Discussion 8 - IFRS vs GAAP

IFRSvsGAAPglobally1.pdf

Home >Business & Finance homework help >Discussion 8 - IFRS vs GAAP

�4▾InternationalConvergence The Urge to Converge and Wherefore IFRS?

Clearly, the growth of cross-border investing and capital flows and a growing endorsement of international stan- dards in many parts of the world mean that, on the one hand, the U.S. cannot go it alone in terms of develop- ment of accounting standards and, on the other hand, the development of international accounting standards across the major capital markets of the world requires that the U.S. be a very active participant in the process, for there can be no truly international accounting stan- dards if the largest capital market in the world, the U.S., is not part of their development.1

As I briefly discussed in Chapter 2 international convergence between accounting principles generally accepted in the United States (U.S. GAAP) and International Financial Reporting Standards (IFRSs) was one of the three strategic objectives we pur- sued following my joining the FASB in 2002. However, the ques- tion was, “How should we pursue this objective?” There were

1. Robert H. Herz in a November 5, 2002, speech at the Financial Executive International’s annual conference on Current Financial Reporting Issues.

113Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 6/24/2019 8:07 PM via CAL POLY POMONA AN: 1353291 ; Herz, Robert H..; More Accounting Changes : Financial Reporting Through the Age of Crisis and Globalization Account: s7451117

many possibilities. For example, should it be a unilateral effort on the part of FASB to try to move U.S. standards toward the existing international standards? Should we try to get the International Accounting Standards Board (IASB) to consider moving its stan- dards toward U.S. GAAP? Should we try to agree on some sort of bilateral program of convergence between the two boards? If so, should it mainly involve trying to converge our existing stan- dards, or should it look more to developing new joint standards?

What Does the Law Require?

Here, I believe the wording in Section 108 of the Sarbanes-Oxley Act of 2002 (SOX) provided some guidance in addressing these questions. That section of SOX stipulates that, among other activ- ities, the designated U.S. standard setter “considers, in adopting accounting principles … the extent to which international conver- gence on high quality accounting standards is necessary or appro- priate in the public interest and for the protection of investors.” There are a number of important words and phrases in this clause, including “considers,” “extent to which,” “high quality accounting standards,” and “in the public interest and for the protection of investors.” Clearly, although the language in Section 108 requires the U.S. accounting standard setter to consider international con- vergence as part of its standard-setting activities, it does not require the achievement of international convergence. Rather, it requires the U.S. standard setter to consider the merits of conver- gence. In doing so, it places that consideration in the context of the standards being of high quality and necessary or appropriate to the public interest and for the protection of investors. Because this is U.S. law that applies to the Securities and Exchange Commission (SEC) and any standard setter the SEC designates as a source of authoritative U.S. GAAP for SEC registrants, it seems that the words “in the public interest and for the protection of investors” should be considered in the U.S. context (i.e., in the con- text of the U.S. public interest and for the protection of U.S. inves- tors). Of course, that does not mean that international convergence

114 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

and the resulting converged standards could not also be a good thing in the broader context of global investors and international capital markets. They could be good both for the United States and internationally.

Views of Standard Setters on International Convergence

Beyond that, the words in SOX do not appear to specify how the U.S. standard setter should go about its consideration of the merits of international convergence. That would appear to be left to the standard setter, with oversight from the SEC. In that regard, both the SEC and FASB and the Financial Accounting Foundation (FAF) had publicly supported the goal of developing a single set of high-quality international accounting standards. In 1999, the FASB and FAF had issued International Accounting Standard Setting: A Vision for the Future. Although clearly supporting the objective of a single set of high-quality accounting standards, it also conveyed the FASB’s and FAF’s intention to maintain a lea- dership role in standard setting to ensure that the standards used in the U.S. capital markets, whether developed by the FASB or an international body, would be of the highest possible quality. That document also identified what the FASB and the FAF viewed as essential functions and characteristics of a high-quality global accounting standard-setting organization. The document identi- fied a set of eight essential functions that the FASB and FAF believed should be embodied by a high-quality international accounting standard setter:

1. leadership,

2. innovation,

3. relevance,

4. responsiveness,

5. objectivity,

International Convergence 115Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

6. acceptability,

7. understandability, and

8. accountability.

It also identified a set of minimum characteristics needed for an international accounting standard setter to achieve the eight essen- tial functions, including having an independent decision-making body, adequate due process, adequate staff, independent fund- raising, and independent oversight. As noted in the introduction to the document

Financial reporting and accounting standard setting are not immune to the changing times. We are beginning to see the emergence of a truly international accounting system — the emergence of international-level organiza- tions and cooperative ventures among national organi- zations in the areas of accounting standard setting and financial statement preparation, auditing, regulation, and analysis — to deal effectively with the merging of national and international financial reporting issues.

The FASB-FAF document was issued at a time when the future structure of international accounting standard setting was under broader discussion. The International Accounting Standards Committee (IASC), which since its establishment in 1973 had developed and promulgated a set of international accounting stan- dards, had formed a Strategy Working Party in 1997 to develop recommendations on potential changes and reforms to the existing IASC structure and process. In December 1998, that group issued a discussion paper, Shaping IASC for the Future, proposing a number of reforms to the IASC structure and process. There was also ongoing discussion between major capital markets securities regulators, most notably the SEC and the European Commission, regarding the structure and process for international accounting standard setting. All of this ultimately led to the establishment in 2000 of the new IASB and its oversight body of independent

116 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

trustees that reflected a number of the ideas set forth in the 1999 FASB-FAF document on the future of international accounting standard setting.

As previously discussed, I was one of the members of the IASB when it commenced operations in 2001. A key element of our strategy was to promote and facilitate international convergence of accounting standards by working with the national accounting standard-setting bodies of major countries. In appointing the initial members of the IASB, the IASC trustees designated seven of the new Board members to act as official liaisons to the national standard-setting bodies of Australia and New Zealand, Canada, France, Germany, Japan, the United States, and the United Kingdom. The role of each of these liaison members was to enhance cooperation between the IASB and the national standard setter. Jim Leisenring, who had been a long-time FASB staff and Board member, was appointed as the IASB liaison with the FASB.

For its part, consistent with the 1999 FASB-FAF vision docu- ment, the FASB recognized that as the accounting standard setter for the world’s largest capital market and the largest national economy in the world, its support of, and participation in, interna- tional convergence efforts were important and made sense both in the context of the United States and to the goal of achieving a single set of high-quality international accounting standards. Following the establishment of the IASB (and prior to my joining the FASB), the FASB formed an internal strategic planning group to evaluate how best the Board and staff could work with the new IASB. One result of that effort was that in 2001, the FASB revised its operating procedures to require, in addition to the existing criteria for evaluating potential agenda projects, assessment of the extent to which a potential new project would provide opportu- nities for convergence with the IASB and other national standard setters.

Very importantly, the strategic planning group also concluded that the best way to maximize the FASB’s ability to both simulta- neously meet its U.S. responsibilities and participate in interna- tional convergence in a meaningful way would be through trying

International Convergence 117Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

to coordinate the agendas of the FASB and the IASB as much as possible and, as appropriate, to try to undertake joint projects with the IASB. By doing so, the FASB might be able to both improve U.S. standards and achieve convergence between U.S. GAAP and internationals standards. In cases when it was not possible to undertake a project jointly, the FASB would decide on a case-by-case basis whether other methods of international cooperation might be feasible and desirable. For example, in the case of projects on the FASB’s agenda but not on the IASB’s agenda, the FASB could specifically seek input from the IASB, and vice-versa.

Additionally, and as part of the cooperative arrangements between the IASB and its partner standard setters, including the FASB, a framework for monitoring IASB projects was established. From the FASB’s perspective, monitoring of IASB projects could help the FASB better consider international perspectives in its pro- jects, would facilitate earlier identification of possible areas of con- vergence and divergence with international standards, and could enhance FASB staff knowledge of international standards and help strengthen relationships between the staffs of the two boards. Accordingly, when the initial monitoring assignments were made, FASB staff were assigned to monitor a number of the IASB’s projects.

There was also agreement among the various partner standard setters to monitor the activities of the IASB’s International Financial Reporting Interpretations Committee (IFRIC) to try to promote convergence between the guidance promulgated by IFRIC and interpretative guidance issued by national interpretive bodies, such as the Emerging Issues Task Force (EITF) in the United States, through cross-monitoring between IFRIC and the national interpretative bodies. That would be particularly impor- tant in the case of converged standards in order to avoid divergence in application of such standards. However, it was also recognized that there might well be differences in interpretations and application guidance in cases when the national standard and IFRSs were not converged.

118 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

The Norwalk Agreement

All these matters had been discussed and agreed between the FASB and the IASB and with and between the major national stan- dard setters by the time I joined the FASB in July 2002 and before the passage of SOX. However, I believe my arrival at the FASB and our strategic planning discussions that summer lent extra momentum to the cooperative efforts between the FASB and the IASB. In September 2002, the two boards held their first joint meeting in the FASB’s office in Norwalk, CN. At that meeting, the FASB and the IASB both publicly affirmed their commitment to developing high-quality, “compatible” accounting standards that could be used for both domestic and cross-border financial report- ing. Both boards also committed to using their best efforts to make their standards compatible as soon as practicable and, once achieved, to work to maintain the compatibility of those stan- dards. Following the meeting, in October 2002, the FASB and the IASB issued a Memorandum of Understanding (MoU), referred to as the Norwalk Agreement (Exhibit 4.1), formally docu- menting their mutual commitments to work together in develop- ing high-quality compatible accounting standards.2 The Norwalk Agreement focused on four key points: (1) eliminating a number of targeted differences between existing U.S. GAAP and IFRSs, (2) coordinating the future agendas of the two boards, (3) continu- ing the existing joint projects and undertaking new ones on “sub- stantive” topics, and (4) encouraging coordination of activities between the EITF and IFRIC. In a joint FASB and IASB news release, we commented on the need for such a partnership

Robert H. Herz, Chairman of the FASB, commented, “The FASB is committed to working toward the goal of producing high-quality reporting standards worldwide

2. Financial accounting standards board and the international accounting standards board memorandum of understanding at www.fasb.org/cs/BlobServer?blobkey=id&blobwhere= 1175819018817&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs and reprinted as Exhibit 4.1 of this chapter.

International Convergence 119Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.sec.org

to support healthy global capital markets. By working with the IASB on the short-term convergence project — as well as on longer-term issues — the chances of success are greatly improved. Our agreement provides a clear path forward for working together to achieve our common goal.”

Hailing the agreement, Sir David Tweedie, Chairman of the IASB, remarked, “This underscores another signifi- cant step in our partnership with national standard set- ters to reach a truly global set of accounting standards. While we recognize that there are many challenges ahead, I am extremely confident now that we can elimi- nate major differences between national and interna- tional standards, and by drawing on the best of U.S. GAAP, IFRSs and other national standards, the world’s capital markets will have a set of global accounting standards that investors can trust.”3

EXHIBIT 4.1

The No rwa l k Ag reement

Memorandum of Understanding

“The Norwalk Agreement”

At their joint meeting in Norwalk, Connecticut, USA on September 18, 2002,

the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) each acknowledged their commitment to the development of high-quality, compatible accounting standards that could

be used for both domestic and cross-border financial reporting. At that meet- ing, both the FASB and IASB pledged to use their best efforts to (a) make their

3. October 29, 2002, news release FASB and IASB Agree to Work Together toward Convergence of Global Accounting Standards.

