Harmonization/convergence of accounting standards has been talked about in both domestic and international fora since I joined the accounting profession many moons ago. Up to now, it remains a desired goal.
The journey toward convergence:
1950s and 1960s
Post World War II, to address greater economic integration and international capital flows, the idea of convergence may have started in the 1p50s. Prior to adopting the buzzword convergence, the initiative was called harmonization. It aimed to limit the differences among the various accounting standards used internationally.
In 1962, during the International Congress of Accountants, hosted by the American Institute of Certified Public Accountants (AICPA), a number of delegates expressed the need for the development of accounting standards on international basis. The AICPA revived its Committee on International Relations to improve cooperation among accountants globally.
1970s to 1990s
In 1973 the International Accounting Standards Committee (IASC) of AICPA was set up to develop accounting standards and promote them internationally.
In the latter part of the 1980s, the worldwide interest for the need of convergence of accounting standards surfaced. In 1991 the Financial Accounting Standards Board (FASB) formally rolled out its vision to develop a set of accounting standards for international use. In the years that followed, the FASB and the IASC conducted projects to lay the groundwork for convergence. With the enactment of the National Securities Markets Improvement Act in 1996, the move for convergence got its bearings, and the Securities and Exchange Commission (SEC) was required to report to Congress on developments of convergence.
The International Financial Reporting Standards (IFRS) Foundation was incorporated in February 2001 as a tax-exempt organization in Delaware. The IFRS Foundation is an independent not-for-profit organization. Its primary mission is to develop, in the public interest, a single set of high-quality, understandable, enforceable and globally accepted International Financial Reporting Standards (IFRS) based on clearly articulated principles.
IFRS are developed by the International Accounting Standards Board (IASB), the independent standard-setting body of the IFRS Foundation. The IASB assumed the accounting standard-setting responsibilities from its predecessor body, the IASC, on March 1, 2001.
The following year, the FASB and the IASB signed a memorandum of understanding expressing the joint commitment to the development of high-quality, compatible accounting standards for all to use. Both bodies pledged their best efforts to (1) make their existing financial reporting standards fully compatible as soon as practicable and (2) to coordinate their future work programs to ensure that once achieved, compatibility is maintained. The agreement has been known as the Norwalk Agreement.
In the European Union (EU) the European parliament passed a regulation in July 2002 requiring companies listed in the EU to prepare their consolidated financial statements in accordance with the IFRS from 2005.
Significant progress has been achieved toward having greater comparability in accounting standards on an international level. Consequently, more jurisdictions/countries decided to adopt IFRS. It was reported that the FASB and IASB convergence program increased the quality of reporting standards and enhanced the comparability of these standards in a number of important areas to include the accounting for business combinations, share-based
payment transactions, fair-value measurement and revenue recognition.
Convergence between the IFRS and the US GAAP appeared to stall in 2012, with the IASB suggesting that it would no longer seek to converge with the US GAAP.
By 2013, over 100 jurisdictions required the use of IFRS for all or most publicly accountable entities in their capital markets, and 115 jurisdictions had made public commitments supporting the convergence of accounting standards.
In the August 21 issue of the Private Equity Manager, FASB Chairman Russell Golden was quoted as saying, “Despite efforts to converge accounting standards worldwide, the US is unlikely to ever adopt international financial reporting standards.”
The cited publication also quoted from the May 2015 speech of US SEC accountant James Schnurr some relevant points, “there is virtually no support to have the SEC mandate IFRS for all registrants” and that “there is little support for the SEC to provide an option allowing domestic companies to prepare their financial statements under IFRS.”
The IFRS are principles-based while the US GAAP are rules-based or “more precise.”
Accounting is the language of business. If the world’s accounting reports will primarily be classified as either IFRS-based or US GAAP-based, there will be two types of reports. Translating one to the other for better comparability or for consolidation purposes would, therefore, require that the practicing accounting professional be bilingual.
Note: Historical backdrop adopted from web sites of institutions cited.
Dr. Conchita L. Manabat is the president of the Development Center for Finance and a Trustee of the Finex Research & Development Foundation. A past chairman of the International Association of Financial Executives Institutes (IAFEI), she now serves as the chairman of the Advisory Council of the said organization. She is also a member of the Consultative Advisory Groups of the International Auditing & Assurance Standards Board and the International Ethics Standards Board for Accountants. She can be reached at firstname.lastname@example.org
Interestingly it is reported today that the UK government thinks future prosperity for the nation depends on strengthening its relationship with the world’s next superpower.
If China is to be the world’s largest economy by 2030, which many think, we’ll need to harmonise accounting standards and enforcement in global finance. Problems highlighted for example include the supposedly unreliability of Beijing’s financial figures – however this might be a flaw elsewhere: a new member of the UK Treasury team once wrote that he had greater doubts about the accuracy of the UK’s GDP figures. China chairs the G20 in 2016.