IASB feature
The long path
to convergence
IASB Liaison Board Member Tatsumi Yamada
provides the latest update on convergence projects
between the IASB and the FASB
T
he International Accounting
Standards Board and the U.S.
Financial Accounting Standards
Board published a memorandum of
understanding (MOU) in February
this year that reaffirmed the boards’
shared objective to develop common
accounting standards for use in the
world’s capital markets.
In response to the MOU, the IASB
decided in July to take up two major
projects – post-retirement benefits
including pensions (IAS 19) and leases
(IAS 17) – and to add a review of the
related party disclosures (IAS 24). This
article covers these topics.
Norwalk agreement
Before talking about the MOU, it is
worth mentioning about the Norwalk
agreement announced in October 2002.
The IASB started its operation in April
2001, and the IASB and FASB had their
first meeting in Norwalk, Connecticut,
where the FASB is based. In that meeting,
both boards “acknowledged their
commitment to the development of high
quality, comparable accounting standards
that could be used in both domestic
and cross-border financial reporting.”
The boards also agreed, among other
things, (a) to undertake a short-term
project aimed at removing certain
relatively minor differences between the
U.S. Generally Accepted Accounting
Principles and the International Financial
Reporting Standards, and (b) to remove
major differences through the mutual
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September 2006
undertaking of discrete, substantial
projects that both boards would
address concurrently.
The principle applied to the shortterm convergence work is very simple:
the board with the older standard will
consider adopting the newer standard
of the other board. As a result, the IASB
issued IFRS 3 Business Combinations
and IFRS 5 Non-current Assets Held for
Sale and Discontinued Operations. The
FASB in turn issued FASB Statements
151 Inventory Costs, 153 Exchanges of
Non-monetary Assets and 154 Accounting
Changes and Error Corrections. Other
longer-term activities included major
projects such as the review of IFRS 3
(purchase method procedures), Revenue
Recognition, Performance Reporting
(now renamed “Financial Statements
Presentation”) and the review of the
conceptual framework. The agreement
has established the basic relationship
between the two boards, which “pledged
to use their best efforts (a) to make their
existing financial reporting standards
fully compatible as soon as is practicable
and (b) to coordinate their future
work programmes to ensure that once
achieved, compatibility is maintained.”
Convergence updates
If convergence between U.S. GAAP and
IFRSs could be reached, the world would
have a single set of high-quality standards
that apply globally.
The U.S. Securities and Exchange
Commission has indicated that it intends
to accept IFRS-based consolidated
financial statements in the U.S. markets
without reconciliation to earnings (net
income) base on the U.S. GAAP by
2009, if, among other things, further
convergence between the two sets of
standards is achieved.
In response to this and after
discussions with the European
Commission and the SEC, the IASB
and FASB have agreed to work towards
achieving further convergence by 2008
and published their intention as the
MOU, which consisted of two parts:
short-term convergence items and other
long-term joint projects. (See chart)
The short-term projects, made up
of six items for each board, are to be
completed by 2008. The IASB has made
progress on the convergence items on its
plate – most are already in the exposure
draft stage.
Other joint projects, consisting of
seven active agenda items (five active
agenda in the IASB’s case) and four
research items, are not expected to
be completed by 2008 due to their
long-term nature. Only the business
combinations project is expected to
be completed by then. There is some
delay with the fair value measurement
guidance project, which was originally
expected to be completed by 2008. But
because the IASB recently decided to
start consultation by issuing a discussion
paper rather than an exposure draft, this
project won’t be completed by 2008. For
other projects, issuance of a due process
document such as a discussion paper
that shows the scope and direction of the
project by 2008 is considered sufficient to
meet the MOU’s requirement.
The impact of the MOU will be
significant because it means further
convergence between U.S. GAAP and
IFRSs will be achieved in the not-toodistant future to ensure the IFRS-based
consolidated financial statements can be
used in the U.S. capital markets without
the present reconciliation requirement.
SHORT-TERM CONVERGENCE
To be done by the FASB
Fair value option
Impairment (jointly with the IASB)
Income tax (jointly with the IASB)
Investment properties
Research and development
Subsequent events
Three new projects
At the July board meeting, the IASB
added three new projects to its agenda:
Borrowing costs
Impairment (jointly with the FASB)
Income tax (jointly with the FASB)
Government grants
Joint ventures
Segment reporting
OTHER JOINT PROJECTS
Type of topics
Convergence topics
Research topics
Derecognition, financial instruments (replacement of
existing standards), intangible assets and leases
Active agenda topics
Stability of IFRSs
The IASB also announced recently
a number of steps to assist with the
adoption of IFRSs and enhance
consultation. The IASB decided that:
(a) there will be a minimum of one
year between the date of the publication
and the date of the implementation of
new IFRSs
(b) a discussion paper, instead of
an exposure draft, for the conceptual
framework project as well as for the fair
value measurement project will be issued
as the initial due process document
to provide more opportunities for
constituents to comment
(c) round-table discussions on the
review of IAS 37 Provisions, Contingent
Liabilities and Contingent Assets, and the
measurement phase of the conceptual
framework project will be held in
November and December of 2006, and
the first quarter of 2007 respectively
(d) the IASB will not require
application of new IFRSs currently under
development before 1 January 2009. But
entities can apply these new IFRSs before
1 January 2009 on a voluntary basis.
With regard to (d), even though the
IASB will keep publishing new IFRSs
from now to 2009, there will be a period
of stability before these IFRSs will be
required to apply. The IASB also expects
countries yet to adopt IFRSs to do so
during this stability period.
To be done by the IASB
Business combinations, consolidations, fair value
measurement guidance, liabilities and equity distinctions,
financial statement presentation, post-retirement benefits
(including pensions) and revenue recognition
post-retirement benefits including
pensions (IAS 19), leases (IAS 17) and
related party disclosures (IAS 24). The
first two are related to the MOU and
the last one is a result of convergence
work being undertaken by Japanese and
Chinese accounting standard-setters.
Pensions
The project targets to improve IAS 19
and is expected to take four years to
complete. The improvements will deal
with cash balance pension plans, the
smoothing mechanisms in IAS 19
and presentation and disclosure in
financial statements.
Leases
The project will reconsider all aspects
of lease accounting, including the
classification of leases into a finance
lease and an operating lease. The
accounting for a lease will be based
on the analysis of the assets and
liabilities arising from contractual
rights and obligations under the lease.
That means the assets and liabilities
recognised in respect of leases should
reflect the conveyance of the right of
use and control of the associated future
economic benefits during the contract,
rather than conveyance of the whole
of the physical property. A discussion
paper is expected to be issued in
late 2008.
Related party disclosures
The main objectives will be to review:
(a) the current related party
disclosure requirements for state-owned
entities (SOE) when they transact with
other SOEs
(b) the scope of the standard, for
example, whether transactions between an
associate and a subsidiary of the associate’s
significant investor are in the scope.
The previous IAS 24 had the scope
exemption for disclosure of transactions
between SOEs, but that was removed
when IAS 24 was revised in December
2003. During convergence discussions,
the Chinese accounting standard-setter
expressed concern about the removal of
this exemption because the requirement
to identify related party transactions
between SOEs is onerous, and the
number of transactions needed to be
disclosed can be excessive.
The Japanese accounting standardsetter requested that it should be clarified
whether transactions such as (a) between
an associate and a subsidiary of the
associate’s significant investor, or (b)
between associates, are within the scope
of IAS 24. The exposure draft is expected
to be published by the end of 2006.
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