IASB and FASB Report Progress on Convergence


FASB and the International Accounting Standards Board (IASB) on Thursday published a progress report on their joint convergence projects.


Since their previous report in November, the boards have:


  • Completed five projects. In the next few weeks, the IASB will issue new standards on consolidated financial statements (including disclosure of interests in other entities), joint arrangements and post-employment benefits. Both boards also will issue new requirements in relation to fair value measurement and the presentation of other comprehensive income.
  • Made progress on the three remaining Memorandum of Understanding (MoU) projects—covering financial instruments accounting, leasing and revenue recognition—as well as insurance accounting.
  • Provided for further time to finalize their convergence work. The boards have agreed to extend the timetable for the remaining priority convergence projects beyond June to permit further work and consultation with stakeholders. The convergence projects are targeted for completion in the second half of this year. However, the U.S. insurance standard, which has not yet been exposed for comment, is targeted for the first half of 2012.


The progress report highlights several developments relating to pending projects:


Financial instruments: After reviewing the feedback received, FASB has tentatively decided to consider three categories for financial assets: (a) fair value measurement with all changes in fair value recognized in net income (trading or holding for sale); (b) fair value measurement with changes in fair value recognized in other comprehensive income (investing with a focus on managing risk exposures or maximizing total return); and (c) amortized cost, subject to an improved impairment approach (customer financing with ability to manage credit risk by renegotiating cash flows with customers) and enhanced disclosures.


When FASB has made its decisions about classification and measurement, which it expects to do in the third quarter of 2011, the IASB will seek views from its constituents about FASB’s conclusions.


A supplement released by the standard setters in January presented an impairment model that reflected the differing objectives for impairment accounting while proposing a common solution to impairment. It outlined a model in which the amount and timing of recognition would vary according to the credit characteristics of the financial asset, specifically the degree of uncertainty about the collectibility of cash flows.


In April the boards considered the feedback from comment letters and the boards’ outreach activities. There was no clear consensus among respondents. The boards are working through the issues and suggestions and are determined to reach a consensus on a basic approach by the end of June. Once the boards have reached consensus they will need to assess what additional steps, such as potential re-exposure or outreach, are necessary to allow the new requirements to be finalized.


Leasing: The boards published a joint exposure draft in August 2010. The proposals would bring lease obligations and the related assets onto the balance sheets of lessees. The proposals for lessors were designed to ensure that an entity that retains significant risks or benefits of the leased asset would recognize that asset and an associated obligation to allow the lessee to use the asset. In other cases, when the significant risks or benefits of the leased asset are transferred to the lessee, the lessor would derecognize the portion of the asset that is transferred by the lease agreement.


The boards have been considering the feedback received from comment letters and outreach activities and are close to completing their deliberations. In light of that feedback, the boards have made tentative decisions that mean that the standard they are working toward will reflect changes from the ED.


Once the boards have completed those redeliberations, they will consider whether re-exposure of the proposal is needed. If the boards conclude that re-exposure is not necessary, they intend to develop a draft of the new standard, which will be posted on the boards’ websites, used as the basis for outreach with parties that are most affected by the proposed new requirements; and “subjected to a detailed drafting review with selected parties, as part of the fatal flaw review process each board is required to undertake.”


Revenue recognition: The IASB and FASB published a joint discussion paper in December 2008 that proposed a single revenue recognition model built on the principle that an entity should recognize revenue when it satisfies its performance obligations in a contract by transferring control of goods or services to a customer.


U.S. GAAP includes a wide range of detailed, industry-specific requirements regarding revenue recognition. IFRS has general requirements that cause preparers to rely on U.S. GAAP for specific guidance. This project is intended to reduce FASB’s detailed guidance to consistent principles and to remove the need for IFRS users to refer to GAAP.


The boards have been considering the feedback received from comment letters and outreach activities and are close to completing their re-deliberations on revenue recognition.


Similar to the leasing project, once the boards have completed their redeliberations, they will consider whether re-exposure is needed. If they opt to go directly to developing a draft of the new standard, it will be posted on the boards’ websites, used as the basis for outreach with affected parties and “subjected to a detailed drafting review with selected parties, as part of the fatal flaw review process each board is required to undertake.”


Insurance: The boards are aiming to complete their deliberations on major issues by the end of June, but are unlikely to complete all discussions until the second half of 2011. Once the boards have completed their deliberations, they will prepare their next due-process documents. For FASB, this will be an ED and, for the IASB, this will be a final IFRS. Before an insurance contracts standard is finalized, the boards will follow the same procedures described for the revenue recognition and leases projects, including assessing whether the proposals should be re-exposed and making a draft widely available as the basis for performing additional outreach.


The IASB is working to issue a new standard on insurance accounting by the end of 2011. FASB will consider the feedback received on its ED with a view to finalizing a standard in 2012. The boards then will consider any differences that may have arisen and how best to address them.


“The progress report highlights the many areas where we have already improved and converged our standards, and our plans for completion of the priority projects,” FASB Chairman Leslie Seidman said in a press release. “We have also clarified our plan to continue to engage stakeholders in the remaining steps of the process, and give them an opportunity to review the draft standards before they are finalized.”


The convergence program continues to raise the standard of financial reporting worldwide, “delivering much-needed improvements in key areas and providing a solid platform for global high-quality standards,” IASB Chairman Sir David Tweedie said in a press release.


­Gary James ( gjames@aicpa.org ) is a JofA senior editor.


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