Pressed last March to describe the biggest controversy between U.S. and international accounting standards setters, Robert H. Herz replied, "I like one brand of Scotch, and Tweedie likes another."

Herz, the often-droll chairman of the Financial Accounting Standards Board (FASB), was referring to Sir David Tweedie, the soft-spoken Scot who is his counterpart on the International Accounting Standards Board (IASB). But there's more than a dram of truth to Herz's answer.

Although many differences remain between U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), they are being eliminated faster than anyone, even Herz or Tweedie, could have imagined. In April, FASB and the IASB agreed that all major projects going forward would be conducted jointly. That same month, the Securities and Exchange Commission said that, as soon as 2007, it might allow foreign companies to use IFRS to raise capital in the United States, eliminating the current requirement that they reconcile their statements to U.S. GAAP.

The change is all the more remarkable given that the IASB was formed only four years ago, and has rushed to complete 25 new or revamped standards in time for all 25 countries in the European Union to adopt IFRS by this year. By next year, some 100 countries will be using IFRS. "We reckon it will be 150 in five years," marvels Tweedie. "That leaves only 50 out."

This development has gone largely unnoticed by many, if not most, U.S. finance chiefs. And the process may not seem to merit attention. After all, convergence is supposed to ease the task of raising capital. Once the process is complete, investors will need less help comparing results of competing firms based in different countries. U.S. companies that conform to GAAP will be able to raise capital abroad without reconciling their results to IFRS.

For a long time, American firms have tacitly assumed that the rest of the world would simply sign on to some version of U.S. GAAP (an assumption shared, and feared, by many non-American firms). But such is not the case. By design, the process is changing accounting both here and abroad. And it may produce financial results for American firms that are quite distinct from those they report now. Along the way, then, convergence may complicate rather than simplify efforts to raise capital — particularly for firms that have allowed U.S. GAAP reporting to shape their economic choices.

"The fact that the IASB is influencing accounting standards throughout the world, including the United States, is something that every U.S. company should pay attention to," observes Grant Thornton CEO Edward Nusbaum, who sits on FASB's advisory council. Herz agrees. "Even in non-joint projects, the thinking of one board will influence the thinking of the other," he says.

"Companies need to pay attention to what's going on at the IASB, even if they operate only in the United States," says Nusbaum. "And I think today, most [U.S.] companies — even international U.S. companies — don't pay attention to the IASB."

Must Be Better
To understand what they're missing, recall that one of Herz's first acts after assuming the chairmanship at FASB in July 2002 was to push for what became the Norwalk Agreement. Issued in October 2002, it committed both boards to work toward convergence. A key pillar of the agreement: standards could not be converged just for the sake of it — they had to improve GAAP or IFRS, or both. "A change that is simply going to get rid of differences is not good enough," remarks Suzanne Q. Bielstein, who oversees convergence as FASB's director of major projects.

That approach pretty much guarantees accounting changes for companies on at least one side of the Atlantic, if not both, any time a standard converges. Such changes can be a headache for companies, but Bielstein notes that this approach serves as a triage tool when selecting projects. "It absolutely has an effect on how we choose projects. We are not going to make users go through a change when we think the value is dubious."

Bielstein points to reporting of accounting changes — part of a recent package of relatively small "short-term convergence" efforts — as a good example. Under U.S. GAAP, companies reported any effect of voluntary accounting changes (and, in some cases, those changed by standard setters) in net income.

But IAS 8, the international accounting standard, required that the change be applied to previous financial statements. "FASB took a look at the IASB's answer and said, 'The IASB has a better way of reporting accounting changes,'" says Bielstein. "That's a case where we eliminated the difference and improved reporting here [in the United States]. It allows the user of financial statements to make period-over-period comparisons, without the noise of an accounting change."

Of course, not everyone agreed. "We question whether the proposed change would result in a higher-quality standard than already exists in the United States," stated Dow Chemical vice president and controller Frank Brod in April 2004, writing as chair of Financial Executives International's (FEI) Committee on Corporate Reporting.

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