The Narrowing GAAP

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

For example, says Bielstein, the IASB has been working for some time on an insurance-standard project. “When the IASB is ready to issue a discussion paper, we’ll issue that to our constituents as well,” she says. That’s still a very early stage in the process of adopting an accounting standard, but it does underscore why U.S. companies would do well to stay apprised of activities in the IASB’s London office. There are, for example, already indications that the IASB views most insurance contracts essentially as a type of financial instrument, a view that could have significant balance-sheet implications for both insurance companies using reinsurance (the cause of the recent AIG scandal) and their customers.

The newly added project on pensions and other postretirement benefits appears to be another example of the modified joint approach — this time with FASB in the lead.

“The boards work very well together,” notes Bear, Stearns & Co. senior managing director Patricia A. McConnell. Going forward, she predicts, “it is less likely that they will be playing leapfrog with standards.”

Indeed, when it comes to other major projects, even controversial ones, FASB and the IASB are beginning to work essentially as one board. Consider the proposal on business combinations, which would effectively require companies to expense acquisition costs rather than include them in the purchase price. “That’s a bitter pill,” notes Nusbaum, especially for serial acquirers. But the business-combinations proposal is a truly joint effort. “The exposure drafts that were issued internationally and domestically were actually the same document — drafted by one staff person — but with s’s instead of z’s and different logos,” says Bielstein. A second project, on revenue recognition — one that would potentially eliminate hundreds of pages of U.S. GAAP guidance — also follows this approach.

The New Income Statement

Another sign of FASB and the IASB’s preference for joint projects is their decision this past April to join forces on ambitious but slow-moving efforts to redraw the income statement — known as the performance-reporting project. Earlier independent efforts on both sides had stalled.

An early effort by the IASB to develop a matrix-style income statement was stopped some 18 months ago after negative reactions to field tests. “The field test was a failure, really,” says Tweedie. Intended to be a complete statement of all changes in equity, with no profit figure presented at all, the proposal was field tested in part because it lacked support among some IASB members. But the test also inadvertently alarmed the business community. Recalls Tweedie: “People saw massive change coming through the performance-reporting project, and that wasn’t the intention.”

But is it possible the new project will also mean dramatic changes to the income statement as companies know it? “Absolutely,” says Herz, but he is careful to add that “the project doesn’t really redo any of the accounting. It’s all [about changing the] display and disaggregation to give a richer picture of what’s really going on.”

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