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International Financial Reporting Standards: IASB and FASB Work Toward Convergence

If your business is part of an international group of companies, you may have experienced the challenge of converting your financial statements between USGAAP (U.S. generally accepted accounting principles) and the accounting standards required in a foreign country. This is a time-consuming and costly exercise for many companies, particularly large multi-nationals.

IASB is developing international accounting standards

An independent accounting standards-setting organization, The International Accounting Standards Board (IASB), exists to promulgate International Financial Reporting Standards (IFRS). There is a strong movement in the international accounting community to adopt IFRS everywhere in the world. But there are impediments to this worthy objective:

• Some emerging countries also have emerging accounting communities, meaning there are few accountants and even fewer existing accounting practices.
• There are individual pockets of resistance in various countries regarding the full or partial adoption of IFRS.
• There are significant differences between USGAAP and IFRS. Until these differences disappear, the universal adoption of IFRS remains only an objective.

IASB and FASB collaborating to converge standards

The IASB and the U.S. Financial Accounting Standards Board (FASB) have joined forces to eliminate as many of the differences between IFRS and USGAAP as possible. This process—known as "convergence"—includes:

• Short- and long-term joint projects devoted to addressing and eliminating differences between the two standards
• Staff liaisons at IASB and FASB
• Research projects and jointly staffed teams
• Explicit consideration of convergence issues in all FASB decisions

The IASB and FASB have agreed to keep the convergence issue on the front burner in making any decisions about accounting standards. The organizations are striving to write standards together, quickly converge wherever possible and not create any new areas of divergence. The process will take time, as there are still substantial differences that need to be overcome before there is true convergence.

What's the major difference between IASB and USGAAP standards?

The IASB and FASB have had the tendency to write very different types of standards. The IASB focused on principles-based standards even though the preparers and auditors applying these standards often looked to USGAAP for assistance. The FASB issued more rules-based ones, but newer standards reflect a more principles-based orientation.

What do principles-based standards do?

Principles-based standards offer basic guidelines to help accountants make determinations on how to account for a particular type of transaction. Accountants are then expected to apply their own judgment to those principles to implement the standards.

What do rules-based standards do?

Rules-based standards are written to try to address every possible permutation of an issue with a rule: "Do it this way." The intent is to limit the amount of discretion an accountant can exercise.

What are the pros and cons of each type?

• Principles-based standards are much shorter and easier to understand. But because they're subject to interpretation, principles-based standards are more easily molded to meet the needs of a particular financial statement preparer—and thus more prone to potential abuse. 
   
• Rules-based standards are long and complicated; it's very easy to miss a particular nuance because the standards are so detailed. However, rules-based standards provide a lot more guidance and certainty. If you're looking for a definitive answer for a particular issue, you're much more apt to find it in a rules-based than in a principles-based standard.

One reason why the U.S. writes rules-based standards is that it has a litigation system that almost forces people to look for the safety of a rule. In the absence of rules, preparers and auditors could be subject to risk, even though they've used their very best judgment in applying a principles-based standard.

When will convergence happen?

That is hard to say, but progress toward worldwide adoption of international standards is being made:

• Many countries and governmental bodies have adopted IFRS.
• Companies listed on stock exchanges in the EU have been required to report using IFRS since 2005.
• The U.S. Securities and Exchange Commission (SEC) has recently proposed accepting financial statements prepared in accordance with IFRS without requiring a reconciliation from IFRS to USGAAP.

The strong push for convergence from many sources in the past few years has resulted in faster progress than anyone would have expected. The SEC's recent action may provide additionalimpetus to converge IFRS and USGAAP.

Questions about financial reporting standards?
Contact Paul Oetter at 312-980-2920.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.