IFRS and GAAP Convergence Update
Presented March 15, 2012
at Main Line Association
for Continuing Education
by Joel Wagoner, MBA, CPA, CMA, CFM
Assistant Professor of Accounting
Arcadia University
IFRS and GAAP Convergence Update
Questions:
• Is the SEC going to require us to use IFRS?
• If so, when?
• Why aren’t we hearing as much about this as we
did a few years ago?
• Are we going to have to learn IFRS?
• What will become of the FASB if we adopt
IFRS?
IFRS and GAAP Convergence Update
The potential conversion to IFRS has been a
concern in the Accounting profession since the
Securities and Exchange Commission first
published their “roadmap” for conversion in 2008.
IFRS and GAAP Convergence Update
Few would disagree with the desirability of a
single set of financial reporting standards and
accounting principles.
The question: How do we go from our divergent
sets of principles, GAAP and IFRS, to a single set
of high-quality standards?
IFRS and GAAP Convergence Update
The FASB and IASB have been working towards
the convergence of American and International
standards since 2002.
IFRS and GAAP Convergence Update
Under a current Memorandum of Understanding
(agreed to by both boards in 2006), the FASB and
IASB will work together to ultimately resolve all
significant differences between GAAP and IFRS.
IFRS and GAAP Convergence Update
The SEC released Publication 33-9109 in 2010,
supporting “a single set of high-quality globally
accepted accounting standards.”
IFRS and GAAP Convergence Update
Shortly afterward, the SEC published a work plan
to determine whether to require American publicly
traded corporations to present their financial
statements in accordance with International
Financial Reporting Standards (IFRS.)
IFRS and GAAP Convergence Update
The work plan “addresses [six] areas of concern
that were highlighted by commenters” on the 2008
roadmap:
1 – Sufficient development and application of
IFRS for the U. S. domestic reporting system;
IFRS and GAAP Convergence Update
2 – The independence of standard setting for the
benefit of investors;
IFRS and GAAP Convergence Update
3 – Investor understanding and education
regarding IFRS;
IFRS and GAAP Convergence Update
4 – Examination of the U. S. regulatory
environment that would be affected by a change in
accounting standards;
IFRS and GAAP Convergence Update
5 – The impact on issuers, both large and small,
including changes to accounting systems, changes
to contractual arrangements, corporate governance
considerations, and litigation contingencies;
IFRS and GAAP Convergence Update
6 – Human capital readiness.
IFRS and GAAP Convergence Update
In a progress report dated October 29, 2010, the
SEC stated that a decision on whether or not to
require IFRS in America would depend in part on
the progress that the Financial Accounting
Standards Board (FASB) and International
Accounting Standards Board (IASB) are making
towards the convergence of American Generally
Accepted Accounting Principles (GAAP) and
IFRS.
IFRS and GAAP Convergence Update
The two boards responded to the progress report
by establishing an ambitious agenda for 2011. As
time allows, later in this presentation we will
review the current status of the items on their
agenda.
IFRS and GAAP Convergence Update
Five weeks later, on December 6, 2010, SEC
Deputy Chief Accountant Paul Beswick suggested
a different approach in an address to the AICPA
National Conference on Current SEC and PCAOB
Developments: “Condorsement”.
IFRS and GAAP Convergence Update
Paul Beswick: “U. S. GAAP would continue to
exist. The IASB and the FASB would finish the
major projects in their MOU (Memorandum of
Understanding). The FASB would not begin work
on any major new projects in the normal course.”
IFRS and GAAP Convergence Update
“Rather, a new set of priorities would be
established where the FASB would work to
converge existing U. S. GAAP to IFRS over a
period of time for standards that are not on the
IASB’s agenda.”
IFRS and GAAP Convergence Update
“This is not meant to be an MOU2 but rather
would entail making sure that, on a standard by
standard basis, existing IFRS standards are suitable
for our capital markets.”
IFRS and GAAP Convergence Update
“At the same time, the FASB would have a
process where they would consider new standards
issued by the IASB for incorporation into U. S.
GAAP and then integrate such standards into the
U. S. codification.”
IFRS and GAAP Convergence Update
Six months after Mr. Beswick’s speech, on May
26, 2011, the SEC issued a work plan “Exploring a
Possible Method of Incorporation” in which they
further explained the concept of “condorsement”.
