The Narrowing GAAP

The convergence of foreign and domestic accounting rules could catch some U.S. companies by surprise.

Pressed last March to describe the biggest controversy between U.S. and international accounting standards setters, Robert H. Herz replied, “I like one brand of Scotch, and Tweedie likes another.”

Herz, the often-droll chairman of the Financial Accounting Standards Board (FASB), was referring to Sir David Tweedie, the soft-spoken Scot who is his counterpart on the International Accounting Standards Board (IASB). But there’s more than a dram of truth to Herz’s answer.

Although many differences remain between U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), they are being eliminated faster than anyone, even Herz or Tweedie, could have imagined. In April, FASB and the IASB agreed that all major projects going forward would be conducted jointly. That same month, the Securities and Exchange Commission said that, as soon as 2007, it might allow foreign companies to use IFRS to raise capital in the United States, eliminating the current requirement that they reconcile their statements to U.S. GAAP.

The change is all the more remarkable given that the IASB was formed only four years ago, and has rushed to complete 25 new or revamped standards in time for all 25 countries in the European Union to adopt IFRS by this year. By next year, some 100 countries will be using IFRS. “We reckon it will be 150 in five years,” marvels Tweedie. “That leaves only 50 out.”

This development has gone largely unnoticed by many, if not most, U.S. finance chiefs. And the process may not seem to merit attention. After all, convergence is supposed to ease the task of raising capital. Once the process is complete, investors will need less help comparing results of competing firms based in different countries. U.S. companies that conform to GAAP will be able to raise capital abroad without reconciling their results to IFRS.

For a long time, American firms have tacitly assumed that the rest of the world would simply sign on to some version of U.S. GAAP (an assumption shared, and feared, by many non-American firms). But such is not the case. By design, the process is changing accounting both here and abroad. And it may produce financial results for American firms that are quite distinct from those they report now. Along the way, then, convergence may complicate rather than simplify efforts to raise capital — particularly for firms that have allowed U.S. GAAP reporting to shape their economic choices.

“The fact that the IASB is influencing accounting standards throughout the world, including the United States, is something that every U.S. company should pay attention to,” observes Grant Thornton CEO Edward Nusbaum, who sits on FASB’s advisory council. Herz agrees. “Even in non-joint projects, the thinking of one board will influence the thinking of the other,” he says.

“Companies need to pay attention to what’s going on at the IASB, even if they operate only in the United States,” says Nusbaum. “And I think today, most [U.S.] companies — even international U.S. companies — don’t pay attention to the IASB.”

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