FASB vs. IASB: Accounting Standards and Global Convergence
This paper examines the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), two major organizations responsible for developing accounting standards in the United States and internationally. The paper traces the origins of each body, the lack of early coordination between them, and the events — including major corporate scandals such as Enron — that prompted their first collaboration in the 2002 Norwalk Agreement. It also addresses the ongoing challenges of reconciling U.S. Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRS), highlighting key differences in terminology, classification systems, and prescriptive detail.
- Introduction: The Need for Accounting Standardization: Accounting scandals highlight urgent need for oversight
- Origins of the FASB and IASB: Both boards founded in 1973 with separate mandates
- Decades of Divergence: Thirty years of parallel development without coordination
- The Norwalk Agreement and Early Collaboration: 2002 agreement marks first formal commitment to convergence
- The IFRS Challenge to U.S. GAAP: IFRS calls for replacement of U.S. GAAP standards
- Persistent Differences in Standards and Style: Classification and prescriptive style differences remain unresolved
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What makes this paper effective
- Provides a clear historical narrative that contextualizes the creation and divergence of the FASB and IASB, helping readers understand why convergence is difficult.
- Grounds abstract policy discussion in recognizable real-world events (the Enron scandal, the global recession) to illustrate the stakes of accounting standardization.
- Maintains a balanced, analytical tone when discussing the limitations of both organizations, acknowledging progress without overstating it.
Key academic technique demonstrated
The paper uses institutional comparison as its central analytical method, systematically contrasting the FASB and IASB across their histories, governance structures, and approaches to standardization. This technique is effective for policy-oriented accounting topics because it identifies where convergence is possible and where structural or philosophical differences create lasting barriers.
Structure breakdown
The paper opens by establishing the broader need for accounting oversight through high-profile scandal examples. It then introduces both organizations and traces their separate development over three decades. The Norwalk Agreement is presented as a turning point, followed by an assessment of why meaningful convergence has remained elusive. The paper closes by comparing the style and scope of each body's pronouncements, pointing to differences in prescriptive detail as a persistent source of division.
Introduction: The Need for Accounting Standardization
As a series of recent and ongoing events have made abundantly clear, there is a great need for consistency and oversight in the accounting practices of large businesses, and for overall standardization that will lead to increased transparency in the financial sector and the accounting industry as a whole. From the Enron scandal of the early 2000s to the more recent mortgage-backed security schemes that were in large part responsible for the global recession, accounting "irregularities" and practices that are questionable both ethically and legally have led to major problems for investors and consumers alike. These failures often benefited certain individuals who held privileged information while publishing misleading "creative" reports. It is for this reason that various boards developing and governing standardized accounting practices have been established, and though the degree of their influence is somewhat limited, their existence is certainly a step in the right direction.
Origins of the FASB and IASB
Unfortunately, this step in the right direction is not necessarily being taken in the same direction by all relevant participants in the accounting industry. In the United States, the Financial Accounting Standards Board (FASB) has been the private sector's selected agency for achieving accounting standardization since 1973 (FASB, 2011). That same year saw the creation of the Board of the International Accounting Standards Committee, now known as the International Accounting Standards Board (IASB) and operated as part of the International Financial Reporting Standards Foundation (IASB, 2011; IFRS, 2011). These organizations have differing standards and nomenclatures that make true international standardization difficult.
Decades of Divergence
A large part of the disparity between these two accounting standardization boards can be attributed to the fact that the organizations simply did not communicate in meaningful ways until recent years. For the first three decades of their existence, the two boards created effective standardization practices for their respective constituent communities — though without any legal authority to enforce these standards, as remains the case today, meaning the degree of standardization actually achieved is somewhat questionable. Without consulting each other, their methodologies, lexicons, and ultimately the standards themselves developed along trajectories that had very little to do with one another (IASB, 2011; FASB, 2011). The growing interconnectedness and interdependence of international business likely led to their eventual collaboration.
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