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No headersINTERNATIONAL ACCOUNTING CONVERGENCE
Former Secretary of the Treasury and current economic advisor to the president, Lawrence Summers, indicated that the single most important innovation shaping the capital markets was the idea of generally accepted accounting principles. He went on to say that we need something similar internationally.
We believe that the Secretary is right. Relevant and reliable financial information is a necessity for viable capital markets. Unfortunately, companies outside the United States often prepare financial statements using standards different from U.S. GAAP. As a result, international companies such as Coca-Cola, Microsoft, and IBM have to develop financial information in different ways. Beyond the additional costs these companies incur, users of the financial statements often must understand at least two sets of GAAP. (Understanding one set is hard enough!) It is not surprising therefore that there is a growing demand for one set of high-quality international standards.
Presently, there are two sets of rules accepted for international use—U.S. GAAP and the International Financial Reporting Standards (IFRS), also known as iGAAP, issued by the London-based International Accounting Standards Board (IASB). U.S. companies that list overseas are still permitted to use U.S. GAAP, and foreign companies listed on U.S. exchanges are permitted to use iGAAP. As you will learn, there are many similarities between U.S. GAAP and iGAAP.
Already over 100 countries use iGAAP, and the European Union now requires all listed companies in Europe (over 7,000 companies) to use it. Recently the U.S. SEC proposed that it will allow some U.S. companies to adopt iGAAP as early as 2009. The SEC also laid out a roadmap by which all U.S. companies will be required to use iGAAP by 2016. (A discussion of the SEC Roadmap is available on a separate page on this website.)
The Boards recognize that global markets will best be served if only one set of GAAP is used. For example, the FASB and the IASB formalized their commitment to the convergence of U.S. GAAP and iGAAP by issuing a memorandum of understanding (often referred to as the Norwalk agreement). The two boards agreed to use their best efforts to:
- make their existing financial reporting standards fully compatible as soon as practicable, and
- coordinate their future work programs to ensure that once achieved, compatibility is maintained.
As a result of this agreement, the two boards identified a number of short-term and long-term projects that would lead to convergence. For example, one short term project was for the FASB to issue a rule that permits a fair value option for financial instruments. This rule was issued in 2007, and now the FASB and the IASB follow the same accounting in this area. Conversely, the IASB has completed work on rule related to borrowing costs, which will result in accounting consistent with U.S. GAAP. Long-term convergence projects relate to such issues as revenue recognition, the conceptual framework, and research and development costs.
You can access more information regarding specific topics of the convergence under the "Convergence" link on the left navigation bar.
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