Convergence Ends as FASB, IASB Pursue Separate Agendas

June 24, 2014

The effort to converge U.S. GAAP and IFRS is all but finished, apart from the last project on lease contracts. As the 12 years of joint work concludes, the boards are focusing more on their differences than what they have in common.

In one shot, IASB Vice Chairman Ian Mackintosh called IFRS “a remarkable success” for gaining acceptance in more than 100 nations in little more than a decade. At the same time, he disparaged the FASB, the IASB’s former partner in international convergence, for its recent decision to pursue a course that had been deemed a failure more than a decade ago.

“If divergences are more or less accepted as inevitable, it can be no surprise they become the norm rather than the exception,” Mackintosh said to attendees at a June 23, 2014, IFRS Foundation Conference in London. “If all IASB constituents were to insist on the primacy of national preferences, obviously the goal of a single set of global standards would come to naught. That was the old [International Accounting Standards Committee] approach. We tried it for 25 years and it failed.”

Mackintosh took exception to a June 5 speech from FASB Vice Chairman James Kroeker that said “one size may not always fit all” with regard to international accounting standards. He also objected to the 2013 annual report of the FASB’s parent organization, the Financial Accounting Foundation (FAF), which was published in May. The FAF said the FASB’s recent decisions to back away from converging its standards with the IASB’s was acceptable, given that it was much important for the board to improve U.S. GAAP than it was to converge with IFRS.

“Now is not the time to turn back the clock, and thereby put at risk the hard-fought gains of the last decade,” Mackintosh said.

In his speech, Kroeker also spoke of the FASB’s new approach toward international accounting, in which it would spend more time with standard-setting bodies from individual nations, even in markets that have adopted IFRS, than with the IASB. A year ago, the IASB formed the Accounting Standards Advisory Forum (ASAF), which includes the FASB and representatives of standard-setting organizations from Europe, Asia and Oceania, North and South America, and Africa. The ASAF is essentially filling the space vacated by the FASB as convergence ends.

An FAF spokesman said he had no comment on Mackintosh’s speech.

Mackintosh’s criticism of the IASB’s onetime partner in international convergence comes at an interesting point for both accounting boards. Just a month ago, the boards issued their revenue recognition standards and hailed them as the crowning achievement of their 12-year effort to converge U.S. GAAP and IFRS.

The FASB published its version as Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The IASB’s version was published as IFRS 15, Revenue from Contracts with Customers.

At the same time, the boards are working overtime to ensure that the next two-and-a-half years of implementing the principles-based standards doesn’t lead to inconsistent financial reporting in part because of the cultural and legal differences Mackintosh said shouldn’t stand in the way of a global financial reporting regime.

The apparent success of the revenue standards also stands in stark contrast to the boards’ inability to converge their work on financial instruments and insurance contracts — two efforts that were pursued mostly at the same time as the revenue project. A fourth convergence project, on lease contracts, continues, but the boards have been separated by some strong differences in recent months, particularly in the treatment of small-ticket items. FASB member Thomas Linsmeier recently said the IASB’s position on small-ticket items will be difficult to reconcile with the SEC’s reporting requirements.

The role of the SEC is also going to factor into how the accounting boards handle their growing differences. SEC Chair Mary Jo White says she’s in favor of the regulatory agency taking a new look at IFRS, but she hasn’t indicated what she expects that look to produce.

Kroeker, before he landed at the FASB, was the SEC’s Chief Accountant and led the work on the July 2012 Final Staff Report:Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers, which outlined the challenges regulators would have to confront before they issued a rule.

At the time, the publication was seen as the handiwork of the SEC’s chairman from 2009-2012, Mary Schapiro, who was always regarded as an IFRS skeptic. But staffers in the chief accountant’s office had raised similar concerns about IFRS’s suitability for U.S. companies under Schapiro’s predecessor, Christopher Cox, who was a vocal proponent of the international standards. Cox spoke at the same conference as Kroeker and said that the U.S. regulatory system was no longer suitable for the adoption of IFRS.

With the differences between the two accounting boards increasing, the challenges outlined in the 2012 report may not be surmounted in the foreseeable future.