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Convergence vs. Conversion

The notion of U.S. companies "switching" to IFRS over the next few years might become moot, if efforts to converge U.S. and international accounting standards are successful.

Recent comments by top Securities and Exchange Commission officials, including chairperson Mary Schapiro, have refueled the already-intense debate about whether the United States should adopt international financial reporting standards (IFRS). Amid criticism that such a move would benefit only the largest global companies, Schapiro said that she was “greatly encouraged” by the efforts of the Financial Accounting Standards Board and the International Accounting Standards Board to accelerate the pace of creating a single, global accounting regime.

Both the completion of the FASB-IASB convergence project and the SEC’s decision on whether U.S. companies should convert to IFRS are currently scheduled for 2011. The accounting boards are hoping to complete major convergence projects, including those related to financial instruments, revenue recognition, leases, and pensions, ahead of the SEC’s decision. To meet their self-imposed deadline, members of FASB and the IASB have recently pledged to convene monthly next year, rather than sporadically, as they do now.

Regardless of what the SEC decides, though, the convergence project will mean major changes for many U.S.-based companies. If the SEC decides to stick with U.S. GAAP instead of IFRS, FASB chairman Robert Herz says the convergence effort would provide an “improvement” over current GAAP by shifting it toward overarching principles and away from more-easily-manipulated rules.

But, short of a mandate, U.S. companies would still approach certain accounting tasks differently than their counterparts in other countries. “‘Convergence’ doesn’t necessarily mean ‘the same,’” says D.J. Gannon, a Deloitte partner. For instance, the already-converged standards on accounting for stock options are similar in principle in that both require the value of options to be expensed on income statements. But the rules guiding the calculation and recognition of the expense (that is, whether to use a straight-line or accelerated method) differ.

Many see IFRS gaining new ground with Schapiro’s reaffirmation of the agency’s commitment to the project. IFRS critics, though, continue to emerge. In a new book, Robert Pozen, the chairman of MFS Investment Management, who also headed up an SEC advisory committee on financial reporting, says that only the largest 100 to 300 U.S. companies have significant enough foreign operations to justify moving to IFRS.

Despite the regulatory uncertainty, some companies are proactively embracing IFRS. United Technologies, which receives two-thirds of its $53 billion in revenues from outside the United States, aims to create both GAAP and IFRS financial reports for internal use starting in 2012, “so we get it right for the public when we finally release our results [in 2014],” corporate controller Margaret Smyth said at a recent conference.

Most, though, are taking a wait-and-see approach. “We’re still monitoring IFRS, but we’re not going to actively work on a project until there’s a date certain,” says Ken Kelly, senior vice president and controller for $3.2 billion spice maker McCormick & Co.

Joint FASB-IASB convergence projects slated for action in 2010

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