The Divergence of Convergence

FASB chairman Robert Herz says the project to create one common set of accounting standards has another five years left to go. That forecast doesn't sit well with regulators and European companies.

As the project to converge U.S. and international accounting standards reaches what could be considered a midway point, cracks in the process are starting to show.

In fact, Financial Accounting Standards Board chairman Robert Herz spent the better half of last week assuring the public that his board’s convergence project with the International Accounting Standards Board is moving along smoothly — and regulators need not interfere by pushing for proposals that could possibly hinder its progress.

Speaking at a Senate hearing and an industry panel, Herz conceded that the pressure to complete the project has increased recently, particularly the market pressure. Businesses have stepped up efforts to raise capital across borders, and more countries — including Australia, Canada, and Japan — have announced plans to eventually switch to International Financial Reporting Standards.

To be sure, amid all this change, observers have marveled at the speed with which FASB and the IASB began to eliminate the differences between U.S. GAAP and the IFRS following an agreement to do so in 2002. However, the project could have at least five more years to go, Herz said Thursday.

The general agreement among business executives that globalization is inevitable has now led to questions about when one common global set of accounting standards will be ready for use by both U.S. and European companies. And worries about the competitive status of the U.S. capital markets recently prompted the Securities and Exchange Commission to release two proposals that raise the possibility that companies listed on U.S. exchanges could file their IFRS-prepared financial statements without having to reconcile them with GAAP.

The fact that the proposals are being presented now doesn’t sit well with Herz, who worries that they could interfere with the success of a completed convergence project. The project aims to create one set of high-quality standards that would incorporate improvements to both GAAP and the IFRS, giving investors the ability to more easily compare the financials of companies on both sides of the Atlantic Ocean. That ultimate version will be the IFRS, and not GAAP, Herz has said.

While he’s not against the SEC’s proposal to eliminate the reconciliation requirement for foreign private issuers, Herz is concerned with what such a proposal will likely lead to: the SEC giving U.S. companies a similar choice and creating a dual accounting system. In fact, the SEC has raised the dual-system idea in another proposal that asks the public for their thoughts on the matter without actually proposing that the change occur. Some comment letters to the SEC on the reconciliation proposal suggest that Europeans would view the elimination of the reconciliation requirement as a death knell for convergence.

“We do not support permitting U.S. companies a choice between IFRS and U.S. GAAP for any extended period of time,” Herz said during a Senate hearing on Wednesday held to discuss whether the SEC is rushing its IFRS-related proposals. “Rather, we believe it would be preferable to move all U.S. public companies to an improved IFRS over a transition period of several years.”

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