This essay examines the SEC's proposed Work Plan for transitioning IFRS into the U.S. Financial Reporting System. This paper presents arguments in favor of convergence because of the benefits it presents.
History of Convergence Efforts
The history of convergence efforts for IFRS reporting includes several milestones. In October 2002, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued a memorandum of understanding (MOU) known as the Norwalk Agreement. This agreement marked an important step toward formalizing their commitment to converging U.S. And international accounting standards (FASB, 2002).
The agreement describes the efforts of both boards to propose changes to U.S. And international accounting standards that reflect common solutions to "certain specifically identified differences" (FASB, 2002, para. 2). By eliminating these differences, the Boards expect to improve comparability of financial statements across national jurisdictions. FASB Chairman Robert Herz described the FASB's commitment to "working toward the goal of producing high quality reporting standards worldwide to support healthy global capital markets" (FASB, 2002, para. 3). In a similar vein, IASB Chairman Sir David Tweedie described the importance of convergence so that "the world's capital markets will have a set of global standards that investors can trust" (FASB, 2002, para. 3).
In February 2006, the FASB and IASB issued another MOU, A Roadmap for Convergence between IFRSs and U.S. GAAP -- 2006-2008. The memorandum describes their intention to develop a new common standard, rather than try to eliminate differences between existing standards, which would result in improved financial information reported to investors. The boards also planned to replace weaker standards with stronger standards. The memorandum also included a list of short-term convergence topics that the boards planned to focus on for completion by 2008 (FASB, 2006).
In August 2008, the SEC proposed a roadmap that could lead to the use of IFRS by U.S. issuers starting in 2014. With the growing integration of the world's capital markets, two-thirds of U.S. investors owned securities issued by foreign companies that reported their financial information using IFRS. At that time more than 100 countries around the world, including all of Europe, required or permitted IFRS reporting. Of those countries, approximately 85 required IFRS reporting for all domestic, listed companies (SEC, 2008).
The IASB and FASB issued a progress report in 2011 detailing recent progress toward convergence. The report described five completed projects, prioritized three others plus insurance accounting, and extended the timetable for remaining priority convergence projects to be completed in the second half of 2011. The U.S. insurance standard was targeted for the first half of 2012 (FASB, 2011).
Analysis of the Proposed Work Plan
The Proposed Work Plan sets forth a possible framework that achieves the goal of establishing a single set of high-quality, globally accepted accounting standards. The Plan would also provide for a U.S. issuer complying with U.S. GAAP to be in a position to assert compliance with IFRS as issued by the IASB (SEC, 2011).
The Work Plan discusses two approaches to incorporating IFRS into companies' reporting requirements, the convergence approach and the endorsement approach. Under the convergence approach, jurisdictions do not adopt IFRS as issued by the IASB. Rather, they maintain their local standards and attempt to converge those bodies of standards with IFRS over time. The People's Republic of China uses the convergence approach (SEC, 2011).
Under the endorsement approach, jurisdictions incorporate individual IFRSs into their local body of standards. Countries within the European Union (EU) follow a form of the endorsement approach (SEC, 2011).
A third possible incorporation approach, referred to as condorsement, is a variation of an endorsement approach. This treatment would share characteristics of the incorporation approaches with other jurisdictions that have incorporated or are incorporating IFRS into their financial reporting systems, except that during the transitional period, the framework would employ aspects of the convergence approach to handle existing differences between the IFRS and U.S. GAAP over some period of time, perhaps five to seven years (SEC, 2011).
Because the SEC believes it will be important for the U.S. To continue its active involvement in the international accounting arena, the FASB would remain the standard-setting body responsible for promoting U.S. GAAP under the framework. The Work Plan sets forth several possible scenarios in which the FASB would participate in IASB standard setting (SEC, 2011).
The SEC would maintain its oversight of the FASB if IFRS is incorporated into the U.S. financial reporting system. The SEC staff would monitor international standard-setting developments to evaluate the implications of changes to IFRS on the Commission's existing rules and regulations (SEC, 2011).
The Work Plan also discusses a transition strategy that borrows heavily from the convergence approach. The FASB would develop a transition plan to allow for U.S. constituents to plan appropriately for implementation in a reasonable timeframe. The initial incorporation could be handled through a transition of individual IFRSs organized into one of three categories. The transition plan would have, as one of its highest priorities, the identification of ways to minimize the potential impact on U.S. constituents while at the same time still provide useful information to investors (SEC, 2011).
The Work Plan also discusses potential benefits of the framework. The framework supports a flexible transition strategy that is better able to be responsive and tailored to the needs of U.S. constituents than other mechanisms for incorporation. The framework also provides for gradual implementation of IFRS, thereby avoiding the costs of an all-at-once approach. Moreover, potentially greater investor protection is available with FASB endorsement than with direct incorporation of IFRS. The framework also allows for retaining U.S. GAAP as the basis of financial reporting for U.S. issuers, mitigating the complexities of changing all of the references to U.S. GAAP (SEC, 2011).
Current Convergence Status
The IASB and FASB have continued to make progress since the Proposed Work Plan was issued, including the following achievements:
On June 15, 2011, the IASB and FASB re-exposed their revised proposals for a common revenue recognition standard, thereby allowing interested parties the chance to comment on revisions that the boards have undertaken since publication of an exposure draft on revenue recognition in June 2010.
On June 16, 2011, the IASB and FASB issued amendments that improved and aligned the presentation of other comprehensive income (OCI) in financial statements that are prepared in accordance with IFRSs and with U.S. GAAP.
On June 29, 2011, the Private Company Financial Reporting Committee (PCFRC), a joint committee of the FASB and AICPA, was briefed by the FASB on the progress of several convergence projects. The PCFRC provided input on several issues.
On August 25, 2011, the IASB published proposals to define investment entities as a separate type of entity that would be exempt from the accounting requirements in IFRS 10 Consolidated Financial Statements (IRFS, 2011c).
Benefits of Convergence
Given the trend toward globalization, the advantages of convergence outweigh the disadvantages for most American firms. By converting to IFRS, a business can present its financial statements on the same basis as its foreign competitors, thereby making comparisons easier. Companies with subsidiaries in countries that require or permit IRFS can enjoy the advantage of using only one accounting language company-wide. Companies wishing to raise capital abroad will also benefit from convergence. Companies can also benefit if they are a subsidiary of a foreign company that must use IFRS, or if they have a foreign investor that must use IFRS (IFRS, 2011).
Some believe that U.S. GAAP is the gold standard of accounting principles, and that full acceptance of IFRS involves a loss of a certain level of quality. Moreover, for issuers without significant customers or operations outside the U.S., there is no incentive to prepare IFRS financial statements; therefore the significant costs of adopting IFRS outweigh the benefits (IFRS, 2011b).