As the international standards were developed, the IASB and its predecessor, the International Accounting Standards Committee (IASC), had the advantage of being able to draw on the latest thinking of standard setters from around the world.
In planning a possible move to IFRS, it is important that US companies monitor progress on the Boards’ convergence agenda to avoid spending time now analyzing differences that most likely will be eliminated in the near future.
As a result, the international standards contain elements of accounting standards from a variety of countries. And even where an international standard looked to an existing US standard as a starting point, the IASB was able to take a fresh approach to that standard.
In doing so, the IASB could avoid some of the perceived problems in the FASB standard — for example, exceptions to the standard’s underlying principles that had resulted from external pressure during the exposure process, or practice difficulties that had emerged subsequent to the standard’s issuance — and attempt to improve them.
Further, as part of its annual “Improvements Project,” the IASB reviews its existing standards to enhance their clarity and consistency, again taking advantage of more current thinking and practice.
For these reasons, some of the differences between US GAAP and IFRS are embodied in the standards themselves — that is, they are intentional deviations from US requirements.
Still other differences have emerged through interpretation.
As a general rule, IFRS standards are broader than their US counterparts, with limited interpretive guidance. The IASB has generally avoided issuing interpretations of its own standards, preferring to instead leave implementation of the principles embodied in its standards to preparers and auditors, and its official interpretive body, the International Financial Reporting Interpretations Committee (IFRIC).
While US standards contain underlying principles as well, the strong regulatory and legal environment in the US market has resulted in a more prescriptive approach — with far more “bright lines,” comprehensive implementation guidance and industry interpretations.
Therefore, while some might read the broader IFRS standard to require an approach similar to that contained in its more detailed US counterpart, others might not. Differences also result from this divergence in interpretation.
Will the differences ever be eliminated?
Both the FASB and IASB (the Boards) publicly declared their commitment to the convergence of IFRS and US GAAP in the “Norwalk Agreement” in 2002, and since that time have made significant strides toward that goal, including formally updating their agreement in 2008.
In addition, the United States Securities and Exchange Commission (SEC) has been very active in this area.
Commitment from the SEC
For example, within the past few years, the SEC eliminated the requirement for foreign private issuers to reconcile their IFRS results to US GAAP and proposed an updated “Roadmap” addressing the future use of IFRS in the United States.
In February 2010, the SEC voted unanimously to publish a statement reaffirming its longstanding commitment to the goal of a single set of high-quality global accounting standards and expressing its continued support for the convergence of US GAAP and IFRS.
The SEC Commissioners generally agreed that timely completion of the convergence efforts, among other things, would best position IFRS to serve as the single set of global accounting standards.
To aid the Commissioners in the evaluation, the SEC staff will execute a comprehensive work plan that addresses specific factors and areas of concern that were highlighted in comment letters submitted in response to the SEC’s proposed IFRS Roadmap.
The SEC staff expects to provide public progress reports on the work plan beginning in October 2010. The SEC further stated that it believes the execution of the work plan will position it in 2011 to make an informed determination regarding the further incorporation of IFRS into US financial reporting system for US issuers.
US transition to IFRS
The SEC Chief Accountant suggested US issuers would be provided with adequate time to make the transition, and the move to IFRS could be made in “approximately 2015 or 2016.”
Convergence efforts alone will not eliminate all differences between US GAAP and IFRS.
In fact, differences continue to exist in standards for which convergence efforts already have been completed, and for which no additional convergence work is planned. And for those standards currently on the Boards’ convergence agenda, unless the words of the standards are totally conformed, interpretational differences almost certainly will continue to arise.
The success of a uniform set of global accounting standards also will depend on the willingness of national regulators and industry groups to cooperate.
They need to avoid issuing local interpretations of IFRS and guidance that provides exceptions to IFRS principles, which would threaten the achievement of international harmonization.
In planning a possible move to IFRS, it is important that US companies monitor progress on the Boards’ convergence agenda to avoid spending time now analyzing differences that most likely will be eliminated in the near future.
At present, it is not possible to know the exact extent of convergence that will exist at the time US public companies may be required to adopt the international standards.
However, that should not stop preparers, users and auditors from gaining a general understanding of the similarities and key differences between IFRS and US GAAP, as well as the areas presently expected to converge.