120 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

existing financial reporting standards fully compatible as soon as is practicable and (b) to coordinate their future work programs to ensure that once

achieved, compatibility is maintained.

To achieve compatibility, the FASB and IASB (together, the “Boards”) 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 pro- grams; 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 undertak-

ing; 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 compatibil-

ity 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, the IASB will actively consult with and seek the support of other national standard setters and will present proposals to standard set-

ters with an official liaison relationship with the 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.

International Convergence 121Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

The September 2002 meeting was the first of what were to become many joint public meetings between the two boards. At first, the meetings were held twice per year for two or three days at a time. Then, in 2006, that was expanded to three times per year; beginning in October 2009, the boards started meeting jointly virtually every month and sometimes multiple times during a month, either in person or via teleconference. Additionally, the boards held numerous joint public roundtables and other meet- ings, and there were frequent meetings between groups of board members and staff on joint projects.

My recollection about the particular wording of the Norwalk Agreement is that the word compatible accounting standards, instead of joint, converged, or common accounting standards, was used in recognition that what mattered most was that the standards should result in the same or similar financial reporting outcomes. I think it also recognized the practical challenges in pro- ducing identical standards. Nevertheless, the objective was refined at our joint meeting in April 2004 when the boards agreed that, ideally, any major future accounting standards should be devel- oped together, with the objective of the FASB and the IASB issuing the same or very similar standard.

Short-Term Convergence Projects

The first aspect of the Norwalk Agreement involved the boards undertaking a number of projects aimed at removing a variety of specific, more narrow differences between U.S. GAAP and IFRSs. They were dubbed short-term convergence projects, reflecting the belief at the time that they could be completed relatively rapidly. Although the areas included in the these projects did not represent major areas for potential joint projects between the two boards, they nevertheless presented challenges to those using, preparing, auditing, or regulating cross-border financial reporting.

The approach to removing the differences in each area generally involved trying to select between the existing U.S. GAAP and IFRSs treatments of the item in question to decide which provided

122 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

the higher quality accounting. Thus, for example, if it was decided that IFRSs treatment was superior, then the FASB would propose changing U.S. GAAP to adopt the IFRSs approach, and vice-versa.

So, toward the end of 2002, the FASB and the IASB began delib- erating a number of narrow differences. Initially, the FASB focused on potential changes to U.S. GAAP in the following areas: balance sheet classification, exchanges of nonmonetary assets, inventory costs, earnings per share, and voluntary changes in accounting policies. The IASB started looking at potential changes to IFRSs in the areas of discontinued operations, restructuring costs and termination benefits, and postemployment benefits. The boards decided to jointly address a number of specific differences between their income tax accounting standards.

As a result of this effort, the FASB issued standards changing U.S. GAAP for certain aspects of inventory costs (FASB Statement No. 151);4 exchanges of nonmonetary assets;5 and changes in accounting principles and error corrections.6 In 2007, the FASB issued FASB Statement No. 159,7 allowing a fair value option in accounting for financial assets and financial liabilities, similar to that in IFRSs. With regard to balance sheet classification, consid- eration of those issues was moved into the major project on finan- cial statement presentation. As the Board deliberated the issues relating to earnings per share, it became apparent they were more complex and numerous than had been expected when the short- term project was added to the FASB’s agenda, resulting in the FASB issuing exposure drafts with proposed changes in 2003, 2005, and 2008. Further consideration of these issues was put on hold pending completion of major joint convergence projects.

4. Inventory Costs — An amendment of ARB No. 43, Chapter 4, issued in 2004 and now codi- fied in FASB Accounting Standards Codification [ASC 330]. 5. FASB Statement No. 153, Exchanges of Nonmonetary Assets — An amendment of APB Opinion No. 29, issued in 2005 and now codified in FASB ASC, 845. 6. FASB Statement No. 154, Accounting Changes and Error Corrections — A replacement of APB Opinion No. 20 and FASB Statement No. 3, issued in 2005 and now codified in FASB ASC 250, Accounting Changes and Error Corrections. 7. The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 15, which is now codified in FASB ASC 825, Financial Instruments.

International Convergence 123Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

For its part, in 2004, the IASB issued IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, amending its require- ments relating to discontinued operations, and amendments to International Accounting Standard (IAS) 19, Employee Benefits, that brought IFRSs closer to U.S. GAAP in certain areas relating to the accounting for pensions and other postretirement benefits. The IASB also made significant changes to its standard on segment reporting by issuing IFRS 8, Operating Segments, in 2006, which essentially adopted the U.S. approach to segment reporting. The IASB also amended IAS 23, Borrowing Costs, its standard relating to capitalization of borrowing costs, and in May 2011, it issued IFRS 11, Joint Arrangements, that aligns the accounting for joint ventures under IFRSs with that under corresponding U.S. GAAP.

Achieving convergence between U.S. GAAP and IFRSs on accounting for income taxes proved to be quite challenging. Although the basic approach to accounting for income taxes is the same under both sets of standards, that is, comprehensive deferred tax accounting for all temporary differences between reported amounts in the financial statements and in tax returns, both the U.S. standard — FASB Statement No. 1098 — and the IFRS stan- dard — IAS 12, Income Taxes — contain a number of exceptions to the basic approach, but the exceptions are not the same. The boards deliberated these differences for several years, tentatively agreeing on a common approach to dealing with some, but not all, of them. The effort to converge was further complicated by the FASB needing to address, at the request of the SEC staff, issues relating to accounting for uncertain tax positions. That FASB project resulted in the issuance of FASB Interpretation No. 48.9

Although FASB Interpretation No. 48 resulted in greater clarity and consistency in accounting under U.S. GAAP for uncertain tax positions, the approach is quite different than that under IFRSs. Accordingly, in 2009, both boards put this project on hold and

8. Accounting for Income Taxes, which is now codified in FASB ASC 740, Income Taxes. 9. Accounting for Uncertainty in Incomes Taxes — An interpretation of FASB Statement No. 109, issued in December 2006 and now codified in FASB ASC 740.

124 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

discussed whether a better course of action might be to undertake a major joint project to more comprehensively reconsider the accounting for income taxes. However, no action was taken on this matter by either board or as a new joint project.

In summary, although the short-term convergence projects resulted in eliminating or narrowing differences between U.S. GAAP in a number of areas, several of them proved to be more complicated and a lot less short-term than originally envisaged. Moreover, constituents of both boards, particularly preparers of financial statements, very understandably questioned the cost and benefit of making such changes to accounting standards that, although seemingly narrow, required companies to make poten- tially costly changes to their financial data systems and processes. As I will discuss further in connection with the 2006 FASB-IASB MoU, we concluded that a better approach would be to focus on achieving convergence through the boards working together to develop common standards on broader areas of accounting.

Undertaking Major Joint Projects

In that regard, at the April 2004 joint meeting, the boards agreed to undertake three major joint projects: business combinations, revenue recognition, and financial reporting by business enter- prises (later renamed financial statement presentation).

Trying to achieve common accounting for business combina- tions was viewed by the boards as a priority, given the increasing importance of cross-border mergers and acquisition activity. Differences between U.S. GAAP and IFRSs in this area were also the most frequent cause of reconciling items reported in SEC Form 20-F filings by foreign registrants. The boards had already begun coordinating their work in this area. In 2001, the FASB had issued major standards on accounting for business combinations and accounting for goodwill and other intangible assets10 that

10. FASB Statement No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, which is now codified in FASB ASC 350, Intangibles — Goodwill and Other.

International Convergence 125Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

eliminated the pooling-of-interests method and generally required all business combinations to be accounted for under the purchase method. Similarly, in 2001, the IASB started work on a project that would eliminate use of the pooling method in favor of the acquisi- tion (purchase) method and to amend its standards on accounting for intangible assets. (The IASB completed that project in 2004 by issuing IFRS 3, Business Combinations, and amendments to its stan- dards on intangible assets and impairment of long-lived assets.) At the April 2004 joint board meeting, the boards agreed to try to develop common standards on purchase method procedures (i.e., on how to apply purchase accounting) and the related area of accounting for noncontrolling interests (what were generally called minority interests in the United States). That joint project resulted in the issuance of new standards in December 2007 by the FASB (FASB Statement No. 141 [revised 2007]),11 and No. 160,12

and similar standards by the IASB. Although not fully converged, the accounting for business combinations and noncontrolling interests under U.S. GAAP and IFRSs is now much more closely aligned on a major subject of great importance to companies all around the world and to cross-border investing and capital flows.

Revenue recognition was another natural candidate for a joint project. Revenue is arguably the most important line item in the financial statements of most companies, so it made sense to try to converge standards in this area. Additionally, the existing rev- enue recognition standards in both U.S. GAAP and IFRSs were viewed as requiring improvement. U.S. GAAP had extensive and very detailed revenue recognition guidance covering specific industries and particular transactions and arrangements, but the guidance was developed piecemeal over many decades and resulted in inconsistent reporting for economically similar transac- tions. In contrast, IFRSs only contained high-level guidance on revenue recognition that also resulted in inconsistent reporting.

11. Business Combinations, which is now codified in FASB ASC 805, Business Combinations. 12. Noncontrolling Interests in Consolidated Financial Statements — An amendment of ARB No. 51, which is now codified in FASB ASC 810.

126 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Accordingly, the boards worked together since 2005 to develop a joint standard aimed at improving the consistency and compar- ability of reporting across a broad variety of revenue transactions. To that end, the boards issued a joint discussion paper, Preliminary Views on Revenue Recognition in Contracts with Customers, on rev- enue recognition in December 2008 and a joint exposure draft, Revenue from Contracts with Customers, of a comprehensive stan- dard on revenue recognition in June 2010, a revised exposure draft with the same title in November 2011, and, ultimately, as dis- cussed later in this chapter, converged standards in 2014.

Both boards had also been working on projects on financial perfor- mance reporting prior to 2004, in the IASB’s case in conjunction with the United Kingdom Accounting Standards Board. The April 2004 decision to conduct a joint project in this area reflected a recognition that it would be important to try to achieve both improvement and international convergence in the form, format, and content of the pri- mary financial statements. Differing formats across the world in, for example, the income statement, hampered international comparabil- ity, and perceived deficiencies in the organization and level of aggre- gation in the financial statements were viewed as contributing to the growing use of pro forma presentations by companies and requests for different reporting formats and more disaggregated information by professional users of financial statements. Accordingly, the boards decided to rename this project Financial Statement Presentation. This project resulted in the issuance of a joint discussion paper, Preliminary Views on Financial Statement Presentation, in October 2008. The boards had been working toward publishing a comprehensive exposure draft of a proposed standard on financial statement presentation, but that was put on hold as the boards work toward completing other major joint projects. In the meantime, they have been working to improve and converge their respective financial statement presenta- tion requirements relating to reporting of discontinued operations and to reporting of comprehensive income, issuing converged stan- dards on the second of these in FASB ASC No. 2011-05, June 2011, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. More recently, both boards have been (separately) begun looking at aspects of reporting on financial performance.

