FASB, IASB Chiefs Agree New Convergence Model Is Needed

December 6, 2011

The heads of the U.S. and international accounting boards that have been working to resolve standards differences agree that their current convergence process should be replaced by one that is more manageable and effective.

FASB Chair Leslie Seidman said Tuesday at the AICPA National Conference on Current SEC and PCAOB Developments that side-by-side convergence is not the optimal model in the long run. Hans Hoogervorst, chair of the International Accounting Standards Board (IASB), spoke immediately after Seidman at the conference in Washington and echoed her sentiment.

Seidman said FASB would like to work with the IASB to complete the current priority convergence projects on revenue recognition, leasing, financial instruments and insurance. But she said indefinite convergence is not a viable option, politically or practically.

“As any observer can see, this process is challenging technically and administratively,” Seidman said. “Plus, we appreciate that the IASB, as an international body, must be responsive to the priorities of other countries that have already adopted IFRS.”

Hoogervorst said the IASB’s convergence history with FASB, which dates back to 2002, has been extremely useful in bringing IFRS and U.S. GAAP closer together. But he said that two boards of independently thinking professionals sometimes simply reach different conclusions.

“It’s tempting to just maintain the status quo,” Hoogervorst said. “But for the long term, the status quo is an unstable way of decision making that inevitably leads to diverged solutions or suboptimal outcomes.”

Hoogervorst cited the example of one part of the financial instruments project, offsetting, where FASB and the IASB were aligned initially but ended up in different places. Because of those differences, he said, the balance sheets of many U.S. banks will look much smaller than those of Asian and European banks. U.S. banks are allowed to show net derivatives, while banks in Asia and Europe must present them in gross.

“Through disclosures, we will try to bridge the gap,” Hoogervorst said. “But I doubt that investors in the U.S. or elsewhere will see it as a satisfactory outcome. At the same time, we at the IASB believe that our conclusion is right for investors. I am sure that Leslie would believe the same for the FASB.”

The next step for convergence could be incorporation of IFRS into U.S. GAAP. The SEC’s long-awaited decision on whether and how to incorporate IFRS for U.S. issuers is at least a few months away, based on a speech Monday by SEC Chief Accountant James Kroeker.

The Financial Accounting Foundation (FAF), in consultation with FASB, has sent a letter to the SEC outlining its preferred path for incorporating IFRS into U.S. GAAP. FAF is FASB’s parent organization.

In the letter, FAF Chairman John Brennan described a number of recommended changes to the approach dubbed “condorsement.” The SEC floated the condorsement concept in a work plan released in May as one possible path to IFRS for U.S. public companies.

FAF pointed to concerns about condorsement, including that it would shift “significant authority to an international governance structure early on” and dilute the SEC’s power to ensure investor protection in the U.S. capital markets as standard setting moves to an international body.

Under FAF’s approach, FASB and the IASB would complete the current priority convergence projects. The United States would look to the IASB to set new standards while participating actively in the process.

The label “U.S. GAAP” would be retained to avoid practical problems, and FASB would evaluate the remaining differences between U.S. GAAP and IFRS and develop a plan to address them. FASB would retain the ability to set U.S. standards for topics of considerable importance that aren’t on the IASB’s agenda and topics where the IASB doesn’t provide timely or adequate implementation guidance.

“We are always going to need a nimble, responsive body to address important matters in the U.S.,” Seidman said. “In cases where other countries share the issue, we would hope to convince the IASB or IFRIC [the IFRS Interpretations Committee] to take up the issue and then participate in the process. But if they don’t, we would address the issue for the U.S., and then the IASB could consider the standard for broader use.”

Hoogervorst said clarity is needed and a final date for the use of IFRS for U.S. public companies must be set, though it need not be tomorrow or next year. He said a model that would emphasize FASB’s role to endorse IFRS for use in the United States would be similar to processes used in most other parts of the world, including Australia, Brazil, Canada, Europe and Korea. He said that mechanism would ensure a strong role for FASB in the global system and would make FASB and the SEC responsible for U.S. accounting standards.

But he said the key for making that model work is a high threshold for endorsement that would make deviations extremely rare. He said frequent non-endorsements and carve outs would make the gains of adopting IFRS elusive.

“Perhaps it’s better to use words that everybody understands that don’t give so much rise to different interpretation, like ‘condorsement,’ ” Hoogervorst said. “ ‘Incorporation,’ everybody knows what that means. ‘Adoption,’ everybody knows what that means. I expect the final decision of the SEC to be clear on that issue.”

Seidman and Hoogervorst appeared to differ on the issue of allowing U.S. companies to volunteer to use IFRS in an early adoption process. Hoogervorst said providing a limited number of U.S. companies with the option to use IFRS for their U.S. consolidated financial reporting would offer a good test of IFRS.

He acknowledged concerns about having two sets of GAAP in the U.S. marketplace, but said if major competitors of those U.S. companies are using IFRSs, comparability would increase.

But Seidman appeared unconvinced.

“I think we’ve got to examine why we would allow an option and who is it benefiting,” Seidman said. “… This whole process has to be investor-focused. You may not agree with the issues that I raised in my remarks, but if you think those are real issues, my view is that we need to resolve them before we allow widespread application of IFRS in the U.S.”

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