Gaap and Ifrs Convergence

U.S. GAAP and IFRS Convergence

Ever since the Norwalk Agreement was reached in 2002, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working diligently on a convergence of accounting standards. The overarching goals of the memorandum were to correct deficiencies in both IFRS and U.S. GAAP, and eliminate particular differences between the two sets of standards. The convergence is also driven by the belief that consolidating the accounting requirements would increase the comparability of different entities' accounting figures, which will contribute to the flow of international investment and benefit a great range of investors.

The movement gained traction quickly in the EU as the European parliament passed a regulation in 2002 that requires EU companies to prepare consolidated financial statements in adherence to IFRS beginning in 2005. Fast forward to today, the vast majority of the financial world have adopted IFRS as their accounting standards. The remaining major capital markets without an IFRS mandate are the U.S., Japan, India, and China (PwC, 2015).

The convergence effort in the U.S. has been mired in inefficiency and lack of trust between the SEC and IASB. Initially, a big boon to the movement came when the “SEC issued a new rule in 2007 that allowed certain foreign entities listed on U.S. exchanges to employ either U.S. GAAP or the English language version of IFRS” (Sullivan, 2014). This rule would save foreign companies whose financial statements are not in accordance to U.S. GAAP up to millions of dollars from not having to include a reconciliation to GAAP on Form 20-F (Sullivan, 2014).

In August 2008, the SEC released a roadmap proposal to eventually require all U.S. registrants to adopt IFRS. In 2010, however, the commissioners unanimously approved a new timeline that now projected 2015 as the earliest date for IFRS adoption. More importantly, they withdrew the proposed rules for early adoption of IFRS developed under the roadmap (Sullivan, 2014).

Also In 2010, SEC Deputy Chief Accountant Paul Beswick introduced yet another alternative for convergence based on his belief that the U.S. should not follow "the convergence or endorsement approach." Rather, it should adopt a modified approach that he labeled "condorsement."

“Under condorsement, U.S. GAAP would continue to exist, and the IASB and FASB would continue their convergence projects. In addition, FASB would work toward convergence of existing U.S. standards not included in the convergence project to IFRS. This, according to Beswick, would ensure that existing guidance was appropriate for U.S. companies on a standard to-standard basis; when the IASB would issue new standards, FASB would decide whether to adopt them” (Sullivan, 2014).

As of 2012, the convergence between IFRS and U.S. GAAP appears to be all but dead. On what killed convergence, former chairman of the SEC Christopher Cox opined, “It was the International Accounting Standards Board who did it, enabled by an increasingly obedient Financial Accounting Standards Board and a lack of interest in accounting convergence on the part of U.S. investors and corporations… IASB hasn’t shown much sensitivity to American criticisms of its proposals” (Katz, 2014).