International Convergence 127Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

In addition to full joint projects, the boards also undertook what we termed modified joint projects. Under this approach, one board took the lead in a project, developing and issuing a discussion paper for public comment describing that board’s preliminary views on the subject. Then, based on the work to date and consti- tuent input, the other board would decide whether to join the pro- ject such that it would then become a full joint project through the development of a common exposure draft and, ultimately, a com- mon final standard. Two projects were designated as modified joint projects: accounting for insurance contracts, which the IASB was already working on, and distinguishing liabilities from equity, which the FASB was already working on. Both of these projects would later become full joint projects between the boards, with the project on accounting for insurance contracts an ongoing joint project and the project on distinguishing liabilities from equity, which was renamed as the project on accounting for finan- cial instruments with characteristics of equity, currently in inactive status as the boards focused on completing other major joint projects.

The 2005 SEC Staff “Roadmap” and the 2006 FASB-IASB MoU

Starting in 2005, listed companies in the European Union and in several other countries began having to prepare their consolidated financial statements using IFRSs. The fact that IFRSs was now being used by thousands of companies around the world, many of them major publicly traded multinationals, enhanced the credibility of IFRSs as an international standard and added impetus to calls for its adoption in other countries. The European laws adopting IFRSs allowed for continued use of U.S. GAAP through 2009 by U.S. com- panies and their European subsidiaries raising capital in the European capital markets. However, the reverse was not true in the United States because the SEC required all foreign registrants in their Form 20-F filings either to use U.S. GAAP or, if they used another set of accounting standards in preparing their financial

128 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

statements, to reconcile the net income and stockholders’ equity reported in those financial statements to U.S. GAAP.

Those requirements were aimed at, among other considerations, providing U.S. investors with more comparable financial informa- tion relating to companies whose securities are traded in U.S. capi- tal markets. However, it was also perceived as creating an uneven playing field by some in Europe who began to question this nonre- ciprocal treatment whereby U.S. GAAP was allowed to be used in Europe, at least for the time being, but IFRSs, Europe’s new stan- dard, was not allowed in the United States. A near-term leveling of the playing field might be accomplished by the European authorities requiring U.S. companies and their subsidiaries to use IFRSs or reconcile their U.S. GAAP financial statements to IFRSs or by the SEC eliminating the Form 20-F requirements to use U.S. GAAP or reconcile to it for foreign registrants that prepared their financial statements using IFRSs.

The expanding use of IFRSs, both by foreign registrants filing with the SEC and other major corporations around the world, coupled with the uneven playing field issue being asserted in Europe, provided both a challenge and an opportunity for the SEC in fulfilling its mandate in terms of U.S. investors and capital markets and its long-stated support for the development of a single set of high-quality international accounting standards. Those challenges and opportunities and the changing international landscape of financial reporting were addressed by SEC Chief Accountant Don Nicolaisen in an April 2005 article in the Northwestern University Journal of International Law and Business.13 It laid out what became referred to as the SEC staff “roadmap” (Figure 4.1). It was not a “roadmap” for adoption of IFRSs in the United States or for complete convergence between U.S. GAAP and IFRSs. Rather, it laid out a process and set of con- ditions and related activities for the SEC staff to consider whether recommending to the SEC elimination of the reconciliation requirements for foreign registrants using IFRSs. These conditions

13. Nicolaisen (2005).

International Convergence 129Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

included the continued progress by the FASB and the IASB in their convergence efforts; review by the SEC staff of the quality and consistency of implementation of IFRSs by foreign registrants; and continued education and sharing of IFRSs implementation experiences among investors, practitioners, standard setters, regulators, and others. The “roadmap” also contained a possible

The infrastructure (standard setting, application, interpretation, regulation, etc...) needed to keep IFRS viable and functioning effectively is and remains in place. The IASB and FASB carry out work to

enable convergence between IFRSs and U.S. GAAP.

Investors in Europe and elsewhere gain additional knowledge about and experience with IFRSs.

SEC staff works to identify changes which will be necessary to SEC rules upon elimination of U.S. GAAP reconciliation requirement.

SEC staff reviews faithfulness and consistency of foreign private issuer 2005 IFRSs financial statements and the accompanying reconciliations to U.S. GAAP.

SEC staff reviews the status of IFRS and U.S. GAAP convergence work.

SEC staff decides whether and when it is in a position to recommend to the Commission that it eliminates the IFRSs to U.S. GAAP reconciliation requirement.

Companies in Europe and elsewhere apply IFRSs.

Start

2002 and beyond

2005 and beyond

2005, 2006, 2007

2006– 2007

2006

2007

2007, 2008, 2009 2009; or

possibly sooner

Finish

Investors, practitioners, auditors, standard setters, regulators, and others share IFRS implementation experiences.

Approximately 300 foreign private issuers are expected to file with the SEC their 2005 financial statements prepared using IFRSs.

SEC staff discusses the implications of its review of 2005 IFRS filings and accompanying reconciliations to U.S. GAAP with investors, practitioners, auditors, standard setters, regulators, and others.

SEC staff reviews faithfulness and consistency of additional foreign private issuer IFRSs financial statements and accompanying reconciliations to U.S. GAAP as well as progress on IFRSs and U.S. GAAP convergence work.

Figure 4.1: SEC Staff Recommendation Roadmap.

130 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

timeline for these activities, noting that the decision by the SEC staff of whether to recommend to the SEC that it eliminate the U. S. GAAP reconciliation requirement for foreign filers using IFRSs could come in 2009 or possibly sooner.

Don Nicolaisen and I had been partners at Pricewaterhouse- Coopers. Our working relationship continued through his tenure at the SEC from 2003 to 2005 and on the 2007�2008 Treasury Department’s Advisory Committee on the Auditing Profession that Don co-chaired and now as fellow members of the board of directors of Morgan Stanley, and our friendship and mutual respect continues today. We were, I believe, like-minded on a num- ber of important issues relating to financial reporting, including when it came to the stock option controversy discussed in Chap- ter 3 in our view, as discussed in Chapter 6, that the U.S. reporting system needs to be made less complex, and on the potential bene- fits of international convergence of accounting standards. The pub- lishing of the “roadmap” and the thinking it forwarded, although not representing official SEC policy, was, in my view, important in guiding both the SEC’s actions in this area and our convergence efforts in the period following its publication.

In the article, Don discussed the convergence of IFRSs and U.S. GAAP as the enabler in ultimately achieving a single set of globally accepted accounting standards and continued progress in the con- vergence effort as one of the factors the SEC staff would consider in deciding whether to recommend elimination of the reconciliation requirement. The lifting of the SEC reconciliation requirement was viewed as important by the European Commission in continuing to allow U.S. companies to use U.S. GAAP in their filings in Europe.

In support of these objectives, FASB and the IASB went about developing a work plan for their continuing convergence activ- ities. That work plan, which was published in February 2006 as the 2006 MoU, sets forth a number of specific milestones that the boards were looking to achieve by the end of 2008.14 Perhaps

14. FASB and IASB document, A Roadmap for Convergence between IFRSs and US GAAP — 2006�2008 Memorandum of Understanding between the FASB and the IASB 27 February 2006.

International Convergence 131Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

more importantly, it laid out the following three interrelated prin- ciples regarding convergence between U.S. GAAP and IFRSs:

Convergence of accounting standards can best be achieved through the development of high quality, com- mon standards over time.

Trying to eliminate differences between two standards that are in need of significant improvement is not the best use of the FASB’s and the IASB’s resources — instead, a new common standard should be developed that improves the financial information reported to investors.

Serving the needs of investors means that the boards should seek convergence by replacing standards in need of improvement with stronger standards.

Accordingly, the focus of the 2006 MoU was on major areas of accounting that both boards believed were in need of improve- ment. The process to develop the list of major areas to be included in the 2006 MoU was extensive and iterative, with each board developing a list of priority areas and consulting with its respec- tive advisory groups, the staffs of the SEC and the European Commission, and other national standard setters. The MoU included seven major areas that were already on the active agenda of one or both boards:

1. Business combinations

2. Fair value measurement

3. Liabilities and equity

4. Consolidations

5. Performance reporting

6. Postretirement benefits, including pensions

7. Revenue recognition.

132 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Four other major areas not yet on the active agenda of either board were also addressed — derecognition, accounting for finan- cial instruments, intangibles, and leases — with a description of the progress expected to be achieved in each area during 2006�2008. It is important to note the 2006 MoU did not envisage completion of any of the major projects by the end of 2008, except for business combinations and fair value measurement. As afore- mentioned, the boards did issue common standards on accounting for business combinations in late 2007 and early 2008. With regard to fair value measurement guidance, the FASB issued FASB Statement No. 157, Fair Value Measurements, in September 2006 and now codified in FASB ASC 820, Fair Value Measurement. That FASB standard was later exposed by the IASB for public comment. The two boards then jointly redeliberated the issues and issued converged standards in May 2011 based largely on FASB Statement No. 157 and additional implementation guidance that the boards issued during the financial crisis.

The 2006 MoU also listed a number of areas for potential short-term convergence, including the aforementioned topics of the fair value option, segment reporting, borrowing costs, and joint ventures.

The 2006 MoU, as updated periodically since 2006, served as the boards’ joint work plan for convergence between IFRSs and U.S. GAAP and was also a very important part of each board’s efforts to improve its respective standards. As enunciated in the key principles in the 2006 MoU, the convergence program between the FASB and the IASB was undertaken not just for the sake of convergence but also as means of jointly developing improved, high-quality accounting standards. Because of the importance of the MoU to the development of global accounting standards, national accounting standard setters and others from around the world wanted to meet not only with the IASB but also with us at the FASB in order to exchange views on international convergence and to provide us with their input on the major projects being addressed by the FASB and the IASB in the 2006 MoU. Accordingly, we started meeting biannually with representatives

International Convergence 133Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

of the Accounting Standards Board of Japan and with members of the Accounting Regulatory Department of the Chinese Ministry of Finance who establish the accounting standards used in the People’s Republic of China. We also had various meetings with representatives of other national standard setters and participated in (a) the periodic meetings of the National Accounting Standard Setters group (now called the International Forum of Accounting Standard Setters) that provides input into the development of international standards and (b) the IASB’s annual World Standard Setters meeting. I found those meetings to be interesting, enjoy- able, and valuable in our efforts, and they provided me with a sense both of the commonality of many issues across the globe and of the perspectives, environments, and challenges faced by standard setters in different parts of the world. On the one hand, standard setters in different parts of the world often face similar challenges and issues in dealing with the reactions and impacts on their constituents of the changes resulting from new accounting standards and can learn from each other’s experiences. On the other hand, because of the differing economic, business, govern- mental, regulatory, and legal environments in which different national standard setters operate, different subjects may be of greater importance to some national standard setters than to others. For example, the subject of accounting in highly inflation- ary environments, a priority for standard setters in countries experiencing high rates of inflation, is of less relevance currently to the United States and most of the developed world. The accounting for mining operations, although highly relevant to countries such as Canada, Australia, and South Africa, is of less significance to many other countries. Thus, an important challenge for the IASB as an international standard setter is how to balance these competing priorities among the many countries that now use its standards. Conversely, a challenge arises for each national standard setter in countries that use IFRSs in trying to ensure that its needs and priorities are properly considered in the formulation of the IASB’s agenda of standard-setting projects and in the IASB’s process for developing new standards.

