The Convergence of Standards: The Impact on Businesses
The Convergence of Standards: The Impact on Businesses
Over the past decade, business professionals have been working on formulating standards to merge the principles that U.S. GAAP and iGAAP find essential in the accounting profession. This is known as "the convergence"; it will allow industries and companies to be comparable internationally, giving these companies prospects of growth.
On September 18, 2002, FASB and IASB put in writing their pledge to put their best efforts towards making their separate financial reporting standards fully compatible. This document is known as, "The Norwalk Agreement". On October 29th of 2002, the first "Memorandum of Understanding" (MoU) marked the initial step to formalizing the pledge for convergence of U.S. and international accounting standards, principles, and concepts. This MoU provided the three principles of how the organizations will reach convergence of accounting standards, eliminate the differences between the two standards, and serve the needs of investors worldwide. These are six different influences that will help perfect the goals of the FASB and IASB: 1) joint projects being conducted between FASB and the IASB, 2) the short-term convergence project, 3) liason IASB member on site at the FASB offices, 4) FASB monitoring of IASB projects, 5) the convergence research project, and 6) explicit consideration of convergence potential in all Board agenda decisions. Their first priority for the joint program was to have a specific outline by 2008 of potential deadlines; with this they will be able to get a good read on the length of time this step in the convergence will take. In 2002, it was well-known that with the volume of differences between the accounting standards, convergence would be a project going well past the latter part of the decade.
The convergence of the US and international accounting standards will improve international businesses comparability of financial statements, while also generating solutions to existing and future accounting issues. The chairman of the FASB, Robert H. Hertz said that by working on the short term convergence project with IASB, there will be a clear path forward for working together to achieve their common goal. The chairman of the IASB, Sir David Tweedie, has similar thoughts of the project, that it is a "significant step in our partnership" and that "the world's capital markets will have a set of global accounting standards that investors can trust."
For a while non-U.S. companies were required to reconcile their statements with FASB standards if they wanted to be registered in the United States. The SEC recently removed this requirement, and now the companies may use their statements compliant with IASB's standards in the United States. This was a big move for the SEC; many more countries will be able to access capital more efficiently in the major economies throughout the world.
The impact on companies may be difficult at first, to work through the changes and get all of the employees educated on the new standards. According to PricewaterhouseCoopers, they believe the changes will influence shareholder's communications and concerns about the business, affect contractual agreements, and prompt a reassessment of the adequacy of systems and operations, including human and other capital resources. It will undoubtedly be expensive, therefore training and budgeting need to be considered.
PricewaterhouseCoopers also recommends that companies begin studying the implications on their business directly, and mapping out a course of action. Starting to get things together now is the key; if businesses wait too long, then they will have to pay the consequences later on. They need to develop a complete understanding of each project of the FASB and IASB, and its impact to the business. The projects that impact the business should be considered with enough time to adopt each standard by effectively analyzing the implications of the standards and plan for implementation.
According to KMPG, preparing for convergence may be as significant a challenge as a full IFRS conversion. They take into consideration the abstract means of the convergence: what the convergence agenda means, what companies should consider doing, and the opportunities convergence brings. The start to all preparations for change is awareness.
In November 2009, FASB and IASB demonstrated their shared commitment to convergence by establishing a comprehensive work plan to complete their joint projects by June 2011. This projected date corresponds with the year in which the SEC is expected to make a date certain decision about IFRS conversion. Instead of meeting every four months, they have agreed to meet every month addressing key convergence issues, so that they can meet this deadline. The boards have agreed to maintain a high degree of transparency to the public about convergence progress by publishing progress reports of planned convergence milestones.
The convergence is a big step that the accounting profession must adhere to in order to be internationally compliant and of course relevant and reliable for investors. Awareness and education are booming in the United States and other countries through higher education and the public realm. Now all there is to do is wait for FASB and IASB to finish their project, and continue to have a great alliance producing necessary accounting standards.
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