10% of the F2 syllabus (section D) relates to the developments in external reporting, meaning a ten mark question on one of the topics in this area is very likely. Tutor Jayne Howson shows how to handle a potential topic.
One hot topic in the external reporting area is the IFRS and US GAAP convergence project where students need to be able to discuss:
1. The major differences between IFRS and US GAAP.
2. The measures designed to contribute towards their convergence.
Having read a number of exam answers on this topic in recent sittings it is clear that too many students simply read their text book/past exam answers and quote points from it. Remember that these will only be accurate up to the point of pulication, and that could be at least six months previously.
As with all developments, this is a topic that is changing constantly and requires students to read a little around the subject. This article will provide an update as at autumn 2011 and discuss how to bring this knowledge into F2 exam answers.
NB: The details of the various convergence projects are very detailed and have not been covered fully here, so students should also carry out research of their own.
What has happened so far?
In September 2002 the IASB and the US equivalent, FASB, agreed to work together (in consultation with other national and regional accounting bodies) to achieve convergence of IFRSs and US GAAP. This decision was embodied in a memorandum of understanding (MOU) between the IASB and FASB known as the Norwalk Agreement.
A roadmap for convergence 2006-2008 was issued in 2006 which strengthened that commitment and set milestones to be met by 2008.
In 2007 the US Securities and Exchange Commission (SEC) no longer required non US companies registered in the US to reconcile their IFRS compliant financial statements with US GAAP. They also published a proposed roadmap on adoption of IFRS for US companies.
In 2008 an update to MOU was issued listing a series of priorities and milestones to meet the goal of producing principle based standards on joint projects. The date set was June 2011.
Progress reports issued since November 2009 have raised concerns that there are too many projects. The most urgent have now been dealt with and the lower priority ones have been delayed until 2012.
Where are we now?
At the start of 2012 it looks like a mandatory date for adoption will not be set imminently (the US government have more pressing issues to focus on!).
SEC was expected to provide further guidance on whether, when and how IFRS should be incorporated into the US financial reporting system. Nobody knows what will be decided but it has been suggested that there will be convergence and endorsement (which has been called ‘condorsement’). It will mean the endorsement of IFRS standards one at a time, with a possible completion deadline set at some stage in the near future.
The appeal of full convergence has fallen away in recent years and the costs of adoption are thought to be a burden in the current economic climate (fpor example, there would be costs for new reporting systems).
In April 2011 PwC conducted a survey amongst US firms. 80% of respondents said they believed that IFRS will be adopted at some stage (probably 2015 or 2016) but 12% thought it would never happen.
Still the project continues. Sir David Tweedie, who served successfully as chairman of the IASB, has stepped down and Hans Hoogervorst has taken over. He is continuing the task of steering the project and progress is being made, but there is still much to do.
The three projects that are top of the agenda (and have been kicking around since thatv 2006 MOU) are:
- leases
- revenue recognition
- financial instruments.
There have been numerous issues and reissues of exposure drafts for these topics and we are not expecting final decisions until 2012 at the earliest.
Other topics subject to ongoing debate are:
- impairments
- loan loss provisioning
- hedge accounting
- offsetting financial assets and financial liabilities.
Students should be aware of those projects where convergence has been successful to date. A good source of reference is past exam answers (for example, question five in the May 2010 paper (PDF 106KB).
Relevance for exams
This topic has been examined in section A several times over the last few sittings and has been worth ten marks. Unfortunately students demonstrate that they have not kept abreast of this current topic and merely regurgitate facts from previous model answers.
Here are some simple steps to take to make sure you are up to date and that you answer the question set:
1. Understand the history of the convergence project (see above).
2. Carry out some research before the exam. Remember that there are a number of decisions due in 2011 and 2012.
Four excellent sources of information are:
- IFRS
- IASB
- FASB
- the websites for the worldwide accountancy firms, eg PwC or Deloitte.
3. Use your reading time in the exam to identify the specific requirement. There are several angles the examiner could come from:
a) Where are we at the moment?
b) What is next?
c) Successful convergence projects to date.
d) Ongoing projects or those where differences still exist.
Students who simply write all they know without answering the question set will gain few marks. Listing buzz words like ‘Norwalk Agreement’ and ‘MOU’ without putting them into context will gain no marks.
However, those who demonstrate some up to date knowledge will score a much higher mark. Please do not make up convergence projects – the examiner will know when you are bluffing even if you make the comments sound confident.
Links
Model answer – F3: buying or leasing assets
Management level