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Hoogervorst Calls Accounting Convergence an Unsustainable Process

March 10, 2014

IASB Chairman Hans Hoogervorst at a speech in India repeated his disappointment about the failure of the FASB and IASB to agree on a joint financial instruments standard.The lack of agreement signals bigger problems with international accounting convergence, which he said could not be a substitute for IFRS adoption.

IASB Chairman Hans Hoogervorst on March 8, 2014, expressed his disappointment about the failure of the IASB and the FASB to come up with a global solution to what had been considered the standard-setters’ most important response to the 2008 financial crisis.

The collapse of negotiations on the high-profile financial instruments project revealed flaws in the once-lauded international accounting convergence effort and led to the project’s demise, he said.He also indicated that the IASB would not pursue a similar relationship with another accounting standard-setter in the future.

“This inability to deliver compatible outcomes with the FASB clearly demonstrates the inherent instability of convergence as a means to achieve a single set of global accounting standards,” Hoogervorst said in prepared remarks to the Asia-Oceania Regional Policy Forum in New Delhi. “For this reason, our trustees wisely concluded that convergence can never be a substitute for adoption of IFRS.”

Hoogervorst’s speech echoed remarks he made to the IFRS Advisory Council on February 24.When council members asked why the FASB and IASB could not come up with a joint response to complaints about current accounting for failing loans, Hoogervorst said the two standard-setters had different constituents—the FASB hears complaints from U.S. banks and analysts while the IASB must listen to groups from more than 100 countries—and the two boards could not agree.

“It goes to show that is inherently a rather unstable way of working,” Hoogervorst told the council members.

Hoogervorst’s comments about the failures of convergence are not new; both he and former FASB Chairman Leslie Seidman first announced the unsustainability of intense trans-Atlantic meetings to finish accounting convergence in December 2011.

The two leaders made the announcement at an AICPA conference six months after a self-imposed deadline to complete the projects in their Memorandum of Understanding, the document that outlined the standards in U.S. GAAP and IFRS that would be merged into a single set of accounting principles.

At the time, the FASB and IASB were working on four convergence projects—financial instruments, revenue recognition, insurance contracts, and leases.

The two boards are poised to publish a joint standard on revenue recognition in April.The boards also have started discussing the comment letters submitted in response to their proposed lease accounting standards.

The insurance contracts project was always a wild card, in that the two boards never expected to come up with matching standards.In February, the FASB scuttled any hope of even similar accounting standards when it decided to focus on limited improvements to existing U.S. GAAP.

Throughout the ups and downs of the convergence process, regulators, companies, and investors, had held out hope that the accounting boards would at least land on the same page for financial instruments, but that didn’t happen.

The boards disagree on how banks and other financial instruments should forecast failing loans and are expected to publish separate credit impairment standards later this year.The boards also disagreed on the best way to simplify existing standards to classify and measure different types of financial products.The FASB in December decided to focus on improving U.S. GAAP than moving to a model it said would be too complicated.The IASB, however, plans to publish its final update to IFRS 9,Financial Instruments,this year.

“The goal of one set of accounting standards for all companies worldwide is clearly one that is nice to talk about, but from a practical point of view is not something we can achieve,” said Charles Mulford, accounting professor at Georgia Institute of Technology. “Working on convergence is great, and I think where we can find convergence between GAAP and IFRS, I think that’s good.But I don’t see GAAP ever being IFRS with no differences.”

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