Ten Years On, Convergence Movement Starting to Wane

It's been a decade since the Norwalk Agreement officially set in motion the massive effort to converge U.S. and international accounting rules, yet the 10th anniversary of the agreement passed with hardly a notice.

Not a single dignitary took to a podium to praise the achievements of the Financial Accounting Standards Board and the International Accounting Standards Board to eliminate the massive differences that existed in 2002 between U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. Instead, it appears the movement may be waning as the two boards wind down a handful of major projects and prepare to focus on other agendas going forward.

“Frankly, I think many people are starting to get tired of convergence, on both sides of the ocean,” says David Schmid, PwC's international accounting leader in the United States. “The past 10 years shows this is an exceedingly difficult and slow process.”

FASB Chairman Leslie Seidman says the board is as committed to convergence as ever, but evolving in how it pursues the endeavor. Rather than working solely with IASB, FASB also hopes to connect more with other global regulators in major capital markets, much the way it worked recently with the European Financial Reporting Advisory Group to develop a framework to govern disclosure requirements. “The work we have done [on the disclosure framework] we think gives all standard setters around the world an opportunity to look at it and think about it and hopefully move forward with more coordinated next steps,” she says.

IASB member Paul Pacter says the IASB is no longer making convergence with U.S. GAAP a priority. “We've gotten some pushback from the 100 or so countries that are using IFRS asking us why are we converging with just one country,” he says. “Going forward, our philosophy will not be convergence with just the United States, but bringing all the key players from around the world into a single standard.”

It was only a two-page memo following a September 2002 joint meeting of the two boards that gave the accounting profession its new convergence parlance, even though the agreement itself never used the word “convergence.” The two boards agreed they would work together to develop “high-quality, compatible accounting standards” that would work in both domestic and cross-border financial reporting.

The process never really worked as originally envisioned, however, says Jack Ciesielski, owner of investment research firm R.G. Associates. “Back then, the optimistic view was that agreement on all aspects of the joint projects would be much easier to come by, and that's certainly not turned out to be the case,” he says.

Off to a Good Start

The two boards hit on some early success, producing consistent approaches to the accounting for share-based payments, such as stock options, and on business combinations. Each board made some individual changes as well to make their own rules more like the others, says Wendy Hambleton, a partner with BDO USA. “IASB changed its approach to borrowing costs to make it very similar to GAAP, and FASB changed research and development in business combinations to make it more converged with IFRS,” she says.

The process was fruitful in the early years, says IASB member Patricia McConnell, because board members at that time shared a similar understanding of the importance of following a conceptual framework and had a more common view than today's board members on the extent to which financial statements should reflect current market value, or fair value, rather than historical costs. Also important, says McConnell, “Initially, no one had to use IFRS, so that put them in a much less political environment where it was much easier to get things done.” That changed, she says, when the European Union began mandatory application of IFRS in 2005, causing an entire new constituency to sit up and pay closer attention to discussions about change.

The Securities and Exchange Commission took a bold step in 2007 when it eliminated the requirement for companies reporting under IFRS as issued by IASB to reconcile their financial statements to GAAP. “When that happened, it felt like convergence was this train moving at 100 mph,” says Gary Illiano, partner-in-charge of international and domestic accounting at Grant Thornton. Then came the financial crisis of 2008 and the recession in its wake. “It felt like the train slowed to a crawl, but it was still muddling along,” he says.

“Frankly, I think many people are starting to get tired of convergence, on both sides of the ocean. The past 10 years shows this is an exceedingly difficult and slow process.”

—David Schmid,

International Accounting Leader,

PwC

With that era, the financial reporting world got a stark view of how the accounting standards worked when the system was in crisis, says Ciesielski. Both boards fell under intense pressure to ease rules in ways that would prop up the balance sheets of faltering financial institutions. “The financial crisis may have had a silver lining,” he observes. It brought to light the differences in how the two boards and their vast constituencies viewed the problems “and the difficulties, if not impossibilities, of bridging them.”

The boards began whittling down where they would channel their efforts, from a dozen projects considered essential to converged financial reporting to ultimately four that remain the core focus today—revenue recognition, leasing, financial instruments, and insurance. The boards are close to issuing new proposals on revenue recognition and leasing that would represent dramatic change from existing rules to a converged approach. The boards are farther apart, however, on financial instruments and still have some issues to resolve on insurance. With respect to financial instruments, they agree on classification and measurement, but have parted ways in recent months on how to “impair” or write down the value of troubled financial instruments, and how to account for derivatives.