134 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Conceptual Framework

The boards also decided that they should work together to develop a single conceptual framework. The FASB’s Conceptual Framework was developed principally in the 1970s and 1980s. Intended to help guide the FASB in developing standards on parti- cular topics, it consists of a series of documents that address key concepts relating to the objectives of financial reporting; qualita- tive characteristics of financial reporting; the elements of financial statements (e.g., assets, liabilities, revenues, and expense); and recognition and measurement of items in financial statements. The IASB has a similar, but much shorter document, Framework for the Preparation and Presentation of Financial Statements (the Framework) that it inherited from its predecessor body: the IASC.

Although these documents have, in my view, been helpful in guiding standard-setting decisions, experience has shown that they need further work and improvement to address gaps in certain areas and to refine some of the core thinking on other key conceptual matters. Accordingly, and consistent with the boards’ commitment to convergence, it made sense to try to develop a sin- gle, improved conceptual framework. So, starting near the end of 2004, the boards began that effort. The initial areas of focus were aimed at improving and converging the conceptual guidance on the objectives and qualitative characteristics of financial reporting by business enterprises; on elements of financial statements of business enterprises; and what is termed the reporting entity (i.e., what are the boundaries of the entity that is the subject of the financial statements). In addition to having a joint team compris- ing FASB and IASB staff members, certain national standard set- ters, most notably Canada and New Zealand, contributed staff to this project.

Progress on the conceptual framework project has been slow and has not come easily. In September 2010, the boards issued a new converged conceptual framework chapter on the objective and qualitative characteristics of financial reporting by business enterprises. An exposure draft addressing the reporting entity was

International Convergence 135Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

issued in 2010, but further work on this phase of the conceptual framework project was put on hold as the boards focused on completing major 2006 MoU projects. Although considerable work was performed for several years on trying to improve the current definitions of assets and liabilities, that work was also been put on hold as the boards focused on completing major joint standards. The boards also began work on the very key area of measurement, a subject that was not fully developed in the existing framework of either board and that continues to be a subject that generates differing views among board members on specific standard-setting projects and an area of disagreement and controversy among constituents. Again, perhaps reflecting fundamental differences in perspectives among board members both at FASB and the IASB; the need to address reporting issues emanating from the global financial crisis, as discussed in Chapter 5; and the need to focus on completing the major MoU projects, the joint conceptual framework project was placed on hold in 2010.

However, in 2012 the IASB decided to restart work on the con- ceptual framework project. The decision reflected the very strong support the IASB received from constituents for the project in response to the IASB’s 2011 public consultation on its agenda. The IASB issued a discussion paper in 2013 to obtain views on key issues relating to its conceptual framework and in 2015 it issued an exposure draft of a revised conceptual framework. Separately, the FASB is working on projects aimed at improving its concep- tual framework in the areas of measurement, presentation, and disclosure. While the two boards are not working together on these conceptual framework projects, they are discussed at meet- ings of the IASB’s Accounting Standards Advisory Forum that is explained further later in this chapter.

Another phase of the planned joint framework project was to develop guidance that would assist the boards in establishing disclosure requirements. In 2009, the FASB began work on a dis- closure framework project that, among other objectives, would include developing such conceptual guidance. In Chapter 6, I dis- cuss the course of this project and some of my thoughts on it.

136 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

As I discuss further in Chapter 7 reflecting back on my years chairing the FASB, one of my greatest disappointments is our not having made more progress on improving the Conceptual Framework.

The SEC Eliminates the Reconciliation Requirement and Explores Potential Adoption of IFRSs in the United States

As previously noted, the 2005 SEC staff “roadmap” for consider- ing elimination of the reconciliation requirement for foreign regis- trants using IFRSs contemplated a decision being made in 2009 or sooner. It turned out to be sooner; November 2007 to be precise.15

In 2007, the SEC issued a release proposing the lifting of the recon- ciliation requirement and a concept release exploring the potential use of IFRSs by U.S. public companies.16

Conrad Hewitt, the chief accountant at the time the reconcilia- tion requirement was eliminated, was a strong supporter of that action and of expeditious movement toward a single set of high-quality international accounting standards. In speeches, he would say words to the effect that when he got to the SEC in 2006, he carefully reviewed the “roadmap” that Don Nicolaisen had developed, that he liked it, and that removing the reconciliation requirement was an important step in the journey toward a single set of high-quality international standards. The then-SEC Chairman Christopher Cox also seemed to share these views. The November 2007 SEC release that eliminated the reconciliation requirement

15. Securities and Exchange Commission (SEC) release, Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards Without Reconciliation to U.S. GAAP. 16. July 2007 SEC proposing release, Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards Without Reconciliation to U.S. GAAP, and August 2007 SEC concept release, Allowing U.S. Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards.

International Convergence 137Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

for foreign registrants using “full” IFRSs as published by the IASB states

The Commission has long viewed reducing the disparity between the accounting and disclosure practices of the United States and other countries as an important objective both for the protection of investors and the efficiency of capital markets … . Towards this end, the Commission has undertaken several measures to foster the use of International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and fully supports the efforts of the IASB and the Financial Accounting Standards Board (“FASB”) to converge their accounting standards … . As part of our efforts to foster a single set of globally accepted accounting standards, we are now adopting amendments to accept from foreign private issuers financial statements prepared in accor- dance with IFRS as issued by the IASB in filing with the Commission without reconciliation to U.S. GAAP.17

This was a very important action by the SEC, one that many parties supported as a necessary step on the road to a single set of standards and as a goodwill gesture by the United States in order to avoid Europe and other jurisdictions imposing a counter- reconciliation requirement for U.S. companies raising capital in their financial markets. Indeed, in reacting to the SEC’s action then-EU Commissioner Charlie McCreevy stated, “Now it will be Europe’s turn to accept accounts in US GAAP. This decision will have to be taken next year. And it is certainly my intention to propose that no reconciliation to IFRS will be needed for

17. SEC release, Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards without Reconciliation to U.S. GAAP.

138 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

companies filing their accounts under US GAAP. This is the only sensible way forward.”18

I also recall that other U.S. parties, including our major stock exchanges, supported the SEC’s lifting of the reconciliation requirement because they believed it would help ensure that our capital markets remained competitive by making it easier for for- eign companies to obtain listings on U.S. stock exchanges, and they also believed that the SEC should allow U.S. issuers to use IFRSs. For example, at an SEC roundtable March 2007, Catherine Kinney, president of the NYSE Group said “a number of large global issuers” had told the New York Stock Exchange that they would “welcome having a choice” of reporting standards and were considering moving to IFRSs if the SEC were to allow that. Many of the other panelists at that roundtable also supported allowing U.S. issuers to switch to IFRS.19

However, others, including some institutional investors and financial analysts, believed it was important to maintain the recon- ciliation requirement until greater convergence between U.S. GAAP and IFRSs had been achieved, such that there would be sufficient comparability without a reconciliation and that it would be premature to allow U.S. issuers to adopt IFRSs. Concerns were also raised over a number of perceived structural weaknesses with the IASB, including issues relating to governance arrangements and the adequacy and stability of funding. Some of the comment letters to the SEC expressed concerns that eliminating the reconci- liation requirement might prompt European companies and the European Commission, satisfied with a mutual recognition regime, to call for a halt to any further convergence between IFRSs and U.S. GAAP. Exhibit 4.2 shows an article and excerpts from two viewpoint letters regarding IFRSs convergence at the time.

18. Press release from European Federation of Accountants’ Conference on Audit Regulations. Brussels, November 27, 2007. 19. Gill (2007).

International Convergence 139Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

EXHIBIT 4.2:

D i f f e r i ng V i ews on In t e rna t i ona l F i nan c i a l Repo r t i ng S tanda rd s Adop t i on

Gill (2007)

Never mind convergence—why not just report in IFRS and forget about U.S. GAAP altogether?

It didn’t take long for the question to come up in March at an SEC roundtable on its International Financial Reporting Standards Roadmap, where the very

first panel raised the issue—and the panelists seemed to applaud the idea.

Chairman Christopher Cox opened the door in his opening remarks, noting that “virtually everyone—issuers, investors and stakeholders alike—agrees

that the world’s cap markets would benefit from the widespread acceptance and use of high-quality global accounting standards.” Replacing the “Babel of

competing and often contradictory standards” would improve investor confi- dence, allow investors to draw better conclusions, and simplify the process

and cut costs for issuers, Cox said.

Soon enough, Ken Pott, head of Morgan Stanley’s capital markets execution

group, followed that argument to its logical conclusion, noting that “the dra- matically increasing acceptability of IFRS may move U.S. companies to decide

they’re better off reporting in IFRS if that’s allowable by the SEC.”

Catherine Kinney, president of the NYSE Group, said “a number of large glo- bal issuers” already have told the stock exchange that they would “welcome

having a choice” of reporting standards and are considering moving to IFRS. If U.S.-based issuers listed abroad continue to report in U.S. GAAP, she noted, European regulators “will have the opportunity—and maybe even the obliga-

tion” to question their financials, just as the SEC asks questions of companies that report in IFRS.

“Every change in regulations has unexpected side effects,” she said. “And I

think regulators will have to allow U.S. companies to report in IFRS. That will be a further spur to convergence, and a positive development.”

140 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

It also would be in keeping with two SEC aims: a more transparent global

financial reporting environment and more principles-based accounting standards.

Panelist David B. Kaplan, who leads the international accounting group of

PricewaterhouseCoopers LLP, said he hoped the question of allowing U.S. companies to report in IFRS would not delay the road map’s timetable but otherwise did not object to the idea. Converting U.S. companies to IFRS

would mean large-scale educational efforts, knowledge transfer and system changes for the accounting profession, but CPA firms already have begun the

process. “At the end of the day, we wouldn’t be asking people here to do any more than what Europe has just done in changing to IFRS,” he said.

KPMG’s partner in charge of professional practice, Samuel Ranzilla, also on

the panel, noted that “this complexity discussion is absolutely the right place to put this issue on the table” and that he “supports the elimination of U.S.

GAAP reconciliation in accordance with the road map and would ask the SEC to take on front and center the issue of whether international standards are something we ought to be moving toward here in the United States.”

With that discussion on the table, any question about whether IFRS was

going to happen seemed moot. Summing up the first panel, Morgan Stanley’s Ken Pott called IFRS “a terrific idea that can’t come fast enough,” and

Brooklyn Law School professor and former SEC Commissioner Roberta Karmel said it “can’t come soon enough.” In fact, she advised the commission

not to wait until it has solved every little question, but rather to “take the plunge.”

In the end, Citigroup Global Markets’ Managing Director J. Richard Blackett noted that allowing foreign issuers filing in IFRS to come into U.S. markets will

“at the margin and perhaps theoretically” raise the cost of capital for U.S. issuers—but “certainly U.S. companies having the option to adopt IFRS will

help.”

