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IFRS vs. US GAAP Convergence – What’s the Story (and does it matter)?

Monday 17 November 2014

It's officially over. Bilateral efforts between the US Financial Accounting Standards Board (FASB) and the London-based International Accounting Standards Board (IASB) to produce unified high-quality international accounting standards (i.e. convergence between IFRSs and US GAAP) have now been abandoned in favour of a broader international forum.

As per the FASB website:

  • From 2002 to 2013, thepathtoward convergence has been the collaborative efforts of the FASB and the IASB to bothimproveUS GAAP and IFRSand eliminate or minimize the differences between them.
  • Moving forward, the FASB will continue to work on global accounting issues with the IASB through its membership in the Accounting Standards Advisory Forum (ASAF), a newly established advisory body comprising twelve standard setters from across the globe.
  • For issues of primary interest to stakeholders in U. S. capital markets, the FASB will set its own agenda.

The following extracts are from an October 2014 article on CFO.com entitled "The Split over Convergence: FASB and the IASB back away from the goal of a single global accounting language".

Speaking in June at the SEC and Financial Reporting Institute Conference in Pasadena, Calif., Christopher Cox (former chairman of the Securities and Exchange Commission from 2005 to 2009) laid much of the blame on the IASB for what some are now calling the 'divergence' of U.S. generally accepted accounting principles and international financial reporting standards. Declaring that he had "come to bury IFRS, not to praise them," Cox charged that "IASB hasn't shown much sensitivity to American criticisms of its proposals." This was quite a turnaround in attitude for the former SEC chairman, who during his tenure was a prime advocate of convergence, issuing in 2008 a 'roadmap' that could lead to IFRS use by U.S. issuers starting in 2014.

"Convergence was a limited-scope project," (IASB chairmanHans Hoogervorst) wrote in an e-mail toCFO. "Like any program, it's had its successes such as the converged standard on revenue recognition, and 'some challenges' especially the inability to come to agreement on how companies should report results involving their financial-instrument holdings ... two independent boards with different imperatives have a nasty habit of reaching different conclusions."

The FASB agreed with this. The recent IFRS vs. US GAAP divergence "requires us to recognize that differences in the cultural, business, legal, and regulatory environments in different jurisdictions inevitably will result in some differences in those standards," wrote (FASB chairman)Russell Golden.

According to Emre Carr, a senior financial economist at the SEC from 2010 to 2012 who focused on how IFRS might be used in the United States, there is a 'huge switching cost' of wholesale IFRS adoption. The expense, he said, would have included that of companies and auditors changing their accounting systems and the alteration of a plethora of contracts. The fatal flaw in the U.S. side of the convergence plan: the price that domestic companies and auditors would have to pay for changing their reporting language from GAAP to IFRS. "It's only the large, global U.S. companies that favor using IFRS, because that's going to save them duplicative costs. They already know IFRS because they have it through their subsidiaries," says Carr. "That's really the only constituent that favors this."

Says Charles Best, CFO of BlackLine Systems, a finance controls and automation software provider. "I'm not sure what the consequences [of divergence] are, though I do believe many people in my position are not terribly distraught over this."

Does this mean that IFRS and US GAAP are now the same? Absolutely not!

As per the CFO.com article: Failures in coming to terms on common standards for two major topics— leases and financial instruments — appear to have left the standard setters with a healthy appreciation of the obstacles they had tried for so long to overcome. The boards also seem to be going their separate ways on accounting for insurance contracts, although that topic was not part of the original memorandum of understanding.

"The schism on the issue of financial instruments, which formally began on July 24 when IASB issued its own standard (IFRS 9), could lead to substantial compliance and data-gathering expense for U.S.-based companies", says Lisa Filomia-Aktas, a partner with Ernst & Young and leader of the firm's financial accounting advisory services.

It is a business reality therefore that those involved in international financial reporting,either as preparers or users of financial information, will need a continued appreciation of the technical differences between IFRS and US GAAP.

IASeminars can help. We opened our shop over 12 years ago simultaneously in the UK and the USA, and have since remained close to the issue of IFRS vs. US GAAP differences. We teach both topics anyway!

If you are interested in such matters, please consider the following courses and contact us for a discussion:

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