IFRS and GAAP Convergence Update
“Condorsement” is a combination of the words
“convergence” and “endorsement”.
IFRS and GAAP Convergence Update
“Convergence” is described as when “jurisdictions
maintain their local standards but make efforts to
converge those bodies of standards with IFRS over
time.”
IFRS and GAAP Convergence Update
“Endorsement” is when “jurisdictions incorporate
individual IFRS’s into their local body of
standards. . .The degree of deviation from IFRS as
issued by the IASB can vary under this approach.”
IFRS and GAAP Convergence Update
“Condorsement” would be an approach in which
the FASB “would facilitate the transition process
(to IFRS) over some defined period of time (e.g.,
five to seven years).”
IFRS and GAAP Convergence Update
“At the end of this period, the objective would be
that a U. S. issuer compliant with U. S. GAAP
should also be able to represent that it is compliant
with IFRS. . .”
IFRS and GAAP Convergence Update
“Incorporation of IFRS. . .would have the
objective of achieving the goal of having a single
set of high-quality, globally accepted accounting
standards, while doing so in a practical manner
that could minimize both the cost and effort
needed to incorporate IFRS. . .”
IFRS and GAAP Convergence Update
“For the endorsement part of the framework, the
FASB would continue to participate in the
development and improvement of accounting
standards. . .”
IFRS and GAAP Convergence Update
“However, the manner of participation. . .would
differ considerably from the FASB’s current
standard-setting role. . .”
IFRS and GAAP Convergence Update
“. . .[T]he FASB would participate in the process
for developing IFRS, rather than serving as the
principal body responsible for developing new
accounting standards or modifying existing
standards under U. S. GAAP.”
IFRS and GAAP Convergence Update
“The FASB would play an instrumental role in
global standard setting by providing input and
support to the IASB in developing. . .standards; by
advancing the consideration of U.S. perspectives
in those standards; and by incorporating those
standards, by way of an endorsement process, into
U.S. GAAP.”
IFRS and GAAP Convergence Update
“The FASB would continue to promulgate U.S.
GAAP primarily through its endorsement of
standards promulgated by the IASB.”
IFRS and GAAP Convergence Update
“[D]ue to the FASB’s participation in the IASB’s
standard setting process, the FASB should be in a
position to readily endorse (i.e., incorporate
directly into U.S. GAAP) the vast majority of the
IASB’s modifications to IFRS.”
IFRS and GAAP Convergence Update
“However, the FASB would retain the authority to
modify or add to the requirements of the IFRSs
incorporated into U.S. GAAP. . .”
IFRS and GAAP Convergence Update
“If IFRS is incorporated into the U.S. financial
reporting system, the Commission (SEC) would
maintain its oversight over the FASB. . .”
IFRS and GAAP Convergence Update
The SEC emphasizes that the work plan describing
“Condorsement” “is not intended to suggest that
the Commission has determined to incorporate
IFRS or that the discussed framework is the
preferred approach or would be the only possible
approach.”
IFRS and GAAP Convergence Update
Here is a brief status update of the joint projects
that the FASB and IASB have been collaborating
on under the Memorandum of Understanding.
Statement of Comprehensive Income
The FASB published Accounting Standards
Update 2011-05, Comprehensive Income (Topic
220): Presentation of Comprehensive Income in
June, 2011.
Statement of Comprehensive Income
Net income and comprehensive income must
either be presented on the same report, or on
consecutive reports.
Fair Value Measurement
The FASB published Accounting Standards
Update 2011-04, Fair Value Measurement (Topic
820): Amendments to Achieve Common Fair Value
measurement and Disclosure Requirements in U.
S. GAAP and IFRSs.
Fair Value Measurement
The two boards sought to “ensure that fair value
has the same meaning” in GAAP as in IFRS,
“other than minor necessary differences in
wording or style.”
Fair Value Measurement
The amendments in ASU 2011-04 “explain how to
measure fair value. They do not require additional
fair value measurements and are not intended to
establish valuation standards or affect valuation
practices outside of financial reporting.”