Bumps in the Road

Under the current economic environment, and with considerable personnel changes over the years on both boards—including the retirements of both chairmen—difficulty is inevitable, says Joel Osnoss, global IFRS leader at Deloitte & Touche. “With so many moving parts, and so many people who are so passionate about this, it does take a long time to get done,” he says. “Unfortunately, it's taking longer than anyone hoped.”

Despite various setbacks, the process has produced several positive outcomes, many accounting experts say. “We have made a significant amount of progress with IASB over the last 10 years to significantly improve the comparability of entities who report under U.S. GAAP and IFRS,” says Seidman.

NORWALK AGREEMENT

Below is an excerpt from 2002's Norwalk Agreement reached by FASB and IASB on the issue of convergence:

To achieve compatibility, FASB and IASB agree, as a matter of high priority, to:

A. Undertake a short-term project aimed at removing a variety of individual differences between U.S. GAAP and International Financial Reporting Standards (IFRSs, which include International Accounting Standards, IASs);

B. Remove other differences between IFRSs and U.S. GAAP that will remain at January 1, 2005, through coordination of their future work programs; that is, through the mutual undertaking of discrete, substantial projects which both boards would address concurrently;

C. Continue progress on the joint projects that they are currently undertaking; and,

D. Encourage their respective interpretative bodies to coordinate their activities.

The boards agree to commit the necessary resources to complete such a major undertaking.

The boards agree to quickly commence deliberating differences identified for resolution in the short-term project with the objective of achieving compatibility by identifying common, high-quality solutions. Both boards also agree to use their best efforts to issue an exposure draft of proposed changes to U.S. GAAP or IFRSs that reflect common solutions to some, and perhaps all, of the differences identified for inclusion in the short-term project during 2003.

As part of the process, IASB will actively consult with and seek the support of other national standard setters and will present proposals to standard setters with an official liaison relationship with IASB, as soon as is practical.

The boards note that the intended implementation of IASB's IFRSs in several jurisdictions on or before January 1, 2005, require that attention be paid to the timing of the effective dates of new or amended reporting requirements. The boards' proposed strategies will be implemented with that timing in mind.

Source: FASB.

Osnoss sees another important benefit: “The product has gotten better over the years,” he says. “The tension between IASB and FASB to a certain degree has been good.”

Convergence forced multinational companies in particular to take a hard look at their systems, says Gary Kabureck, chief accounting officer at Xerox. “We have a greater global understanding of business and accounting issues than we ever would have had without the Norwalk Agreement,” he says. When it appeared imminent that U.S. companies would eventually cut over to IFRS, companies did “deep internal dives” to get a better idea of what such an adoption might mean operationally. He says it was analogous to the early years of implementing the Sarbanes-Oxley Act—a lot of work companies wouldn't have undertaken voluntarily but that proved valuable as learning exercises.

“If nothing else, it's heightened our appreciation for the fact that it makes all the sense in the world to try to have similar or the same standards for public companies throughout the world,” says Dan Noll, director of accounting standards at the American Institute of Certified Public Accountants. “It emphasizes that we have to keep trying.”

One Set of Standards?

Even if efforts continue, convergence of the rules doesn't answer how they will be enforced, says Hambleton. “You might have identical standards, but that doesn't guarantee you will have the exact same application,” she says.

How far the accounting standard setters will go to eliminate other differences is still an open question. Both boards have said their efforts to work jointly are not practical as a long-range approach. Chris Wright, managing director at Protiviti, is hopeful that implementation of the emerging core standards on revenue recognition and leasing might make it easier to tackle remaining differences. “The list of objectives is clear, but less clear is the time frame,” he says.

It makes sense, says Kabureck, that both boards need to turn some attention to issues within their own rulebooks that were deferred as they focused on the current core projects. “In the long run, I continue to believe there will be one set of high-quality global accounting standards and these will be issued by IASB,” he says. “I am not sure of when, but I believe it is inevitable.”

Ken Marshall, a partner with Ernst & Young and leader of the firm's financial accounting advisory services in the Americas, says he expects convergence to continue, even if not along a formal plan or agenda. “It's very hard to imagine a world in which the two largest standard setters in the world go off and pursue their own agendas without having an eye on what the other is doing,” he says.

It will happen ultimately, says Hambleton, when capital markets start pushing for it, for example by providing more favorable pricing based on which accounting standard is at play. “That's what will drive convergence,” she says.