Eric J. Williams and Dr. Earl K. Stice, School of Accountancy and Information Systems
Introduction
Business is simultaneously conducted in many lands—markets are no longer restricted by boundaries or time zones. Virtually every aspect of the corporate world is changing in response to the opportunities and challenges accompanying global expansion. Adaptation by corporations must occur or else obsolescence will result. The accounting and financial reporting profession is not immune to these globalizing currents of change. The resultant challenges are the impetus causing accounting-standard setters, namely the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), to examine areas of convergence.
As part of a continuing effort to provide solutions in an ever shifting business environment, and to create the necessary global accounting standards, the FASB and IASB formally approved on September 18, 2002 a short-term project (hereafter known as “the project”) to study potential areas of convergence between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The objective of the project is to eliminate conflicting differences between GAAP and IFRS. The project is limited to those differences in which convergence around a high-quality solution would appear to be achievable in the shortterm.
Scope
This paper will summarize and highlight the progression of the convergence project to date. Because of the technical nature of accounting standards, this summary will not outline every standard that is being considered and every decision being made. Rather, an overview will be provided to give a general understanding of how the convergence project is developing.
Findings
Each Board is following the process of identifying and selecting certain GAAP and IFRS that possibly meet the short-term criteria, and then deciding whether the respective principle or standard can be adjusted and, if not, the rationale behind that decision. Differences that are associated with issues requiring comprehensive adjustments will not be addressed under the project. Those differences will be addressed by the Boards in the future.
The FASB and IASB initially set December 31, 2003 as the target date for issuing a final Statement or Statements covering some, if not all, of the short-term, identified differences. This date was established in part to accommodate the impending deadline set by the European Commission that all publicly-listed companies in Europe be required to adopt IFRS by 2005.
However, at the most recent Board meeting—October 15, 2003—it was determined that on topics where the two governing bodies have reached a consensus, the Boards are expected to issue Exposure Drafts on these and others early in the fourth quarter of 2003. Subsequently, they will issue a final Statement in the first half of 2004; thus extending the anticipated deadline. Such an action is to be expected. Because of the volume of differences and the complex nature of some issues, the FASB and IASB likely anticipated that many differences between U.S. and international accounting standards would persist well beyond the 2005 European deadline.
The two Boards have agreed upon many short-term initiatives including topics such as classification of liabilities on refinancing, classification of liabilities due on demand due to violation of debt covenants, asset exchanges, voluntary changes in accounting policy, accounting policies and changes in accounting estimates, inventories – idle capacity and storage, and earnings per share.1 The remaining differences to be addressed by the FASB and the IASB in the short-term project include financial instruments, interim financial reporting, and research and development. A detailed and technical description of what each respective Board is doing concerning the aforementioned topics can be found at www.fasb.org and www.iasb.org. As a caveat, these Board decisions are tentative and do not change current accounting policy and procedure in the U.S. or in Europe. The official positions of the FASB and IASB on accounting issues are determined only after extensive due process and deliberations.
During the past year, the FASB and the IASB have expanded efforts towards global accounting convergence. In addition to the short-term convergence project, the two standard setters have embarked on five other key initiatives. First, the FASB and IASB are conducting joint projects to address revenue recognition and business combinations. Second, is the presence of a full-time IASB member working and residing at the FASB offices. Third, IASB projects are monitored by the FASB based upon the FASB’s level of interest in the topic being addressed. Fourth, the FASB staff is working on a research project that seeks to identify all of the substantive differences between GAAP and IFRS, and to catalog those differences according to the strategy for resolving them. Fifth, within the framework of the Board’s agenda criteria, all topics formally considered for addition to the FASB’s agenda need to be assessed for the possibilities for cooperation with the IASB. 2
Conclusion
What initially began as a short-term convergence project between the FASB and the IASB has evolved into a globally beneficial cooperation between two accounting standard-setting bodies. The additional initiatives being embarked upon will only bring greater harmonization to accounting standards, and will help to unify the financial reporting all public companies within and without the borders of the United States are required to do.
From a practitioner’s point of view, standard setters, financial statement preparers, auditors, and regulators should be aware of similarities and differences between the financial reports that are being and will be produced under IFRS standards and GAAP standards. Ideally, in the future, those differences will be minimal because of the efforts currently being expended by the FASB and the IASB.
References
- Financial Accounting Standards Board. FASB: Short-term International Convergence. Online. World Wide Web. Available. http://www.fasb.org/project/short-term_intl_convergence.shtml#summary.
- 2 Financial Accounting Standards Board. FASB: Short-term International Convergence. Online. World Wide Web. Available. http://www.fasb.org/intl/convergence_iasb.shtml.