Long Live the King?

As international accounting standards close in on GAAP, the U.S. standard-setter considers its mortality.
Sarah JohnsonJanuary 1, 2008

Even before the Securities and Exchange Commission made a key move in November to advance the convergence of generally accepted accounting principles and international financial reporting standards, many leaders in the accounting world were wondering aloud what that effort would mean for the future of the Financial Accounting Standards Board. Among them was FASB chairman Robert Herz, who admitted that, “as the king of GAAP, it’s like contemplating your own mortality.”

In a letter to the SEC, the board and trustees of FASB suggested that the organization may well lose its role as the official standard-setter of the accounting rules that govern U.S. public companies. Instead, the 34-year-old group may evolve into a standard-setter for private companies and nonprofits, an IFRS educator, or a distant adviser to the International Accounting Standards Board (IASB), which sets the IFRS standard.

FASB’s potential vulnerability stems from the strong momentum behind accounting “convergence,” which most — including Herz — believe essentially means the end of GAAP as we know it in favor of a modified form of IFRS. That move gained more steam in November when the SEC voted to eliminate the requirement for international companies to reconcile their IFRS-prepared financial statements with GAAP. The SEC also issued a concept release seeking comments on the idea of allowing U.S. multinational companies to choose whether to report via IFRS or GAAP, and in December FASB helped drive convergence by revising its rule on business combinations and issuing a new rule on how to account for minority interests.

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Many questions have been raised about the timing and speed of a wholesale switch to IFRS. Critics ask whether allowing a dual reporting system in the United States will hamper efforts to create one strong set of global accounting standards. Most of the letters received by the SEC support the goal of a single set of standards, but are split as to whether the SEC is acting prematurely in allowing the nonconverged IFRS to be used by U.S. filers in the near future.

Herz worries that haste will come at a price. “Immediate adoption [of a largely unmodified IFRS] would replace a weak U.S. standard with a weak IFRS standard now, and then require U.S. companies to incur additional costs to adopt a new, improved standard at some point,” he says.

Others agree that IFRS can benefit from a cross-pollination with GAAP, and that the IASB can learn a thing or two from FASB. For example, FASB is funded by corporate levies, while the IASB gets its funding from donations. And unlike FASB, the IASB does not have the equivalent of an SEC to question its actions — a fact perhaps not lost on the SEC.

What’s on Tap for ’08

Financial statements:

In the second quarter, FASB will release its proposed redesign for adding new breakdowns to the income statement, balance sheet, and cash-flow statement.


Also in the second quarter, FASB and the IASB will release a joint discussion paper for a new rule that would require companies to capitalize all leases.

Liability-equity project:

The IASB and FASB will begin conferring on a new standard that will limit the classification of financial instruments as equity. (FASB’s views can be found in the “Exposure Documents” section at


Legislation could ease one convergence roadblock: Rep. Charles Rangel (D–N.Y.) has proposed repealing the use of last-in, first-out inventory reporting, a practice not allowed by the current version of IFRS.

Revenue recognition:

The boards plan to release a discussion paper on this complex standard, which to date is far from being converged.