The Convergence Blog™

FASB Issues Standards on Business Combinations and Noncontrolling Interests

On December 4, 2007, the U.S. Financial Accounting Standards Board (FASB) issued a revised Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, as well as the related new SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. Both statements represent significant changes to financial reporting under U.S. GAAP resulting from the FASB's joint efforts with the International Accounting Standards Board to converge U.S. GAAP with International Financial Reporting Standards. And as is often the case with the Boards' joint efforts, the newly-issued standards are intended to improve and simplify financial reporting while moving closer to a common set of financial reporting standards.

SFAS No. 141R and SFAS No. 160 "represent the completion of the FASB’s first major joint project with the International Accounting Standards Board (IASB), as well as a significant convergence milestone," according to FASB member G. Michael Crooch, who added "These standards and the counterpart standards issued by the IASB will improve reporting while eliminating a source of some of the most significant and pervasive differences between International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP)." While the FASB and IASB have been conducting many joint Convergence projects for several years, this is the first project that the Boards consider "done" -- at least for now, and despite the fact that U.S. GAAP and IFRSs are not fully converged on the issues that the standards address. When it comes to Convergence on these issues, "close enough" seems to have been "good enough" for the Boards, who apparently believe they have bigger fish to fry and are therefore unlikely to revisit these issues anytime soon.

In particular, SFAS No. 160 is just one example of how willing the FASB is to implement a new U.S. financial reporting standard when that standard represents a significant improvement over prior GAAP and is converged with existing IFRSs. But the Convergence of U.S. GAAP and IFRSs is a two-way street -- there are many examples of the IASB changing IFRSs to improve them and converge them with existing U.S. GAAP (e.g., IFRS 8, Operating Segments). Most important of all, U.S. financial managers should know that the Boards are conducting other longer-term projects that will converge U.S. GAAP and IFRS by introducing improved standards that are very different from either Board's existing standards.

Improve and Adopt: The Future of IFRSs in the U.S.

On October 24, 2007, the Securities, Insurance, and Investment Subcommittee of the U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing on "International Accounting Standards: Opportunities, Challenges, and Global Convergence Issues" in Washington, DC [see the hearing web page]. Here are some highlights of the testimony provided at that hearing:

Robert H. Herz, Chairman of the U.S. Financial Accounting Standards Board (FASB): "[W]e do not support permitting U.S. companies a choice between IFRS and U.S. GAAP for any extended period of time. 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 following the blueprint we are advocating be developed."

Charles E. Landes, Vice President, American Institute of Certified Public Accountants (AICPA): "I want to state as directly as possible that the AICPA supports the goal of a single set of high-quality, comprehensive accounting standards to be used by public companies in the preparation of transparent and comparable financial reports throughout the world. The debate or question should no longer be whether we move to convergence of high quality accounting standards, but how soon we can accomplish convergence. . . Is there still hard work to be done towards convergence? Yes. Will there be bumps in the road as we take this journey? Absolutely. But it is a journey that must be taken."

In summary: The FASB, the AICPA, and other providers of testimony expressed strong support for the movement of all public companies away from U.S GAAP to an improved versions of IFRS as the only acceptable set of standards to use in preparing financial statements. And all agreed that the transition process would work better if it was based on a well-conceived "blueprint," which has yet to be developed. But while the AICPA and SEC expressed strong support for the SEC's proposal to eliminate the U.S. GAAP reconciliation requirement for foreign private issuers using IFRSs and the SEC's Concept Release regarding giving U.S. issuers an option to prepare financial statements in accordance with IFRS, other hearing participants were generally either neutral or opposed to the SEC accepting IFRS-compliant filings as-is prior to the development of an improved version of IFRSs, with respect to which U.S. GAAP will either be converged or simply no longer relevant.

Commentary: Regardless of what the SEC does in the short-term, the long-term trend is unmistakable: U.S. public companies (and possibly privately-held companies as well) will eventually use a version of IFRSs that will be significantly different from either current IFRSs or current U.S. GAAP. And it is that yet-undefined set of standards that U.S. financial executives need to begin preparing themselves and their organizations for, knowing that both U.S. GAAP and IFRSs will undergo rapid, profound change along the way.

Japan takes a major step towards convergence with IFRSs

On August 8, 2007, the Accounting Standards Board of Japan (ASBJ) and the International Accounting Standards Board (IASB) jointly announced an agreement to accelerate convergence between Japanese GAAP and International Financial Reporting Standards (IFRSs).

As part of the new "Tokyo Agreement," the two boards will seek to eliminate by 2008 major differences between Japanese GAAP and IFRSs, with the remaining differences being removed on or before mid-2011.

Commentary: The impact of Japan's accelerated shift towards IFRSs cannot be ignored. As measured by Gross Domestic Product (GDP), Japan's economy is the second-largest in the world among individual countries, trailing only the United States. Japan is also home to the world's second largest stock market (as measured by market capitalization), again trailing only the U.S.

Financial executives in companies having related entities that use Japanese GAAP should be aware that Japan's financial reporting standards will change significantly in the next few years and, once converged with IFRSs, will continue to change significantly for many years thereafter.

U.S. financial executives should be aware that direct convergence with U.S. GAAP has once again been rejected in favor of IFRSs by a major economic power. Japan's recent action highlights the increasingly isolated position of U.S. financial reporting standards and increases the incentives for the U.S. to converge U.S. GAAP with IFRSs, which would affect all U.S. companies, not just multi-nationals.

Read the IASB's Press Release here.

India commits to convergence with IFRSs

On July 24, 2007, the Council of the Institute of Chartered Accountants of India (ICAI) decided to fully converge with International Financial Reporting Standards (IFRSs) for accounting periods beginning on or after April 1, 2011. As of that date, all publicly-accountable enterprises (including listed companies, banks, and insurance companies) will be required to adopt IFRSs.

Commentary: India's commitment to IFRS convergence is significant as India's economy is large, growing, and increasingly intertwined with the economies of developed nations such as the United States.

Financial executives in companies having related entities that use Indian GAAP should be aware that India's financial reporting standards will change significantly in the next few years and, once converged with IFRSs, will continue to change significantly for many years thereafter.

Direct convergence with U.S. GAAP has once again been rejected in favor of IFRSs by a major economic power. India's recent action highlights the increasingly isolated position of U.S. financial reporting standards and increases the incentives for the U.S. to converge U.S. GAAP with IFRSs, which would affect all U.S. companies, not just multi-nationals.

Read the IASB's Press Release here.