting principles).

This follows an earlier announcement back in November 2009 where the two bodies reaffirmed their commitment to convergence by June 2011. Why does any of this matter? Because users of accounts, which includes investors, shareholders, unions and tax authorities, like comparing apples with apples. If one company bases its accounts on international accounting standards and the other on FASB standards and US GAAP, then will be a number of divergences between their accounts. An analyst  would have to work that much harder to sort out what the differences really meant.

However, agreeing to do something is one thing, actually doing it is something else. The latest convergence agreement is all about recognising that the best way of getting some momentum going is to put some energy behind those projects that really can bring about a significant rapprochement between the two sides. 

One of the biggest problems that the two bodies face, however, as they drive for convergence, stems from the fact that they have to take their target audience with them. All the stakeholders involved, including the big multi-nationals, have to engage with the process. This takes time and what the IASB and FASB have realised is that while they are dedicated standard setting bodies, and as such can focus on the issues involved, companies have other objectives, such as generating profit, that claim their attention.

It is just not feasible to ask corporates to respond seriously to a whole raft of proposed changes in a very short time frame. The 2 June statement from FASB and IASB puts it succinctly:

“As noted in our March 2010 progress report, we recognise the challenges that arise from seeking effective global stakeholder engagement on a large number of projects. Since publishing the March progress report, stakeholders have voiced concerns about their ability to provide high-quality input on the large number of major Exposure Drafts planned for publication in the second quarter of this year.”

There is just no way that the two bodies can put out a large number of exposure drafts, get the feed back they want on those and then dash off a single, unified set of standards, in the tight time scale that they have set themselves. Instead, they now intend to prioritise the major projects and to stagger the publication of Exposure Drafts and related consultation exercises such as round table discussions. This will enable more people to get involved and as both bodies acknowledge, effective stakeholder participation is critically important to the quality of the standards they are trying to produce.  For this reason, they plan to cap the number of Exposure Drafts issued in a quarter, limiting it to just four. Many would say that this is probably still two too many for serious participation, but much depends upon the kinds of controversy that is stirred up when the differences between US GAAP and international standards are blended together. Many of the differences are trivial, but equally, many are not.

FASB and the IASB have indicated that they are prepared to be a little flexible about their deadline of June 2011 for a finished, harmonised set of standards. Their statement anticipates “a few projects extending into the second half of 2011”. In fact, it may well be more than a few. As the  accounting standards bodies acknowledge, until they see what the reaction is to the various exposure drafts, they really won’t be able to get a definitive idea of, as they put it, “the timeline required to arrive at high quality converged standards.” Much remains to be done.

Further reading on accounting standards

Tags: accounting standards , fair-value accounting , FASB , IASB , regulation , transparency
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