The SEC announced in April it is planning to publish a concept release about providing U.S. issuers the alternative to use IFRS. Comments would be due this fall.

International Convergence 141Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.sec.gov/comments/s7-13-07/s71307-108.pdf

Gaylen R. Hansen, CPA …

The core concern is the underpinnings of the international standard-setting structure and its relative lack of independence vis-à-vis the Financial Accounting Standards Board (FASB). The observations below are relevant

to the Commission’s publicly stated goals that Release No. 33-8818 implicitly re-articulates.

The International Accounting Standards Board (IASB) is a private sector crea-

tion, meaning that it answers primarily to a non-regulatory constituency. That constituency includes much closer ties to accounting membership trade asso-

ciations, international accounting firms, and large corporate, institutional and governmental organizations than does its FASB counterpart. These alliances are manifest in IASB participation and funding, which raises questions about

its actual independence.

In the shadows of the Enron and WorldCom collapses, passage of the Sarbanes-Oxley Act (SOX) by Congress in 2002 was a cornerstone event

enhancing independence of both accounting firms and also the private sector standard setters that the SEC looks to for leadership within the accounting

profession. Given the long and well documented history that ultimately led to an independently financed FASB, it is remarkable that the Commission would

so quickly conclude that shifting this critical role to a foreign-controlled body is in our national interest without public analysis and discussion of the pros and cons. Such a dialogue should be unfettered by one-off questions � e.g. “Should the IFRS to U.S. GAAP reconciliation be discontinued?” or, “Should domestic issuers have the option of electing IFRS versus U.S. GAAP?”

Those questions have leap-frogged a more relevant question: “Does the IASB stand up to public scrutiny particularly when it may be subject to external

pressures from its funding sources?”

The subtle focus on peripheral issues is particularly troubling since the SEC is solemnly charged by Congress with the final responsibility to establish national accounting principles and practices.76

…

76. See, for example, Securities Act of 1933, 15 U.S.C. §§ 77g, 77s(a), 77aa(25) and (26).

142 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.sec.gov/comments/s7-13-07/s71307-108.pdf

Aside from autonomy and structural concerns, there is also the practical

aspect of IFRS implementation. It is highly likely that if the SEC were to agree to adopt IASB standards that U.S. practitioners would need significantly more

time to get up to speed on IFRS. …

There may be a subconscious tendency to regard IFRS as an easy fix for the many shortcomings of U.S. GAAP. A more realistic expectation would be that

the IASB may only solve a few of those problems in exchange for accepting other risks. Even if the structural and practical problems noted above are satis-

factorily addressed, there are a myriad of others, such as the impact of recon- ciling IASB standards to the U.S. federal income tax system. Also, there are

serious differences and gaps between U.S. GAAP and IFRS � e.g. accounting for leases, derivatives, insurance and income taxes.

U.S. GAAP has been discussed, debated and interpreted for decades and has stood the test of time. By contrast, for all practical purposes � IFRS financial statements have only been issued in any large number for the past three years. …

https://www.sec.gov/comments/s7-13-07/s71307-73.pdf

Lee S. Ainslie, III, Managing Partner, and Jane B. Adams, Managing Director, Maverick Capital …

While we are supportive of the SEC’s goal ultimately to eliminate the reconci-

liation requirement for foreign private issuers who prepare financial state- ments in accordance with IFRS and to progress to one set of global standards, we believe the current proposal is premature. The reconciliation provides

incremental information to investors that would be lost if the reconciliation requirement were eliminated. Many of these reconciling items arise because

IFRS is not yet comprehensive and because it is not uniformly applied across regions. As auditors and preparers become more expert in applying IFRS, as

IFRS becomes a more comprehensive set of standards, and as companies com- ply with recently issued standards whose implementation was delayed by

IASB’s moratorium, we would hope that the incremental information provided by the reconciliation diminishes significantly. Until then, we believe that the

removal of the reconciliation harms investors and removes relevant informa- tion not available through other sources.

International Convergence 143Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

https://www.sec.gov/comments/s7-13-07/s71307-73.pdf

In addition, the multiple versions of “endorsed” IFRS pose real hazards to the

investor. The current poor disclosure as to which IFRS requirements have been selectively excluded imperils all investors. Consequently, we support the pro-

posal’s requirement that issuers be required to state in a prominent footnote to the financial statements unreservedly and explicitly that its financial state-

ments are in compliance with IFRS as published by IASB (excluding the IASB’s proposed IFRS for Small and Medium-sized Entities). …

For our part, the FAF-FASB comment letter dated November 11, 2007, to the SEC on the proposing and concept releases expressed qualified support for lifting the reconciliation requirement, stating, “The removal of the requirement that foreign private issuers reconcile their reported results to U.S. GAAP is a difficult and sensitive issue that could have important implications for the continued development of a truly international financial reporting system.”20 It went on to suggest that before the SEC removed the requirement it should ensure two things:

1. The development of a detailed “blueprint” setting forth the key issues, necessary actions to address those issues, and target dates for a transition by U.S. public companies to IFRSs and commitment by key parties in the United States to the “blueprint.”

2. A commitment by international parties to undertaking the steps necessary to strengthen the IASB as the independent international accounting standard setter.

The letter included an appendix that provided a detailed discus- sion of the many issues we believed would need to be included in the “blueprint” for U.S. transition to IFRSs, our views on the

20. See www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175818772343&blobhea der=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs

144 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.sec.org

importance of improving IFRSs through the continued conver- gence program between FASB and the IASB, and our views on actions needed to strengthen the IASB as a global standard setter.

The SEC concept release also raised the possibility of allowing U.S. registrants to choose between using U.S. GAAP and IFRSs. In our comment letter, we expressed our strong opposition to creating a two-GAAP system for U.S. public company reporting for any pro- longed period of time because we believed it would decrease com- parability and could increase overall costs in the reporting system.

In my view, and based on subsequent developments, the elimi- nation of the reconciliation requirement gave significant additional impetus for the adoption of IFRSs by many countries around the world. IFRSs now became something of a passport for companies to raise capital in the major world capital markets. It was already the standard recognized in Europe and many other parts of the world, and no longer would a non-U.S. company need to either use U.S. GAAP or reconcile to it in raising capital in the U.S. mar- kets. Although U.S. GAAP also continues to be allowed in many capital markets, I believe it is generally viewed by non-U.S. com- panies as more difficult and costly to implement and as providing management with less options and room for judgment than IFRSs. Further, I believe that many outside our country view U.S. GAAP as an overly detailed and prescriptive set of standards developed in the highly litigious U.S. environment, a view that is also shared by some in the United States. So, it is not surprising that soon after the SEC lifted the reconciliation requirement, a number of coun- tries that may have been on the fence about whether to adopt IFRSs announced plans to do. Those included major economies such as Brazil, India, Korea, and Mexico.

Improve and Adopt IFRS

The FAF-FASB November 2007 comment letter reflected our view at that time that IFRSs could and would likely become the globally accepted international standard. However, we also believed it was not yet a comprehensive set of standards and that, like U.S.

International Convergence 145Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

GAAP, a number of existing standards needed improvement. We also shared the concerns of others regarding some of the perceived structural weaknesses in the IASB and its oversight body, includ- ing the need for the organization to obtain adequate, stable, and secure sources of funding to ensure its long-term viability and ability to operate independently, ensuring that the IASB was adequately staffed, and the need to eliminate national and jurisdic- tional endorsement approaches that could result in variations of IFRS being adopted in different parts of the world. Accordingly, we advocated what became known as the “improve and adopt” approach to achieving a single set of high-quality international standards and to transitioning to those standards in the United States over time. Under the improve and adopt approach, the FASB would continue working with the IASB to develop major standards that improved both U.S. GAAP and IFRSs and that filled in major gaps in IFRSs, such as in the accounting for insur- ance contracts, to the point where IFRSs represented a comprehen- sive, high-quality set of accounting standards. At that point, provided that appropriate actions had also been taken to address the structural issues around the IASB, we believed it would be appropriate to begin an orderly and well-planned transition in the United States from U.S. GAAP to IFRSs. The aforementioned “blueprint” would provide a detailed plan of the many issues that would need to be addressed in a successful transition.

My speeches and press interviews at the time and my testimony in an October 2007 U.S. Senate hearing reflected that view.21 I and my fellow Board members also believed it would take a number of years of further work between the two boards, pursuant to the MoU and potentially in other areas, to get to the point where adoption of IFRSs in the United States would be cost beneficial. In my testimony before the Subcommittee on Securities, Insurance,

21. For example, see interview of Robert Herz in the article “FASB Chairman Advocates ‘Improving and Adopting’ IFRS for U.S. Companies” in the September 2008 issue of Financial Executive magazine.

146 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

and Investment of the Senate Committee on Banking, Housing, & Urban Affairs on October 24, 2007, I stated

We expect that the myriad of changes to the U.S. finan- cial reporting infrastructure would take a number of years to complete. During that time, the FASB and the IASB should continue our cooperative efforts to develop common, high-quality standards in key areas where neither existing U.S. GAAP or IFRS provides relevant information for investors. Those common standards, issued by both the FASB and IASB, would be adopted by companies in the U.S. and internationally when issued. In other areas that are not the subject of those joint improvement projects, we envision that that U.S. public companies would adopt the IFRS standards “as is” over a period of years. The adoption of those IFRS standards by U.S. companies would complete the migration to an improved version of IFRS …. Under this approach, new standards or existing IFRS will be gradually adopted over a period of several years, smoothing the transition process and avoiding the capacity constraints that might develop in an abrupt mandated switch to IFRS.

Indeed, in October 2007, I also stated that it would probably take at least five more years to complete the convergence pro- gram.22 I recall that I used the words at least because I believed it would take a minimum of five years, assuming there were no other events and pressing areas requiring the attention of either or both boards. Although that was not intended as a prediction of the financial crisis that was soon to engulf much of the world and the impact it would have on our standard-setting activities, experience had taught me to expect the unexpected. Accounting standard setting, like many other fields of human endeavor, rarely progresses in a straight line.

