Big bang or gradual convergence of U.S. and international accounting standards? That is the question the Securities and Exchange Commission plans to decide by year-end, and a white paper it released in May that outlines a convergence approach is likely to play a significant role in its decision.
A big bang approach would involve setting a date by which generally accepted accounting principles (GAAP) in the United States would have to convert to International Financial Reporting Standards (IFRS) promulgated by the International Accounting Standards Board (IASB).
The SEC white paper instead describes a more gradual, two-phase process that it suggests could take five to seven years.
In the first phase, the Financial Accounting Standards Board (FASB), which currently establishes U.S. GAAP, would aim to complete its current convergence agenda projects with the IASB, which is expected to occur by year-end. The projects, long in the works, are revenue recognition, lease accounting and a broad financial instruments initiative that involves issues such as use of fair value, offsetting, impairment and hedge accounting.
In the second phase, FASB would seek to minimize or eliminate the differences that remain between GAAP and IFRS, so that GAAP would essentially become IFRS. This process would also consider new IASB standards, which FASB would “endorse,” thereby incorporating them as part of GAAP.
“The big difference is the role of the FASB will change,” says D.J. Gannon, a deputy managing partner for regulatory and public policy at Deloitte. “The IASB would lead the development of new standards, and the FASB would feed into the global process. FASB would promulgate U.S. GAAP primarily through its endorsement of standards issued by the IASB.”
Adopting a single set of international reporting standards would benefit global companies, many of which now comply with a variety of reporting standards, and analysts and investors, who often see apples and oranges when comparing the results of global competitors. The white paper offers a more gradual approach toward one set of standards—an approach that Canada, Australia and many other countries have already adopted.
One advantage to this approach, Gannon notes, is that U.S. GAAP would technically remain in place as the statutory basis for financial reporting, making it easier to address regulatory reporting requirements. Banks, utilities and other industries have regulatory reporting requirements that are based on U.S. standards. “By retaining U.S. GAAP, the complexity of changing references in technical rules and regulations would be mitigated,” he says.
Publicly proposing a plan to converge U.S. GAAP and IFRS should help the SEC decide how to incorporate IFRS into the U.S. capital markets, if at all, by its year-end goal. Comments are due on the white paper July 31, following a SEC roundtable July 7 on the benefits of adopting IFRS.
“This was a major step to bring the two accounting standards together in advance of this decision by the SEC,” says David Schmid, a partner at PricewaterhouseCoopers, adding that the regulator could also decide to continue developing U.S. GAAP independently or adopt a hybrid or even a voluntary option.
Schmid says some multinational companies may prefer to adopt IFRS all at once and as soon as possible, rather than going standard by standard. The white paper doesn’t directly address implementation issues, but the staff would likely grant their wish, he says. “It would require some rulemaking, but it would be a pretty simple rule to write.”