The International Accounting Standard Board (IASB) is the independent standard-setting body established to develop global standards for financial reporting. It was created to develop International Accounting Standards (IAS) and International Financial Reporting Standards (IFRSs). Its main objective is to implement the single set of Accounting Standards globally by convergence of International Accounting Standards and National Accounting Standards (International Accounting Standards Board, 2001)
The United States currently follows a Generally Accepted Accounting Principle established by the Financial Accounting Standards Board (FASB). It was designed to improve and establish standards of financial reporting for non government entities. US GAAP has some similarities to IFRS. However, the difference between US GAAP and IFRS has caused concerns from parties at a corporate level. United States has proposed a deadline of 2014 for conversion from US GAAP to IFRS (Financial Accounting Standards Board, 2000)
Current state of the IFRS and FASB conversion Project
In November 2009, the US FASB and the IASB issued a joint statement and commitment to improve the IFRSs & US GAAP and achieve their convergence. They set future plans for completing the major projects in the Memorandum of Understanding (MoU) issued in 2006 and updated in 2008 (Ernst & Young, May 2010, p. 2)
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On 24 June 2010, FASB issued progress report of their convergence work plan till the date of this report. The report described changes that FASB made to work plan to enable broad- based and stakeholder involvement when developing high-quality accounting standards. FASB have released a modified work plan and convergence strategy. The boards' goal is to issue comprehensive improvements to their complex and contentious areas that will encourage international comparability of financial information about financial instruments (Ernst & Young, June 2010, p. 1)
The board have set Priority projects and is expecting to achieve projects by closely coordinating the issues arising in their separate standards setting projects. The modified work plan for accomplish different projects will allow for more effective stakeholder participation in the standard-setting process. Additionally, the Boards note that the modified work plan will provide a stable accounting platform for countries adopting IFRS in 2011 or 2012, while also assisting countries that are considering converting such as Japan, India, and Canada in their evaluation of adopting IFRS (U.S. Financial Accounting Standards Board, November 2010, p. 2)
Main features of the work plan are to focus on those projects for which the need for improvement of IFRS and US GAAP is the most urgent. The main features of the work plan were:
Prioritises the major joint projects to be completed before June 2011, specifically:
The presentation of other Comprehensive income
Fair value measurement
Limits to four the number of Exposure drafts (EDs) issued in any one quarter
Announces consultation with stakeholders on effective dates and transition methods
The IASB finalised improvements to Derecognition disclosures and the presentation of own credit gains and losses when entities have elected to measure liabilities at fair value (Ernst & Young, December 2010, p. 2)
In a joint meeting in Nov 2010, FASB and IASB have approved the priorities as set along in the June report. They also amended strategies and plans for other projects in order to complete their priority projects by the June 2011:
They decided to defer until after June 2011 substantive deliberations on four projects:
The broader financial statement presentation project
Financial instruments with characteristics of equity
Emissions trading schemes
The reporting entity phase of the conceptual framework.
The Boards agreed that Consolidation of investment companies is no longer a priority for June 2011.
The FASB and IASB also deferred deliberations on several of their independent standards-setting projects such as contingency disclosures for the FASB and IAS 37 Provisions, Contingent Liabilities and Contingent Assets and annual improvements for the IASB. The Boards have been reassigned to the high priority projects.
FASB decided to prioritise its work plan, focusing first on classification, measurement and impairment. It will begin work out schedule plan of proposed hedge accounting requirements until the second quarter of 2011.
IASB plans to publish an Exposure draft of proposed requirements for General Hedge Accounting and re-expose proposals for impairment accounting early in the first quarter of 2011 (U.S. Financial Accounting Standards Board, November 2010, p. 2)
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When those separate standard-setting efforts will completed, US GAAP and IFRS requirements relating to the consolidation of structured investment vehicles and other special purpose entities will substantially converge and related disclosures will align. Therefore, it will eliminate differences between US GAAP and IFRS requirements for consolidation of investment companies.
Discussion on Convergence Project
A thoughtful approach of FASB to the global accounting convergence challenge is important to help manage the risks inherent in adopting new accounting standards. The Boards' convergence plan represents a large shift in the financial reporting landscape.
The Boards' have decided to finish most of the joint projects by June 2011. With completion of MoU project, US companies will able to do international comparison of financial information about financial instruments, will improve the quality and consistency of information, help multinationals to escape from multi reporting, reduce cost of capital etc (Hail, Leuz, and Wysocki, February, 2009, p. 29)
The Boards' MoU project has significant impacts based on their work plan on existing projects:
Financial Instruments: The Boards' have different accounting treatments for financial instruments and their work plan acknowledges that the boards have different views on accounting for financial instruments The FASB's proposed model will result in dramatic changes in the accounting for loans, debt securities currently measured at amortized cost, equity securities (both those currently measured at cost and those classified as available for sale) and core deposit liabilities. These accounting changes could have significant regulatory capital implications and reconciling them will be difficult for the US companies but the boards will continue to work on their respective financial instruments projects and will consider the Comment letters from stakeholder to reconcile the differences (U.S. Financial Accounting Standards Board, November 2010, p. 4)
Consolidation: After completion of the projects in June 2011, the US GAAP and IFRS will be aligned for the consolidation of structured investment vehicles and other special purpose entities including disclosures. But FASB will continue issue Exposure drafts on Consolidation, which will be consistent with IASB's requirements to eliminate the remaining differences between US entities in terms of consolidation accounts (Ernst & Young, June 2010, p. 2)
Derecognition: IASB have been developed a new Derecognition model; however, the FASB has recently made amendments on Derecognition model in order to reduce the differences with IFRS (Ernst & Young, June 2010, p. 3)
Balance sheet netting of derivatives and other financial instruments: The Basel Committee on Bank Supervision and the financial Stability Board has noted that there are material difference related to netting of derivatives and other financial instruments. Therefore the Boards' plan to publish Exposure Drafts according to converged requirements and related disclosures in the first quarter of 2011 (Ernst & Young, June 2010, p. 2)
Financial statements presentation: The FASB proposed changes for convergence to IFRS would represent a fundamental change in how financial information is presented. In particular, the requirements to
(a) Disaggregate information by nature as well as function
(b) Present the statement of cash flows using the direct method
(c) Roll forward selects balance sheet accounts
It will require significant systems changes and changes to internal controls for most companies (Ernst & Young, June 2010, p. 4)
The above discussion based on IASB and FASB conversion projects will create a route of competing U.S. GAAP based set of global standards that could serve as an alternative to IFRS.