22. Johnson (2007).

International Convergence 147Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

I also believe the decision by the FAF trustees in early 2008 to reduce the size of the FASB Board from seven to five members reflected, along with other considerations, a view at that time that the United States might well be moving to IFRSs in the fore- seeable future and that the efficiency and effectiveness of the FASB’s work on convergence might be enhanced through having a smaller Board. Although FASB had always had a seven-person Board, other rule-setting bodies and agencies, including the SEC, the Public Company Accounting Oversight Board, and many other U.S. agencies and commissions, have a five-member board.23

The SEC Proposes a New “Roadmap” to IFRSs Adoption, and the FASB and IASB Update the MoU

Not surprisingly, the lifting of the reconciliation requirement in November 2007 led to some major U.S. corporations and other parties to call for the SEC to also allow the use of IFRSs by domes- tic registrants. The major U.S. accounting firms were also urging clients to start planning for the change to IFRSs. There were also international calls for the United States to move more quickly to adopt IFRSs. In August 2008, the SEC approved issuing the proposing release.24 This proposal was then issued for public comment in November 2008. In the press release on this, the then- SEC Chairman Cox stated

An international language of disclosure and transpar- ency is a goal worth pursuing on behalf of investors who seek comparable financial information to make well-informed investment decisions. The increasing worldwide acceptance of financial reporting using IFRS, and U.S. investors’ increasing ownership of securities

23. Leone (2008). 24. Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers.

148 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

issued by foreign companies that report financial infor- mation using IFRS, have led the Commission to propose this cautious and careful plan. Clearly setting out the SEC’s direction well in advance, as well as the condi- tions that must be met, will help fulfill our mission of protecting investors and facilitating capital formation.25

The press release stated that the SEC would make a decision in 2011 on adoption of IFRSs by U.S. issuers. It set out a number of milestones that would factor in the decision, including the degree of convergence that had been achieved and resolution of the issues relating to the funding and governance of the IASB and the IASC Foundation. Assuming a positive decision to require mandatory use of IFRSs by U.S. issuers, the release proposed mandatory use starting in 2014. It also proposed permitting a limited group of major U.S. multinationals to early adopt IFRSs starting with 2009 calendar year-end filings. In order to qualify for early adoption of IFRSs, a U.S. issuer would have to be among the largest compa- nies worldwide in its industry, and within that industry, IFRSs would have to be used as the basis of financial reporting more than any other set of accounting standards. The thinking behind allowing a limited early adoption option of this sort was that it could increase the comparability of reporting by major U.S. cor- porations with major non-U.S. companies in same industry.

In September 2008, following extensive discussion within and between the two boards and consultation with advisory groups and others, the FASB and the IASB issued an updated MoU,26 that provided a status report on each of the projects included in the 2006 MoU, an explanation for changes in the joint work program, and estimates of forward milestones and targeted completion dates. At that point, most, but not all, of the projects were targeted for completion in or before 2011.

25. SEC press release 2008-184, SEC Proposes Roadmap toward Global Accounting Standards to Help Investors Compare Financial Information More Easily. 26. Completing the February 2006 Memorandum of Understanding: A progress report and timetable for completion.

International Convergence 149Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Why had the year 2011 become an important one in our think- ing? Was it based on the writings of Nostradamus or something divined from the Mayan calendar? No, 2011 became viewed as a potentially pivotal year for a number of reasons. First, the SEC had committed to make a decision in that year on IFRSs adoption in the United States. Also, a number of major countries had announced plans to adopt IFRSs in 2011 or 2012, so the IASB’s intent, if possible, was to have issued major new standards in time for companies in these countries to adopt them to avoid having to first adopt the old IASB standards in these areas and soon there- after changing to the new standards. Also, at the IASB, there was a concern that the required board turnover in the 2009�2011 per- iod could complicate and delay completion of projects. When the IASB was created, the initial 14 Board members had staggered terms ending in 2009�2011. For example, the terms of three board members ended on June 30, 2010, and three others, including Chairman David Tweedie, ended on June 30, 2011. These board members had been heavily involved over the years with the various MoU projects, and that, coupled with the IASB’s super- majority voting requirement to approve documents, was often cited by the IASB as another reason to try to expeditiously com- plete the projects.

A number of events were soon to affect on our work plan and the environment surrounding our convergence efforts. The most significant of these was the global financial crisis that I discuss at length in Chapter 5. As subsequently discussed, support for the November 2008 SEC “roadmap” was mixed at best, with many commentators citing a host of issues in transitioning U.S. issuers to IFRSs. Leadership of the SEC changed in early 2009, with Mary Shapiro becoming the new chairman and James (Jim) Kroeker becoming the acting chief accountant (and then chief accountant in August 2009). Also, the composition of the IASB and FASB and their trustee oversight groups were changing because members’ terms ended, and new people joined, including John (Jack) Brennan succeeding Bob Denham as chairman of the FAF in early 2009.

150 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Mixed Responses to the SEC “Roadmap”

Also very important were comment letters on the SEC’s November 2008 proposing release. The SEC received more than 200 comment letters on the proposing release from a variety of market participants and stakeholders. Although certainly not an inconsequential number of comment letters, it was, in my view, a somewhat surprisingly low number of comment letters given the potential significance of what the SEC was proposing. The FASB often receives over 500 comment letters on particular proposals and has received thousands of comment letters in the case of very major or highly controversial proposals. In any event, I believe the letters did enable the SEC and the SEC staff to better understand the wide range of views on the subject.

Although commenters on the proposal generally expressed sup- port for the goal of a single set of high-quality globally accepted accounting standards, many expressed concerns with various aspects of the proposed “roadmap.” These concerns included questions regarding the readiness of IFRSs to serve as the stan- dards in the United States, the need for continued convergence between U.S. GAAP and IFRSs, and inadequate lead time to implement what many perceived would be a difficult and costly transition to IFRSs. Some commenters questioned whether the use of IFRSs was actually achieving a sufficient level of comparability in financial reporting across the world in light of the existence of jurisdictional variations in IFRSs and perceived inconsistencies in application, auditing, and enforcement of the standards interna- tionally. Some commenters supported the proposed early adop- tion option and believed it should be broadened to include a wider group of U.S. issuers. However, many other comment let- ters expressed concerns with the proposed option, believing it would reduce comparability of reporting within the United States and that few companies would elect early adoption until they were certain that the use of IFRSs would become mandatory.

In developing the FAF-FASB comment letter to the SEC on the November 2008 “roadmap” proposal, we carefully considered

International Convergence 151Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

the extensive input we had received on the subject, including from our various advisory committees and the diverse group of stake- holders that participated in our June 2008 roundtable on the potential adoption of IFRSs in the United States.27 We had also specifically engaged two sets of independent researchers to exam- ine the potential economic and public policy implications of the United States moving to IFRSs, and their reports were attached to our comment letter. The reports of the independent researchers raised questions about the overall level of macroeconomic benefit to the United States adopting IFRSs and also raised the possibility of potential alternative paths to achieving a single set of high-quality global accounting standards, including continuing for a longer per- iod the process of convergence between IFRSs and U.S. GAAP. Our letter expressed continued support for the goal of a single set of global accounting standards but urged the SEC to conduct a thor- ough study on the implications for investors and other market participants of implementing IFRSs for U.S. issuers and to consider potential alternative paths to a single set of global accounting stan- dards before making a decision in 2011 about whether to mandate IFRSs adoption. We recommended that the SEC establish a broad- based advisory committee to provide input into the study and, if a decision was made to mandate IFRSs for U.S. issuers, to help develop and implement a transition plan, or “blueprint,” in order to minimize the cost and disruptions to investors, companies, and other market participants. We also reiterated our opposition to the SEC permitting an early adoption option prior to deciding whether to mandate the use of IFRSs by U.S. issuers.

Some Begin to Question America’s Commitment to Global Accounting Standards

Although we tried to make it clear in our letter that our recom- mendation that the issues be further studied did not, in any way,

27. See www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175818992147&blobhea der=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs

152 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.sec.org

reflect a withdrawal of support for the goal of worldwide use of a single set of high-quality accounting standards or of our commit- ment to continue to work collaboratively with the IASB on conver- ging and improving IFRSs and U.S. GAAP, I believe our letter was perceived by some parties outside the United States as a soft- ening of our support for the IASB and for IFRSs as the global set of accounting standards. Moreover, the fact that many commen- ters on the SEC’s November 2008 “roadmap” proposal had raised numerous issues and concerns over potential IFRSs adoption in the United States, inevitably led many parties to question whether the United States would ever truly embrace the goal of global accounting standards.

In January 2009, Mary Schapiro became the new chairman of the SEC. At that point, the SEC “roadmap” proposal was still out for public comment. In commenting on it in her Senate confirma- tion hearing, she stated “I will tell you that I will take a deep breath and look at this entire area again carefully and will not be bound by the existing roadmap that is out for comment.”28 In the United States, I believe most interested observers viewed this as a measured and very understandable statement by an incoming SEC chairman on a proposal she had not participated in issuing. In the wake of the financial crisis and Madoff scandal, the SEC was facing numerous challenges and many pressing issues it needed to address. However, in other parts of the world, particu- larly Europe, I believe Mary’s statement was viewed by some with alarm as an indication of waning support by the SEC for IFRSs. That, in turn, led to some calls for the IASB to halt the convergence program with the FASB.

However, I think it is interesting to note that in January 2009, a new Monitoring Board was established to provide enhanced oversight and accountability over the trustees of the IASC Foundation.29 The Monitoring Board was created to establish a

28. See www.gpo.gov/fdsys/pkg/CHRG-111shrg50221/html/CHRG-111shrg50221.htm 29. SEC press release 2007-226, Authorities Responsible for Capital Market Regulation Work to Enhance the Governance of the IASC Foundation.

International Convergence 153Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.sec.org

formal link in terms of oversight and accountability between the IASC Foundation and the IASB to public authorities, akin to the relationship in the United States between the FAF and FASB and the SEC. Initially, the Monitoring Board comprises leading officials from the Emerging Markets and Technical Committees of the International Organization of Securities Commissions, the European Commission, the Japan Financial Services Authority, and the SEC. So, Mary Schapiro, as chairman of the SEC, became a member of the new Monitoring Board over the IASC Foundation (soon to be renamed the IFRS Foundation).

The G20 Leaders Push for Rapid International Convergence of Accounting Standards

It is also very noteworthy that the official declarations coming out of meetings of the G20 that were held in response to the global financial crisis included comments urging expeditious interna- tional convergence of accounting standards and exhortations to international standard setters to work together and with regula- tors and supervisors to quickly develop common responses to financial reporting issues emanating from the financial crisis. For example, the communiqué issued following the April 2009 G20 meeting in London called on accounting standard setters “to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards.”30 That communiqué also included a number of recommendations on specific accounting standard- setting actions, calling for them to be achieved by the end of 2009. These recommendations seemed to largely mirror those made by the Financial Stability Forum (which then became the Financial Stability Board of the G20).31 Although these recommendations

30. Paragraph 15 of the April 2009 G20 Leaders Statement, The Global Plan for Recovery and Reform. 31. See the “Accounting Standards” section of the April 2, 2009, G20 Declaration on Strengthening the Financial System.

154 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

were very important, it was not, in my view, realistic to expect resolution of these complex and controversial matters within the nine-month timeframe contemplated in that communiqué.

In contrast, the communiqué issued following the September 2009 G20 meeting in Pittsburgh, PA, called upon “international accounting bodies to redouble their efforts to achieve a single set of high-quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011.”32 We took the words “conver- gence project” to mean our work plan under the MoU. For the rea- sons previously noted, the June 2011 target for completion was viewed as important, particularly by the IASB. I believe it is fair to say that they and their trustees viewed June 2011 as a deadline for completing all the major projects on the MoU, but we viewed it as providing an important target, not an absolute deadline. Issuing sound standards that would improve financial reporting was the overriding objective. Further, although successful completion of the MoU projects would bring U.S. GAAP and IFRSs into conver- gence in a number of major areas, there would still be many remaining differences between the two sets of standards. So, any notion that completion of the MoU would achieve complete con- vergence between U.S. GAAP and IFRSs was not, in my view, consistent with the facts.

