The Narrowing GAAP

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

Must Be Better

To understand what they’re missing, recall that one of Herz’s first acts after assuming the chairmanship at FASB in July 2002 was to push for what became the Norwalk Agreement. Issued in October 2002, it committed both boards to work toward convergence. A key pillar of the agreement: standards could not be converged just for the sake of it — they had to improve GAAP or IFRS, or both. “A change that is simply going to get rid of differences is not good enough,” remarks Suzanne Q. Bielstein, who oversees convergence as FASB’s director of major projects.

That approach pretty much guarantees accounting changes for companies on at least one side of the Atlantic, if not both, any time a standard converges. Such changes can be a headache for companies, but Bielstein notes that this approach serves as a triage tool when selecting projects. “It absolutely has an effect on how we choose projects. We are not going to make users go through a change when we think the value is dubious.”

Bielstein points to reporting of accounting changes — part of a recent package of relatively small “short-term convergence” efforts — as a good example. Under U.S. GAAP, companies reported any effect of voluntary accounting changes (and, in some cases, those changed by standard setters) in net income.

But IAS 8, the international accounting standard, required that the change be applied to previous financial statements. “FASB took a look at the IASB’s answer and said, ‘The IASB has a better way of reporting accounting changes,’” says Bielstein. “That’s a case where we eliminated the difference and improved reporting here [in the United States]. It allows the user of financial statements to make period-over-period comparisons, without the noise of an accounting change.”

Of course, not everyone agreed. “We question whether the proposed change would result in a higher-quality standard than already exists in the United States,” stated Dow Chemical vice president and controller Frank Brod in April 2004, writing as chair of Financial Executives International’s (FEI) Committee on Corporate Reporting.

Today, with the standard passed, says Brod, “we [still] don’t think this is a better solution.” Although FASB renamed such changes “retrospective applications,” Brod worries that they still look like restatements, which tend to alarm investors. “There’s always this notion that something is wrong. It adds an element of confusion,” he says.

Despite the complaint, Brod says FEI’s reporting committee is broadly supportive of convergence. His own company operates in 175 countries, and despite Europe’s move to IFRS this year, he says, tax authorities in the 20 European Union member countries where Dow operates still require local GAAP as a starting point. “At the current time, it just adds another set of books,” he says. “If our accounts in all 175 countries had to keep track of only GAAP and IFRS,” notes Brod, “that would be a plus in the long run.”

Also, he says, companies represented on FEI’s committee “compete against organizations all over the world. To put [corporate accounting] on a comparable basis worldwide allows investors to make global decisions.” Brod, who sits on FASB’s Emerging Issues Task Force as FEI’s representative, recently joined the IASB’s advisory panel as well.


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