Sarah Johnson, CFO.com | US
November 13, 2007

fasb fade away

Ed...you do recognize that your question at the end of your insightful comments is rhetorical

Posted by Rick Macchiarulo | Dec 21, 2007 4:08 PM ET

Convergence with what?

Convergence is the ultimate goal but convergence with what?
Ed Ramos, CPA

We discuss convergence between financial accounting standards (FAS) issued by the Financial Accounting Standards Board (FASB) and international financial reporting standards (IFRS) issued by the International Accounting Standards Board (IASB), but how do you converge moving targets.

IFRS are applied differently, depending on the country that regulates their use. A convergence on the application and regulation of IFRS is necessary.

The FASB and the Securities Exchange Commission (SEC) are in constant convergence. Staff accounting bulletin (SAB) 109, issued by the SEC last week, represents SEC convergence with FASB Statement 156, (issued 3/06) and FAS 159 (issued 2/07).

Identical transactions are recorded and presented differently depending on the nature of an entities business. Generally accepted accounting principles (GAAP) on investments differ for insurance companies, not for profits, investment companies, and banks. Convergence of accounting practices between industries remains an objective and challenge in setting accounting standards.

Finally, in 2003, FASB issued an interpretation (FIN) 46, of an accounting research bulletin (ARB) 51 (issued 1959). Enron abused the lack of specificity in GAAP on consolidating financial statements. FIN 46(R) represents a convergence of current GAAP as written during the last century with accounting principles necessary to address the evolution of business and protect investors of today and tomorrow.

The IASB challenge to reach consensus among the varied international interests, hinders, if not precludes, IFRS evolution to standards that hold business and auditors accountable comparably with US GAAP. It may also preclude their ability to quickly respond to the next "Enron".

The requirement for a GAAP - IFRS reconciliation should not be dropped by the SEC. Elimination of the GAAP - IFRS reconciliation should be accomplished through convergence or a company's voluntary election of accounting principles that are common to both standards. If, or when, convergence is established between GAAP and IFRS, international business and their accountants should expect that it will resurface from time to time.

If the SEC moves toward IFRS by removal of the GAAP ? IFRS, they will hinder US companies restricted to the use of GAAP. They will solve their "created" problem with an IFRS election for US companies. This will allow standard setting by an organization with little interest in cooperation with the SEC on the interests of US investors. The result will be numerous SABs on IFRSs. When the dust settles, standards will be set by the SEC instead of the FASB.

It was interesting reading the comments to the SEC on the reconciliation proposal. http://www.sec.gov/comments/s7-13-07/s71307.shtml
The majority of comments came from business (mostly foreign) seeking money from US investors. They support dropping the reconciliation. Investors (the constituents of the SEC) supported GAAP and a continued reconciliation.

Consistent financial reporting ?convergence?, is a goal of every stakeholder in financial statements and capital markets. If consistent accounting principals are so important, why would the SEC drop a reconciliation that highlights those differences? The SEC?s decision on whether to drop disclosure of the remaining GAAP ? IFRS divergence will be a statement on their priorities. Which is more important, the use of consistent accounting standards and the investors they protect, or the large foreign corporations standing to gain the most from a dropped reconciliation and acceptance of the less detailed and internationally inconsistent IFRS?

Posted by Ed Ramos | Nov 14, 2007 12:48 PM ET