The FASB and the IASB Respond to the G20 Call by More Than Redoubling the Convergence Effort

Prior to the G20 call to redouble our convergence efforts, the FASB and the IASB had been meeting three times per year in multiday, full board-to-board meetings. More frequent meetings had been occurring between small groups of board members, and our staffs

32. Paragraph 14 of the “Strengthening the International Financial Regulatory System” sec- tion of the September 25, 2009, G20 Leaders’ Statement: The Pittsburgh Summit.

International Convergence 155Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

had been working closely together for several years on major joint projects. In this way, by September 2009, we had been successful in jointly issuing a number of important documents on major pro- jects, including discussion documents on accounting for financial instruments, revenue recognition, lease accounting, and financial statement presentation.

Responding to the call from the G20 would require us to meet more frequently. Additionally, differences in approach and project timelines between the IASB and FASB on the major project on accounting for financial instruments and SEC Chairman Mary Schapiro’s perceived ambivalence toward adoption of IFRSs had led some observers to question the commitment of both boards to the overall convergence program. For example, an article in Accountancy Age33 reported that

the Fédération des Experts Comptables Européens, which represents more than 500,000 accountants across Europe, said that International Accounting Standards Board should cut its losses and walk away for its US-GAAP convergence strategy … . FEE believes the IASB should change direction and instead “concentrate exclusively on major improvements and simplifications in International Financial Reporting Standards over the medium term.”

The article called this “the latest blow to the IASB’s convergence strategy,” noting that “[i]n January, comments by SEC chairman Mary Schapiro stoked concerns surrounding America’s commit- ment to global standards.”

The boards discussed these and other matters related to the joint efforts at length at our joint meeting in October 2009. We came to a number of agreements regarding the path forward that were described in a joint communiqué we issued on November 5, 2009.34 That document provided a status report on the MoU

33. Christodoulou (2009). 34. FASB news release IASB and FASB and IASB Reaffirm Commitment to Memorandum of Understanding.

156 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

projects and forward plans for completing them by June 2011. It noted that in order to expedite the process, the boards had agreed to begin meeting together each month. Very importantly, it described a number of shared goals, values, and priorities, includ- ing emphasizing that convergence for the sake of convergence was not our goal and the importance of the standards under develop- ment resulting in improvements over our respective existing stan- dards. The trustees of the IASC Foundation and FAF also issued a joint statement on November 5, 2009, in support of the joint communiqué by the FASB and IASB, noting “both Trustee groups continue to support unequivocally the joint work of the IASB and FASB aimed at achieving the objectives and convergence milestones outlined in the February 2006 Memorandum of Understanding, as updated in September 2008.”35 Supportive public statements were also issued by SEC Chairman Mary Schapiro (November 5, 2009) and the IASC Monitoring Board (November 11, 2009).

So, beginning with the November 2009 meeting, the boards began meeting monthly for several or more days each month. A good bit of this was accomplished by the five FASB Board mem- bers and key staff flying to London for multiday joint meetings with the 15 members of the IASB and its staff. We also held numerous joint board meetings via teleconference. In embarking on this intensified effort, both David Tweedie and I (and, I believe, other members of our boards) believed it would enable us to make more rapid progress toward completion of the major MoU projects within the 2011 timeframe set out by the G20. Thus, for example, in the IASC Foundation Annual Report 2009, David stated

Our work programme is focused on substantially com- pleting the MoU projects, and insurance, by 30 June 2011. Some commentators have suggested that the scale of the programme and the timetable are too ambitious.

35. International Accounting Standards Committee and Financial Accounting Foundation statement Joint Statement of the International Accounting Standards Committee Foundation and the Financial Accounting Foundation.

International Convergence 157Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

While I agree that the programme is ambitious, it is cer- tainly achievable. The G20 have urged us to complete our work by that date and many major economies have selected 2011 or 2012 as the year to adopt IFRSs on the basis of a completed programme. I want to emphasize that our primary focus remains on making significant improvements to financial reporting. The Board will not issue a new standard unless it is an improvement over its current requirements … . I believe that defined tar- gets and deadlines impose discipline and enable us to deliver needed improvements sooner rather than later.

This undertaking was intense and amounted to far more than a doubling of our efforts. Although I believe it enabled us to make significant forward progress on many of the major joint projects, our deliberations also revealed a number of areas of disagreement among board members, both within each board and, in some cases, between the boards, and also identified additional issues requiring further exploration. For example, differences in views among board members surfaced in regard to various aspects of the projects on lease accounting, consolidation, and insurance con- tracts. The inevitable result was slippage in certain projects. That slippage and revised timetables on certain projects were reflected in the joint progress report we issued in mid-April 2010 covering the first quarter.36 At that point, we were expecting to issue joint exposure drafts by June 30, 2010, on a number of the major projects, and at the FASB, we were also planning to issue a major exposure draft of accounting for financial instruments in the second quarter of 2010. Recognizing the importance of proactively informing constituents about these important exposure drafts and of obtaining broad-based input on these pro- posals, we had developed programs for enhanced outreach to stakeholders.

36. IASB and FASB Commitment to Memorandum of Understanding: Quarterly Progress Report.

158 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

A Necessary Change in Plans

However, quite understandably, a number of concerns were voiced at our advisory council meetings and from others, perhaps more so in the United States than abroad, over the very significant challenges that constituents would face in responding to numer- ous proposals on major projects if simultaneously released. They very rightly, in my view, expressed concerns over their ability to properly review, evaluate, and provide well-developed comment letter on the numerous exposure drafts that were scheduled to be issued in the second quarter of 2010.

Accordingly, in recognition of these very valid concerns and the importance to the development of sound accounting standards of enabling all parties to properly review, evaluate, and provide well-developed input on exposure drafts, the boards, at our joint meeting in late May 2010 and as detailed in a joint communiqué in June 2010, agreed on a number of significant revisions to the MoU work plan.37 These involved changes in the timing, scope of, and approach to certain projects to prioritize our joint efforts in order to better enable the boards to complete high-priority projects by June 2011 while also maintaining proper due process, including allowing constituents sufficient time and ability to properly review, evaluate, and provide input on exposure drafts. Four major projects were designated as priority projects, with a targeted completion by June 30, 2011:

1. Accounting for financial instruments

2. Fair value measurement

3. Leases

4. Revenue recognition.

37. FASB-IASB Progress Report on Commitment to Convergence of Accounting Standards and a Single Set of High Quality Global Accounting Standards.

International Convergence 159Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

For the IASB, completion of its project on insurance contracts by June 30, 2011, was also a priority. The boards also agreed to try to issue converged standards on the presentation of other compre- hensive income by June 30, 2011. Issuance of final standards on other major joint projects, including financial statements and financial instruments with characteristics of equity, were now targeted for dates beyond June 30, 2011, and there were revisions to the approach to be taken on other projects, such as derecogni- tion and consolidation. SEC Chairman Mary Schapiro again issued a public statement on June 2, 2010, supporting the modified plan, emphasizing the importance of the boards issuing quality standards, and providing reassurance that the SEC continued to be on schedule to make a determination in 2011 about whether to incorporate IFRSs into the financial reporting system for U.S. issuers.

The reworking of the timelines and approach to certain MoU projects was an important and, in my view, a necessary action by the boards. We had worked very hard to try to progress the many MoU projects toward completion by June 30, 2011, but it was proving to be a very challenging and, at times, downright exhaust- ing effort. As I observed in a speech on June 3, 2010, at the Annual SEC and Financial Reporting Institute Conference of the Leventhal School of Accounting of the University of Southern California about the intensified convergence effort

I am proud to say that so far my fellow Board members and our staff (both FASB and IASB) have risen to the occasion. But I do fear potential burnout, as it’s not easy to be running a marathon at sprint speed. [O]n our side, the FASB side, expeditiously completing the projects is important and we have been working hard to achieve this. But our emphasis also has been and will continue to be on seeking not only expeditious completion and convergence but also genuine improvement in the stan- dards …. We’re also stressing the importance of main- taining full and proper due process, including extensive constituent outreach and engagement.

160 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

In looking back at the period from November 2009 when we announced the highly intensified convergence effort to May 2010 when we reworked the timetable and approach, I think it is clear that I, along with others, had underestimated the amount of time it would take to properly and fully examine, discuss, and come to decisions on the many key issues in each of the projects and had overestimated the potential effect of significantly increasing our joint meetings on our ability to expedite progress on so many pro- jects. It was an effort that had never been tried before, and as we progressed with the many joint meetings, it became increasingly clear that despite all the hard work and good intentions, more time would be needed to properly complete projects. Making sure that constituents would be able to properly review and comment on major proposals was essential to ultimately issuing sound standards.

Nevertheless, as planned and by the time I retired on September 30, 2010, we had issued joint exposure drafts on rev- enue recognition, accounting for leases, and presenting compre- hensive income.38 At FASB, we had issued a major exposure draft on accounting for financial instruments,39 received very extensive input on that proposal from a wide group of stakeholders, and begun discussions with the IASB on a plan for jointly redeliberat- ing the key issues. The IASB had also issued a major exposure draft on accounting for insurance contracts that was significantly different from the existing U.S. accounting standards on insur- ance.40 We decided to solicit input from U.S. constituents on the IASB’s proposal and alternative ways of improving U.S. GAAP in

38. Proposed Accounting Standards Update (ASU) Revenue Recognition (Topic 605): Revenue from Contracts with Customers issued June 24, 2010; proposed ASU Leases (Topic 840) issued August 17, 2010; and proposed ASU Comprehensive Income (Topic 220): Statement of Comprehensive Income issued May 26, 2010. 39. Proposed ASU, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities — Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815) issued May 26, 2010. 40. IASB exposure draft Insurance Contracts issued July 2010.

International Convergence 161Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

this area and, therefore, issued an Invitation to Comment in September 2010.41

Post-September 30, 2010, both the FASB and IASB made some further changes to their technical agendas, so they could focus their efforts through June 30, 2011, on the priority projects. Toward that goal, the monthly meetings between the boards con- tinued, with the boards focusing on those projects. However, in April 2011, the boards announced further revisions to the conver- gence timetable that included extending the timeline for complet- ing the projects on accounting for financial instruments, leasing, and revenue recognition beyond June 30, 2011, in order to permit further work and consultation with stakeholders on these very major subjects.42 The boards also decided to issue second exposure drafts on revenue recognition and lease accounting for public com- ment, reflecting the importance of these subjects and the fact that in redeliberating issues relating to the 2010 exposure drafts, the boards had agreed on a number of changes to those proposals. The boards were able, however, to finalize and issue common standards on fair value measurement in May 2011 and presenta- tion of comprehensive income in June 2011.

Clearly, and very appropriately in my view, the boards proceeded in a deliberate and thorough manner on the major projects, ensuring that there was proper consultation with stake- holders, careful consideration of all the input that is received, rede- liberation of issues, and issuing revised proposals for public comment in order to try to ensure that the final standards, when issued, are high quality, understandable, operational, and cost- effective. For several years The G20 continued to issue periodic calls urging the boards to complete the key convergence projects in support of the goal of establishing a single set of high-quality global accounting standards, but more recently (perhaps because of the lapse of time and/or reflecting the end of the formal convergence

41. FASB discussion paper Preliminary Views on Insurance Contracts issued September 17, 2010. 42. April 21, 2011, FASB news release IASB and FASB Report Substantial Progress towards Completion of Convergence Program.

