International Convergence

Hayley French

AC 3503-01

August 30th, 2013

International Convergence

It is extremely hard to get individuals of different cultures and customs to agree. Living proof of that is the long discussed convergence between the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP). I quickly discovered from my research that everyone has a different opinion on how this should work and if the transition is going to ever be accomplished. However, with 2002 improvements like the “Norwalk Agreement” and the European Union requirement of IFRS, there is solid evidence that we are slowly working and are motivated to get the issue resolved. Today the convergence efforts are centered towards large issues such as revenue recognition. The Securities and Exchange Commission (SEC) is even pushing for a complete endorsement and acceptance of uniform standards. Many projects have been disregarded or given up on, but the long process is slowly but surely underway.

What really brought on the idea of a convergence was the crucial need for U.S. and foreign companies to be able to compare. The additional costs and efforts that large international companies have to acquire just simply to operate are unreasonable. The IFRS and U.S. GAAP have to find a common ground in order to help these businesses function efficiently. The International Accounting Standards Committee tried to resolve this for years, but countries seemed to not take it very seriously. If the International Accounting Standards Board had not taken over in 2001, we might still have been at a loss. Between that time and today there have been considerable achievements. With the movement of the European Union now more than 7,000 companies in Europe use IFRS. The “Norwalk Agreement” brought the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) together to pledge to make their financial reporting standards compatible and to continue that throughout the future. The SEC has also obviously played a role in this process, especially in 2007. The November of that year, they finally removed the requirement of reconciliation of IFRS measures for foreign issuers trying to file in the U.S. You would think after seeing all of this headway and improvement that the process would be coming to a close in 2013, but unfortunately there are still many differences to sort through.  

Ernst & Young’s publication “US GAAP Versus IFRS the Basics” alone proves that the conversion has a long way to go. It really walks you through the process and shows what IFRS and GAAP simply couldn’t agree on. The introduction has a degree of optimism stating, “We believe that any discussion of this topic should not lose sight of the fact that the two sets of standards are generally more alike than different for most commonly encountered transactions, with IFRS being largely, but not entirely, grounded in the same basic principles as US GAAP.” To a certain point this is accurate. General Accounting concepts such as financial statement presentation have quite a bit in common. Both require the accrual basis and all the same components of a financial statement. The only real differences are in preparation guidance. Inventory also surprised me with the similarity of cost measurement. The IFRS’s disallowance of LIFO being one of the few things that make the two stand out. From intangible assets to income taxes I still was acknowledging the similarities, but noticing that the progress is just not there. For example, the convergence status for income taxes was described as, “The Boards have abandoned plans for a joint convergence project. However, the IASB and FASB have separately agreed to consider as a potential longer term project undertaking a fundamental review of accounting for income taxes.” Ultimately, the whole point of this convergence was to bring the two together, not to have them working individually.  This reflected back to what Ernst & Young’s opinion on convergence is through their first opening statement. It seems as if they are trying to suggest that there is enough similarity between IFRS and GAAP to survive so we should just embrace the common ground. This would be a simpler approach but it would not implement the plan of business comparability. Although one of the big four companies may be leaning towards that mindset it is just too complicated for businesses to leave it at that.

Many convergence efforts have been abandoned but there is at least one currently underway. In November of 2011 the FASB and IASB discussed the proposal of a combined project concerning revenue recognition. The objectives included constraining the cumulative amount of revenue recognized, customer credit risk, and licensing and rights to use intellectual property. The revenue plan is very clear and concise in explaining that, “the cumulative amount of revenue that a vendor may recognize for a separate performance obligation would be limited to amounts to which the vendor is reasonably assured to be entitled.” The boards even pointed out that the revenue constraint is a qualitative threshold. Regarding collectability, the statement in 2011 said that it would not be included in the transaction price. Commenters agreed that this was necessary but there were a lot of requests for clarification. Software and entertainment companies had a wide variety of views on the licensing issue. Their focus was concerning when the vender would recognize license revenue relating to when the customer receives the product. This is difficult to determine because many situations could be vastly different. It was definitely clear that the IASB and FASB had their work cut out for them. As of today, the boards have tentatively made small decisions that effect topics from contract issues and modification to allocation of the transaction price in performance obligations. At an FASB board meeting this past March they discussed the 2011 exposure draft and made a goal to issue final standards in the second quarter of 2013. This would begin to effect periods beginning after December 31, 2016, for public entities, and one year later for private entities. Hopefully these deadlines will not be delayed and the remainder of 2013 will result in much progress.