Lifting the Lid: Accounting Rulemakers to Speed Up Convergence
U.S. and foreign accounting rulemakers will soon debut a new plan to speed up the convergence of international and U.S. accounting rules, with the aim that all major capital markets would be able to operate from one set of standards by 2013.
While the U.S. Securities and Exchange Commission has yet to set a timeline for the United States to adopt International Financial Reporting Standards (IFRS), accounting rulemakers believe they will have to accomplish years of work in record time and are barreling down the convergence path full speed ahead.
“It is a new world and we’re going to have to figure out how to play in that,” said Robert Herz, chairman of the U.S. accounting rulemaker Financial Accounting Standards Board (FASB).
About 110 countries are currently using, or plan to use, the international accounting standards, which are considered more flexible. Meanwhile, many are clamoring for the United States to set a national plan to move to IFRS from U.S. Generally Accepted Accounting Principles, which are seen as more prescriptive.
FASB and the London-based International Accounting Standards Board (IASB) expect to release an updated “Memorandum of Understanding” that will lay out how the boards plan to work together and prepare the industry for one set of accounting standards.
The boards could release the agreement as early as June, Herz and an IASB official told Reuters on Thursday.
The accounting boards signed the original agreement, known as “the Norwalk agreement,” in February 2006. In it, both rulemakers pledged to work together to develop new common accounting standards, rather than attempt to eliminate all the differences in the two sets of accounting rules.
The new version of the memo will allow the boards to resolve what they called “significant fundamental weaknesses” in IFRS, and what they believe are major impediments to adopting IFRS in the United States.
“The two boards generally agreed on the broad principles, but now we have to put the meat on it,” said Wayne Upton, IASB’s director of research.
The boards’ staffs hope to resolve major differences between the two sets of rules by 2011 and then impose a moratorium on major accounting changes before a “target date” of mandatory U.S. IFRS adoption in 2013, according to a document on the IASB Web site.
The accounting boards, which often spend years listening to interested parties’ views on different standards, are considering even changing their basic processes to speed up work on convergence.
“Three years sounds like a long time until you do some math,” the report on the IASB Web site reads.
Earlier this year the FASB’s overseeing body reduced the size of the board and increased the power of its chairman in order to increase efficiency and ease the convergence process.
Major Differences Include Insurance
But if U.S. companies are to move from the accounting system they have used for over a century, there are several a key differences that will have to be quickly ironed out between the two sets of standards.
“There are a number of practical issues about changing to IFRS,” said Wayne Carnall, chief accountant at the U.S. Securities and Exchange Commission’s corporation finance unit.
The rules differ broadly on key topics such as inventory accounting, insurance industry accounting, when companies can recognize revenue and the use of mark-to-market or “fair value” accounting.
For example, one of the biggest differences is the use of the last-in, first-out inventory reporting method, known as LIFO. It is popular with U.S. manufacturing companies and helps them keep taxes lower. However, the LIFO method would be prohibited under IFRS, and switching to FIFO, or first-in, first-out, could cost U.S. companies billions in higher taxes.
The FASB has been meeting with tax officials at the Internal Revenue Service about where the tax code specifically requires U.S. GAAP rules so they can flag possible problems, according to Herz.
The SEC is expected to unveil a plan to adopt IFRS this summer.
(Reporting by Emily Chasan and Rachelle Younglai, editing by Gerald E. McCormick
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