Fair Value Measurement
“The Board (FASB) does not intend for the
amendments in this Update to result in a change in
the application of the requirements in Topic 820.”
Revenue Recognition
On November 14, 2011, the FASB reissued a
Proposed Accounting Standards Update (what we
used to call an “exposure draft”) on Revenue
Recognition (Codification Database Topic 605.)
Revenue Recognition
The FASB and IASB had received almost 1,000
comments in response to an earlier version of the
Proposed Accounting Standards Update (Exposure
Draft).
The earlier version had been released in June,
2010.
Revenue Recognition
“[R]evenue recognition requirements in. . .GAAP
differ from those in. . .[IFRS], and both sets of
requirements are considered to be in need of
improvement.”
Revenue Recognition
GAAP “comprises broad revenue recognition
concepts and numerous requirements for particular
industries or transactions that can result in
different accounting for economically similar
transactions.”
Revenue Recognition
“Although IFRSs provide less guidance on
revenue recognition, the two main revenue
recognition standards, IAS 18, Revenue, and IAS
11, Construction Contracts, can be difficult to
understand and apply to transactions beyond
simple.”
Revenue Recognition
The objective of the Revenue Recognition project
is to “clarify the principles for recognizing revenue
and to develop a common revenue standard for
U. S. GAAP and IFRSs that would:
Revenue Recognition
(a) remove inconsistencies and weaknesses in
existing revenue recognition standards and
practices;
Revenue Recognition
(b) provide a more robust framework for
addressing revenue recognition issues;
Revenue Recognition
(c) Improve comparability of revenue recognition
practices across entities, industries, jurisdictions,
and capital markets; and
Revenue Recognition
(d) Simplify the preparation of financial statements
by reducing the number of requirements to which
entities must refer.”
Revenue Recognition
The core principle underlying the project is that
“an entity should recognize revenue to depict the
transfer of promised goods or services to
customers in an amount that reflects the
consideration to which the entity expects to be
entitled in exchange for those goods or services.”
Revenue Recognition
An entity accomplishes this through a five-step
procedure:
Revenue Recognition
1 – Identify the contract with a customer.
Revenue Recognition
2 – Identify the separate performance obligations
in the contract.
Revenue Recognition
3 - Determine the transaction price.
In doing this, we must consider the effects of each
of the following:
Revenue Recognition
a - Variable consideration: “If the promised
amount of consideration in a contract is variable,
an entity would estimate the transaction price by
using either the expected value. . .or the most
likely amount, depending on which method the
entity expects to better predict the amount of
consideration to which it will be entitled”;
Revenue Recognition
b - The time value of money;
Revenue Recognition
c: Non-cash consideration;
Revenue Recognition
d: Consideration payable to the customer: “If an
entity pays, or expects to pay, consideration to a
customer. . .in the form of cash, credit, or other
items that the customer can apply against amounts
owed. . .the entity would account for the
consideration payable. . .as a reduction of the
transaction price unless the payment is in exchange
for a distinct good or service.”
Revenue Recognition
4: Allocate the transaction price to the separate
performance obligations in the contract.
Revenue Recognition
5 – Recognize revenue when (or as) the entity
satisfies a performance obligation – by transferring
a promised service or good to a customer.
Revenue Recognition
A performance obligation is satisfied – control of a
good or service has been transferred – when one of
two criteria have been met:
Revenue Recognition
1 – The entity’s performance creates or enhances
an asset that the customer controls as the asset is
created or enhanced;
Revenue Recognition
2 – The entity’s performance does not create an
asset with an alternative use to the entity and at
least one of the following criteria is met:
Revenue Recognition
a – The customer simultaneously receives and
consumes the benefits of the entity’s performance
as the entity performs;
Revenue Recognition
b – Another entity would not need to substantially
reperform the work the entity has completed to
date if that other entity were to fulfill the
remaining obligation to the customer;
Revenue Recognition
c – The entity has a right to payment for
performance completed to date and it expects to
fulfill the contract as promised.
Revenue Recognition
The amount of revenue recognized as a
performance obligation is met is allocated based
on the proportion of revenue that will ultimately be
realized from the contract.
