In 2005, the IASB (International Accounting Standards Board) and FASB (US Financial Accounting Standards Board) launched a joint project to introduce convergence between their respective conceptual frameworks, and therefore convergence on national and international standards.
The FASB and the IASB each have a conceptual framework, which provide the boards with guidance on standard setting problems and also help the boards’ constituents to consult with them. In fact, the FASB was the first standard-setter to implement such a conceptual framework. Both the IASB’s and FASB’s conceptual frameworks are fundamentally the same though there are specific issues each board must individually address.
The Convergence Project
This IASB and FASB’s convergence project builds on a roadmap initiated by a joint statement from the EU’s Internal Market Commissioner, Charlie McCreevy, and the then SEC (US Securities Exchange Commission) chairman, William Donaldson, in March 2005. “The convergence project is not about the IASB’s and FASB’s existing standards becoming the same but about improving financial reporting overall, which is why the SEC has said don’t try to eliminate every single existing difference between standards,” explains Tricia O’Malley, IASB board member.
The project is supported by industry participants as convergence between the IASB’s international financial reporting standards (IFRS) and the generally accepted accounting principles (US GAAP) will make it more efficient for companies operating in different capital markets around the world. “If a company wants to operate in the capital markets of North America, in the future they will be able to do so using one set of rules rather than having to reconcile their IFRS financial statements with GAAP standards,” says Elizabeth Hickey, director of technical activities, IASB.
Wayne Upton, director of research, IASB adds: “Historically, industry bodies and preparer groups have said that convergence should be our number one priority”.
The roadmap, which is now in Brussels awaiting approval, outlines the respective agendas of the FASB and IASB and these are divided into short-term and long-term convergence projects. Short-term projects, as the name suggests, are issues that can be dealt with quickly (i.e. within a timeframe of up to two years) to reduce differences between the IASB’s IFRS and FASB’s US GAAP. These projects will decide which board has the most efficient standard on any given topic and then take steps to adapt either the IASB or FASB’s standards to align them.
For instance, on 19 January 2006, the IASB published for public comment proposals to improve segment reporting. The proposals are set out in an exposure draft (ED) on operating segments. ED 8 results from the IASB’s comparison of International Accounting Standard (IAS) 14 on segment reporting with the US standard SFAS 131 on disclosures about segments of an enterprise and related information. The proposed IFRS will replace IAS 14 and align segment reporting with the requirements of SFAS 131.
“The FASB is also looking at whether it will allow fair value accounting for investment properties, which is already included in the IASB’s standards,” says the IASB’s Upton. “The IASB’s standards on borrowing costs allow a choice about whether a company capitalises borrowing costs or expenses them when they are incurred in instruction of particular types of assets.” The IASB is looking at issuing an exposure draft that would require borrowing costs to be capitalised, which will bring it in line with the US.
The long-term convergence projects will focus on cases where a particular standard might need to be re-written all together. This includes, for example, business combinations (ED on IFRS 3 – mergers and acquisition), which is being run as a joint project by the two boards.
Progress on Measurement
As part of the convergence project, the IASB and FASB will explore issues related to measurement. Measurement is a fundamental component of financial reporting and the current problem is that the IASB’s and FASB’s conceptual frameworks do not provide the standard-setters with sufficient guidance on what type of measurement to include in particular standards. “While there is reference to measurement [in the conceptual framework], this only describes different types of measurements, not when you might use one,” explains the IASB’s Upton.
According to the Institute of Chartered Accountants in England & Wales (ICAEW), previous conceptual frameworks prepared by standard-setters deliberately avoided the question of the basis of measurement. The ICAEW suggests this is because, in practice, different bases of measurement are used in different circumstances, so deciding that one particular basis is ‘the right one’ would be a revolutionary move and one probably impossible to agree on. While the ICAEW agrees that it is sensible that the IASB should look at measurement as a general question, it adds that it is not clear whether this will be any easier now, than it was in the past, to lay down a single basis for measurement that would be universally applicable.
The IASB’s and FASB’s work on measurement is in its preliminary stages. “A discussion document has been released and prepared by the Canadian Accounting Standards Board, at our request, which is the first part of the work on measurement,” says the IASB’s O’Malley. She adds that this conceptual consideration of measurement won’t be on the FASB’s and IASB’s agenda until the end of 2006, i.e. discussion about which attribute of measurement will be specified in standards.
In a separate initiative, the ICAEW is planning a report on ‘measurement in financial reporting’, which will look at different bases of measurement in financial reporting, such as historical cost, fair value, and value to the business and their respective advantages and disadvantages. The ICAEW’s aim is not to come up with a single ‘right answer’ that would be applicable for all measurements in all circumstances; in fact, as mentioned before, it is sceptical about whether this is a sensible objective in any case. The report is expected to be published later this year.
In the same area, the IASB will be issuing an exposure draft on fair value measurement, which will outline how to perform fair value measurement if a standard states that a fair value measurement is required. “Wherever a standard mentions fair value and provides guidance on how to do it, we will eventually remove that reference and replace it with one standard on fair value measurement to provide consistency on fair value between all the standards,” explains the IASB’s O’Malley.
The ICAEW points out that although fair value has its uses, it is important that its limitations are recognized in any developments going forward. For instance, it believes that the main limitation of fair value is that, except where there are active markets (e.g. for listed shares, certain commodities and currencies), it can lead to very subjective measurements.
The convergence project between the IASB and FASB is taking strides forward and no doubt the industry will see more progress over the next 12 months. Indeed, the IASB is keen to accelerate public consultation on issues such as measurement. With a closer relationship being forged between the IASB and the FASB, it is unlikely that either will initiate a project on their own in the future – further cementing convergence between the two.
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