Accounting: Mutual gain

At the end of March, the US’s Financial Accounting Standards Board and the
International Accounting Standards Board were due to meet in London to hammer
out the practicalities of merging International Financial Reporting Standards
and US generally accepted accounting principles.

The meeting follows the publication of a memorandum of understanding (MoU)
between the two accounting standard-setters and is the latest in a series of
summits since the Norwalk agreement in September 2002 where, in laying out a
roadmap for convergence, they “each acknowledged their commitment to the
development of high quality, compatible accounting standards that could be used
for domestic and cross-border financial reporting.”

While FASB/IASB are working on the detail of the financial reporting, they
have also been busy hammering home the message that this is about more than
accounting alone. IASB chairman Sir David Tweedie summed this up when he said:
“The ability to meet the objective set out by the roadmap depends on the efforts
and actions of many parties, including companies, auditors, investors,
standard-setters and regulators.”

In developing the MoU, the boards have been talking over the past year with
representatives of the European Commission and the SEC. The EC’s response to the
reality of impending harmonisation between IASB/FASB can be seen in moves such
as the creation, late last year, of the European Group of Auditors’ Oversight
Bodies (EGAOB). The role of the group is to ensure effective co-ordination of
new public oversight systems of statutory auditors and auditors within the
European Union.

With the agreement of the EC and the SEC, IASB/FASB have agreed to work
towards a short-term convergence plan. By 2008, the IASB and FASB intend to
reach a conclusion about whether major differences should be eliminated through
short-term, standard-setting projects and, if so, actually (or substantially)
complete the work in the ten areas: fair value option; impairment; income tax;
investment properties; research and development; subsequent events; borrowing
costs; government grants; joint ventures; and segment reporting.

There are another seven projects: business combinations; consolidations; fair
value measurement guidance; liabilities and equity distinctions; performance
reporting; pensions; and revenue recognition, which are on an “active agenda”
where the IFRS reconciliation requirement is planned to be removed by 2009.
Finally, there are four topics: derecognition; financial instruments; intangible
assets; and leases, where it’s admitted that work will still be ongoing by 2008.

The MoU has to be seen from both a political angle as well as a practical
one. The overwhelming concern of non-US companies quoted in the US, led by major
European corporates, is the removal of the need for the reconciliation
requirement for non-US companies that use IFRS and are registered in the US. The
SEC has, in essence, made an offer that that can happen. This is good news for
corporates, the IASB and the EC. From a practical point of view, the IASB seems
to have convinced the US that the best accounting answer should be chosen and
not the one that had been in place longer, which in most cases meant the
US-version would win out. And the IASB/FASB have said that if neither of them
have the right answer then they should go out and build something better. The
IASB has been tediously consistent in preaching that message and it seems that
by saying it often enough they have made it come to pass.

Crucially, the SEC is not setting a barrier that says everything has to be in
place before it will drop the reconciliation requirement. This is in sharp
contrast to the deal the International Accounting Standards Committee (IASC) was
forced to strike in the 1990s with the International Organisation of Securities
Commissions (IOSCO), the body of international regulators, where if all the
ducks weren’t lined up in a row then the whole deal was off. There is now
agreement that if there isn’t an acceptable standard in place and it is
recognised that more work needs to be done, and that work is in progress, then
that should be enough to keep the show on the road.

For FDs in Europe, the MoU signals another round of financial reporting
upheaval. But cynical FDs, who are tempted to think this sounds like more pain
but no gain, should think again. The part of the MoU that FDs need to focus on
is the role of the SEC.

The IASB/FASB writes: “In setting out the projects for both the short-term
convergence topics and the major joint topics, the FASB and the IASB recognises
that, with respect to its foreign registrants, the SEC will undertake an
analysis of their 2005 IFRS financial statements across companies and
jurisdictions. This analysis may reveal the need for additional standard-setting
actions by one of the boards or another.”

In other words, the SEC is looking at financial reports being published now
to see if they can accept them without reconciliation. Even if the answer is
“no” or “not quite”, it still represents astonishing progress.