Capital Markets

Convergence Killers?

International accounting standard-setters fear that European "carve-outs" could spoil hopes for a global set of principles.
Alan RappeportOctober 25, 2007

Accounting standards-setters are stepping up their rhetoric in hopes of dissuading the European Commission from sabotaging their dreams of convergence.

Although plans for a “single, quality set” of accounting standards remains several years from completion, the obstacle that worries members of America’s Financial Accounting Standards Board and its counterpart International Accounting Standards Board is Europe. Speaking on a panel Thursday, FASB chairman Bob Herz and James Leisenring, an IASB member, both signaled their concern.

“I think the biggest threat to convergence lies in the European Commission,” Leisenring said of Europe’s tweaking of International Financial Reporting Standards. “Our mission fails completely if that’s tolerated and allowed to continue.”

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

The issue of European “carve-outs” became increasingly prominent last month as the U.S. Securities and Exchange Commission concluded its comment period on a proposal to drop the requirement for foreign firms to reconcile with U.S. generally accepted accounting principles. One key carve-out was Europe’s decision to change IAS 39, a standard on hedge accounting. European standard-setters also came close this year to changing IFRS 8, which covers reporting business segments.

A European version of IFRS complicates matters for European companies, because the SEC has said it would only accept “full” IFRS to avoid being flooded with exceptions. Since European firms are legally bound to follow the European Commission’s rules, they would have to continue reconciling their books when filing in the U.S. Herz suggested that if reconciliation were not dropped it could create, in effect, a “trade war” with other jurisdictions that might begin to require their own reconciliations.

The controversy also highlights ongoing tension between the IASB and Europe, which has wanted its own standard-setter. Meanwhile, some have expressed concern that the SEC may use convergence as an opportunity to exert influence on global accounting standards.

The FASB chalks it up to anti-American sentiment in Europe. “We’re even less popular than we were before,” Herz said. “There is a view in particular parts of Europe that having the IASB work with the FASB will allow the importation into IFRS of bad American things.”

Herz went on to explain that the FASB and IASB are trying to strike the right balance, not to impose a standard that is more rules-based and more open to litigation, as some fear. “Anything that has to do with America is not viewed as being good,” Herz said.