The Narrowing GAAP

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

Tim Reason is a senior editor at CFO.

All A Board

Now, which of you folks actually live in Norwalk?

At the joint Financial Accounting Standards Board-International Accounting Standards Board meeting this past October at FASB’s Norwalk, Connecticut, headquarters, it wasn’t hard to see why convergence of U.S. and international accounting standards is moving so quickly. In fact, it was harder to tell the two boards apart. The respective heads of FASB and the IASB, Robert H. Herz and Sir David Tweedie, were seated side by side and took turns chairing, while members of both boards and their staffs sat evenly interspersed around the rectangle of tables in the small amphitheater that serves as FASB’s boardroom. The October gathering was the seventh such meeting, held in Norwalk each fall and in London each spring.

Although the boards meet in person only twice a year, their staffs work together daily via phone, E-mail, and video conference, exhibiting the easy familiarity of co-workers from the same office. And while debates often grow intense — even heated — over accounting questions, they offer observers little sense of any parochial differences. (With four North Americans on the IASB, even accents aren’t a foolproof gauge.)

Indeed, although the purpose of the semiannual meeting is to hammer out those areas in which the boards don’t agree, debate doesn’t necessarily split along those lines. In a discussion on revenue recognition this past October, for example, it quickly became clear that members of each of the boards were divided among themselves. “There are a lot of different views within FASB and within the IASB,” says Ed Nusbaum, CEO of Grant Thornton and an adviser to FASB. “They’re not unified on some of the concepts, particularly when it comes to fair value. Where they are unified is in the desire to have convergence.” — T.R.

On the Agenda
A look at how convergence has changed, or is likely to change, particular areas of accounting, based on CFO‘s analysis. The arrows, though only a rough indicator, point to whichever board was more influential in the development of the standard, either because that board took the lead in developing the standard, or because the final standard adopted more-closely resembled existing U.S. GAAP or IFRS.

Completed Projects
Share-based payment FASB IASB Touted as a joint project, although FASB followed IASB’s lead. Some differences in income-tax treatment remain.
Inventories FASB IASB FASB changed its accounting guidance to require all abnormal manufacturing costs to be recognized as an expense. Although essentially a minor wording change, the result moved the standard toward IFRS.
Asset exchanges FASB IASB FASB eliminated an exception to the fair-value measurement principle in existing U.S. GAAP, resulting in a standard that is simpler to apply and converged with IFRS.
Voluntary changes in accounting policies FASB IASB Requires “retrospective application” of certain voluntary changes in accounting policy, which critics complained could be confused with restatements.
Discounted activities FASB IASB Moved international accounting closer to U.S. GAAP with regard to assets held for sale and the timing of classification of operations as discontinued. FASB and IASB definitions of discontinued operations remain divergent.
Depreciation on assets held for disposal or idle assets FASB IASB Moved international accounting closer to U.S. GAAP.
Projects Under Way
Business combinations and reporting non-controlling interests FASB + IASB The first joint project in which FASB and IASB issued a common exposure draft. The principles it describes would effectively require expensing of acquistion costs, and also would be likely to eliminate many of the greatest differences currently seen when foreign issuers reconcile their accounting to U.S. GAAP.
Revenue recognition FASB + IASB The second of the two boards’ joint projects. One of the primary goals is to eliminate more than 180 pieces of different, and sometimes conflicting, revenue-recognition guidance that exist in U.S. GAAP.
Financial-performance reporting FASB + IASB Replaces separate efforts by the boards to revamp the income statement. Initital definitions of “financing” follow IASB’s approach, requiring companies to conform to the definition, rather than choose whether they consider income items to be derived from financing or operations.
Liabilities and equity FASB IASB Currently under development by FASB, the resulting discussion paper (on how to account for financial instruments with characteristics of both debt and equity) will be issued by IASB for comment by its constituents—an example of the modified joint approach, in which one board does the initial development work, with the goal of then proceeding as a joint project.
Insurance contracts FASB IASB Another modified joint approach project, in this case led by IASB, which views many insurance contracts as a type of financial instrument. FASB expects to issue the resulting IASB discussion paper for comment by its constituents.
Income taxes FASB IASB An exposure draft expected next year will aim to eliminate differences among existing standards. Both IASB and FASB propose to adopt elements of each other’s standards.
Postretirement benefits FASB + IASB FASB added this project to its agenda last month, and proposes requiring balance sheets to reflect the status of pension funding based on the fair value of pension assets. Experts predict a joint FASB-IASB second phase will eliminate or reduce smoothing.
Major Future Projects
Leasing FASB IASB Not formally on FASB’s agenda, but long expected and recently endorsed by the SEC. IASB has an active research project on the topic. Most observers expect that the boards will ultimately require all leases to be capitalized.
Intangible assets Unknown Would seek to recognize internally developed intangible assets, such as patents and copyrights, on the financial statements. IASB has an active research project on the topic.


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