Revenue Recognition
If the amount of revenue that an entity will
recognize from a contract is variable, the
cumulative amount that it would recognize at any
time “would not exceed the amount to which it is
reasonably assured to be entitled.”
Revenue Recognition
If an entity has an “onerous performance
obligation” (“the lowest cost of settling the
performance obligation exceeds the amount of the
transaction price allocated to that performance
obligation”), it would “recognize a liability and a
corresponding expense.”
Revenue Recognition
This Accounting Standards Update will not be
effective before January 15, 2015 at the earliest.
Early application will not be permitted.
Balance Sheet - Offsetting
The FASB issued ASU 2011-11 this past
December to address differences in disclosures
related to offsetting assets and liabilities on the
balance sheet.
Balance Sheet - Offsetting
ASU 2011-11 is intended to “enhance disclosures
and provide converged disclosures about financial
instruments and derivative instruments that are
either offset on the statement of financial position
or subject to an enforceable master netting
arrangement or similar agreement, irrespective of
whether they are offset on the statement of
financial position.”
Balance Sheet - Offsetting
ASU 2011-11 requires entities “to provide both net
and gross information for these assets and
liabilities in order to enhance comparability
between those entities that prepare their financial
statements on the basis of U.S. GAAP and those
entities that prepare their financial statements on
the basis of IFRS.”
Consolidation: Policy and Procedures
The FASB issued a proposed Accounting
Standards Update on November 3. Comments
were accepted through January 17, 2012.
Consolidation: Policy and Procedures
FASB Statement 167 (Codification Topic 810)
requires an entity to “perform a qualitative
evaluation of its power and economics to
determine whether it should consolidate a variable
interest entity.”
Consolidation: Policy and Procedures
Accounting Standards Update 2010-10, issued in
February, 2010, had indefinitely deferred the
effective date of the consolidation requirements for
certain entities. The proposed ASU rescinds this
deferral and requires “all variable interest entities
to be evaluated for consolidation.”
Consolidation: Investment Companies
The FASB published a Proposed Accounting
Standards Update on consolidating investment
companies on October 21, 2011. The comment
period for this proposed ASU ran through January
5, 2012.
Consolidation: Investment Companies
“Investment companies carry all of their
investments in operating entities at fair value, even
if they hold a controlling financial interest in the
investee. Therefore, the Boards agreed that, as part
of the development of a consolidation standard,
they would look to develop consistent criteria for
determining whether an entity is an investment
company.”
Financial Instruments
The FASB and IASB hope to increase the
usefulness and simplify the accounting
requirements for financial instruments.
Financial Instruments
“Although the project objective is comprehensive,
it is also the Boards’ objective that the project
should be completed expeditiously.”
Financial Instruments
Three specific goals of this project are:
1 – Reconsider the recognition and measurement
of financial instruments;
2 – Address issues related to impairment of
financial instruments and hedge accounting;
3 – Increase convergence in accounting for
financial instruments.
Financial Instruments
On May 26, 2010, the FASB issued one
comprehensive proposed Accounting Standards
Update, Accounting for Financial Instruments and
Revisions to the Accounting for Derivative
Instruments and Hedging Activities (proposed
Update), which addresses the measurement,
classification, and impairment of financial
instruments, as well as hedge accounting.
Financial Instruments
On January 31, 2011, the FASB and IASB also
issued a supplementary document, Accounting for
Financial Instruments and Revisions to the
Accounting for Derivative Instruments for Hedging
Activities – Impairment.
Financial Instruments
“The Boards continue to develop a comprehensive
model for accounting for financial instruments,
including hedge accounting. The Boards plan to
deliberate certain issues relevant to this project
separately and then meet subsequently to reconcile
differences in their technical decisions.”
Leases
Professor John Fusco will present coverage of the
proposed changes to lease accounting.
Insurance Contracts
This project is in the early stages. The FASB
issued a discussion paper in September, 2010, and
expects to issue a proposed Accounting Standards
Update during the first half of 2012.
Insurance Contracts
It should be noted that there is an extensive body
of GAAP concerning Insurance Accounting, but
relatively little IFRS has been developed.
Conceptual Framework
Other than the Revenue Recognition project that
we discussed earlier, this has been “reassessed as a
lower priority project. Further action is not
expected in the near term.”