Meeting stirs tensions over timing of convergence

World in danger of splitting on standards, says Tweedie. By Nick Topazio, business and finance reporting specialist, CIMA.

Picture caption: Ethiopis Tafara, director, office of international affairs US SEC.

The International Accounting Standards Board and the US Financial Accounting Standards Board (FASB) have been attempting to converge international accounting standards and US generally agreed accounting principles since the Norwalk Agreement in 2002.

However, there are fundamental differences between the two. The US approach is rules-based and the European is based on principles. The conflict between these two systems begs the question how far IAS and US GAAP can converge. For example, the joint IASB-FASB exposure on business combinations provoked widespread criticism (see CIMA's response on our consultation database).

With concern mounting as to the progress of the convergence project, the European Federation of Accountants (FEE) hosted a conference in Brussels on 1 December.

Controversial combinations

In a typically forthright opening speech, Charlie McCreevy, European commissioner for internal market and services, told the conference that ‘convergence of existing accounting frameworks is important for the development of a truly international set of accounting standards’. He felt that it would be unrealistic to aim for an absolute level of convergence. The bodies involved should seek to establish a sufficient level of convergence within a reasonable timeframe.

Two-way street

But what is sufficient? In its simplest form, from an EU perspective, it would have to be that level which enables the SEC to dispense with the US GAAP reconciliation. McCreevy continued by pointing out that convergence must be a two-way street and must not be allowed to de-stabilise the IFRS platform in Europe. He particularly stressed that ‘convergence is not an invitation to standard-setters to try and advance the theoretical frontiers of accounting’.

According to Ethiopis Tafara, director, office of international affairs US SEC, the SEC recognises the benefits of truly global accounting standards to world markets. However 50 per cent (by market capitalisation) of the world’s companies use US GAAP and IAS have no proven track record. The SEC does not expect full convergence before the reconciliation requirement is removed. It would be enough if the financial statements produced using IFRS were understandable by US investors. To achieve this we need to find the right balance between principle-based and rules-based standards.

Sir David Tweedie, chairman of the IASB, said that we were at a critical juncture. The world might split into two camps, one US GAAP and the other IFRS. He reiterated that the IASB would press ahead with its convergence programme with FASB. Both bodies have committed to the identification and elimination of significant differences between the two accounting regimes by 2008.

This writer thinks that there is a significant risk that IASB and FASB will steam ahead with convergence but the EU will not endorse new 'theoretically challenging' standards. A de facto EU GAAP could emerge as a ‘smooth IFRS’, that is IFRS but without the bits we don’t like. As the EU is the largest bloc of countries using IFRS, the IASB should recognise this risk. Sufficient convergence that results in the removal of the US GAAP reconciliation requirement is desirable but not at any price. After all only 250 of the 8,000 EU listed companies are also quoted on the US stock market. The savings that they will make need to be compared with the additional cost for the others of having to comply with unnecessarily complex accounting requirements.

Concentrating on concepts

Under the convergence umbrella, the IASB and FASB are considering the conceptual frameworks that underpin their respective accounting standards. Much of the criticism of the recent business combinations proposals mentioned above is in effect calling for an acceleration of the framework project. Respondents to the consultation accused the IASB of introducing some fundamental changes as part of the exposure draft. They might better have been initiated as part of the conceptual framework project and as part of a discussion paper.

Jonathan Symonds, chief financial officer of AstraZeneca, was a member of a discussion panel at the conference. He concluded that the next steps should be for the IASB to:

• agree the boundaries of the conceptual framework project - in particular the basis of measurement (to what extent do we use fair value accounting?)
• focus on performance reporting – this is at the heart of the communication process to users of financial statements
• aim to reduce complexity of accounting standards to make financial statements more understandable and so improve communication, and
• agree the agenda for the next phase with all stakeholders, not just the SEC.
   

Although the conference did not produce any decisions as to the way forward, it did produce a full and frank discussion. Each party recognised that the success of the convergence project is important. The main tension appears to be in the timing of the changes required. For a rules-based system to converge with a principles-based system, fundamental changes need to occur in both.

However the EU is calling for time to bed down the stable platform and is unlikely to accept any revolutionary new standards. It is time for the IASB and FASB to devote more of their resources to the conceptual framework project. They must accelerate the exposure of their thinking in discussion papers rather than amending current standards.

McCreevy said that the EU ‘will not be adding new carriages to the IFRS train, just as it has left the station’. It is time for all parties to take notice of the guard’s warning flag and settle down for the journey.

December 2005