162 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

program between FASB and the IASB and broader changes in geo-economic and geo-political priorities) stopped doing so.

Waning of the Urge to Converge

For several more years the two boards continued to meet together frequently trying to produce joint, or at least common, standards on revenue recognition, accounting for financial instruments, lease accounting, and accounting for insurance contacts.

Those efforts had mixed results in terms of producing con- verged standards. In May 2014, in what may have been a last hur- rah for the FASB-IASB MoU convergence effort, the boards issued converged standards on revenue recognition.43 To someone who was heavily involved in the convergence effort over many years, the issuance of what was effectively a global standard on what is probably the most important line item in the financial statements was a very major accomplishment.

I also think it demonstrated that convergence was possible in a major area where the two boards recognized that improvement to their standards was needed, but where each board was starting from a very different place in terms of its existing standards. In the United States, the existing accounting standards and SEC require- ments on revenue recognition encompassed myriads of very detailed pronouncements and guidance on specific industries and particular transactions and arrangements. They had been devel- oped piecemeal over decades by the FASB and its predecessors, the AICPA, the EITF, and by the SEC staff and were not based on a consistent set of overarching objectives or principles. As a result, the application of these disparate standards and requirements sometimes resulted in inconsistent reporting of economically simi- lar transactions and arrangements. In sharp contrast, the existing IFRS standards on revenue recognition contained only high-level guidance, also resulting in inconsistent reporting.

43. FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and IFRS 15, Revenue from Contracts with Customers.

International Convergence 163Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

So for both boards revenue recognition represented a major opportunity for improvement of their respective standards and for convergence between U.S. GAAP and IFRS. It would also likely require significant changes in practice, affecting almost all consti- tuents of both boards. And so achieving all this was not easy. The effort involved many years of joint work and joint deliberations in countless joint board meetings, issuing joint discussion documents, two joint exposure drafts, holding numerous joint public roundta- bles, and field visits by board members and staff from the two boards to scores of companies around the world.

Post issuance of the May 2014 standards, the FASB and IASB formed a joint revenue recognition resource transition group to help the boards identify and, as needed, address implementation issues in advance of the effective dates of the new requirements (originally slated for 2017 for public companies and subsequently deferred for one year by both boards). Some have expressed con- cerns that this process of addressing implementation issues may lead to some divergence in what were converged standards because the FASB seems inclined IASB to issue additional formal guidance on more of the implementation issues than the IASB.

Both boards decided in 2015 to delay the effective date of the new standard by a year (to 2018 for calendar year-end companies) to allow companies more time to implement the new requirements and to enable the boards to discuss with the transition resource group the numerous implementation questions and issues that have arisen regarding the new standard and, as each board deems appropriate, to issue clarifying guidance or amend specific provi- sions of the standard in advance of the effective date. Nonetheless, I feel that revenue recognition represents a very major achieve- ment in the over decade-long convergence program between the FASB and the IASB.

However, the joint standard on revenue recognition may repre- sent the last major converged standard, at least for a while. While the original goal of the projects on accounting for financial instru- ments, lease accounting, and accounting for insurance projects was to develop converged standards and the boards deliberated jointly on each of these projects for several years, at various points

164 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

the FASB and IASB decided to pursue some different paths on each of the three projects.

In regard to accounting for financial instruments, while, at times the two boards seemed to be coming together on the basic model for classification and measurement of financial instruments, on the accounting for credit impairment of loans and debt securities, on balance sheet offsetting (“netting”), they subsequently proceeded on different paths on all these subjects, and on hedge accounting. Thus, the project has resulted in new standards being issued by each board that are not converged. Arguably and taken as a whole, the result may be greater differences between U.S. GAAP and IFRS in accounting for financial instruments than before the project was undertaken.

Progress on the joint project on insurance contracts also proved to be challenging, both because of the complexity of the issues and also because there were very understandable differences in per- spective between the two boards regarding the urgency of devel- oping a converged standard in this area. For the IASB, this has been and continues to represent a major gap in the body of IFRS standards, one requiring that it develops and issues a standard as soon as possible. However, we already have well-established stan- dards under U.S. GAAP on insurance, and although these may be capable of improvement, the perceived urgency to do so is not as great, and the cost-benefit considerations of requiring a major change are important. Thus, it is not surprising that after several years of joint deliberations on this project and continuing differ- ences of view among board members and between the boards on certain key issues, it was reported that FASB Chairman Leslie Seidman indicated at the June 2012 meeting of the FASB’s Financial Standards Advisory Council that, in her view, it is not likely that the boards will achieve convergence on the accounting for insurance contracts and that the FASB was planning to step back to rethink its approach to this project.44

44. “In brief: FASB Chairman provides status update on insurance contracts project,” PwC CFO Network, June 7, 2012. http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf? ContentCode=THUG-8V2L4G&rss=true

International Convergence 165Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.sec.org

As a result of this rethinking, in February 2014 the FASB decided to discontinue working with the IASB on the approach they had been developing for many years and that would have represented a major change for U.S. insurers and instead to focus on making targeted improvements to existing U.S. GAAP for insurance entities. The IASB decided to continue pursuing the model that the two boards had been developing. As a result, it seems likely that financial reporting by insurance companies that use U.S. GAAP will vary significantly from those that use IFRS.

On the other hand, the joint project on lease accounting has resulted in high-level convergence (and in my view a very impor- tant improvement) in terms of requiring on balance sheet treat- ment of the obligations and rights relating to most leases. However, here too the boards were unable to reach converged answers in regard to various other aspects of accounting for leases. Probably the most important of these relates to the income state- ment treatment, where IFRS will require a single approach that is consistent with the balance sheet accounting while U.S. GAAP will require two different approaches that yield income statement results akin to those under the current operating and capital lease accounting lease models.45

Moreover, in recent years it has become clear that the unique, bilateral program of convergence between the FASB and the IASB would be coming to an end and is unlikely to continue in the future. In that regard, in July 2011, the IASB issued for public comment a major consultation document seeking input on its agenda for the next three years. With a growing list of potential projects requested by constituents in countries that have or plan to adopt IFRSs and continuing uncertainty over where the United States stands in regard to IFRSs, joint projects with the FASB may have become less of a perceived strategic imperative for the IASB and its trustees.

Very importantly, other countries wanted a seat at the IASB standard setting table. Thus, in 2013 the IFRS Foundation Trustees

45. See FASB Accounting Standards Update No. 2016-02, Leases (Topic 842) issued in February 2016 and IFRS 16 Leases issued in January 2016.

166 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

formed the Accounting Standards Advisory Forum (ASAF) con- sisting of 12 national and regional standard setting groups to “pro- vide an advisory forum in which members constructively contribute toward the achievement of the IASB’s goal of develop- ing globally accepted high quality accounting standards.” The FASB is one of the twelve standard setters currently on the ASAF (along with the national accounting standard-setting bodies of Australia/New Zealand, Canada, China, France, Germany, Italy, Japan, South Africa and regional groups from Europe, Latin America, and Asia Oceania) and the FASB representatives partici- pate actively in that group’s discussions.

In recent years the FASB has also strengthened its relationships with other major national and regional standard setters in order to proactively share information and perspectives about their respec- tive standard setting activities and the development of standards used internationally. More recently, senior representatives of the FASB and the national accounting standard setters of Canada, Germany, Japan, and the United Kingdom have had periodic meetings of what they are calling the “Multilateral Group” of stan- dard setters to discuss common issues and ways to narrow differ- ences in the accounting standards used internationally in order to continue to increase the range of comparable outcomes in report- ing across different sets of accounting standards. There are also various other forums that bring together standard setting bodies to share information and perspectives.

In summary, it seems clear that the bilateral FASB-IASB stan- dard setting program has given way to a more multilateral world of international standard setting.

Additionally, from reading press accounts and talking with members of the FASB and IASB and observers of the accounting standard-setting scene, it seemed clear that by 2011 convergence fatigue was setting in on both sides. Thus, as reported on in November 2011 in WSJ.com

In a speech in Australia on Friday, he [referring to IASB Chairman Hans Hoogervorst] said it’s not in the best interest of U.S. or global investors for the IASB and the

International Convergence 167Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.WSJ.com

U.S. Financial Accounting Standards Board to spend another ten years making minor tweaks to accounting rules to get them exactly the same … . Gradual conver- gence between the standards “has served its purpose, but now it is time to move on” Hoogervorst told the IFRS Foundation conference in Melbourne, Australia. [M]any other international stakeholders won’t support a longer, indefinite period of convergence between U.S. and international rules.46

As reported in the December 6, 2011, article “FASB, IASB Chiefs Agree New Convergence Model Is Needed” in the Journal of Accountancy, FASB Chair Leslie Seidman said the FASB would like to work with the IASB to complete the current priority conver- gence projects but that indefinite convergence is not a viable option practically or politically.

I had made similar observations (e.g., as reported in the CFO. com article “Herz: No Convergence for 10�15 Years”) at a 2009 public meeting of the Financial Crisis Advisory Group [FCAG] in response to the question from FCAG Co-Chair Harvey Goldschmid, “In a perfect world, with full resources and free from outside influence, when could we get convergence?” I responded “Ten to fifteen years.”47 Although my response may have sur- prised some, that was my assessment at the time of how long it would take the boards, working together, to achieve full conver- gence between IFRSs and U.S. GAAP. I knew, as did other knowl- edgeable parties, that beyond the joint projects under the MoU, there were many other differences between the two sets of stan- dards and that ironing these out through a continued convergence effort would likely take a long time. That’s one reason why I favored the improve and adopt approach under which we sought to work jointly with the IASB to develop new, improved, and con- verged standards in a finite number of major areas, at which point

46. Chasan (2011). 47. Accounting Body Defends Changes on G20 Goal, Banks Fret (2009).

168 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.CFO.com

I believed IFRSs would be a high-quality set of standards suitable for adoption in the United States. Although such a process was clearly challenging and would take a number of years to com- plete, I reasoned that it would be a more expeditious path to achieving common standards than a continued process of conver- gence between the boards beyond the completion of the MoU pro- jects that would need to deal with the many remaining differences between the two sets of standards.

Leslie Seidman retired from the FASB at the end of June 2012. FASB Board member and former FASB Technical Director Russell (“Russ”) Golden succeeded Leslie as FASB Chairman and James (“Jim”) Kroeker, former SEC Chief Accountant, joined the FASB as Vice Chairman in September 2013. Russ and Jim have a lot of experience working together at Deloitte, as the two lead staffers to the 2007�2008 SEC Advisory Committee on Improvements to Financial Reporting which I discuss in Chapter 6, and in their respective roles at the FASB and SEC. I had the opportunity to work closely with both Russ and Jim and I have a very high regard for both of them, I look forward to great things from the FASB under their leadership.

How all that continues to play out will be very interesting to observe and very important for financial reporting in the United States and around the world. On the one hand, the inability in recent years of the FASB and IASB to reach converged standards in a number of key areas would seem to provide evidence that, at least as far as the U.S. is concerned, there will always need to some differences between national accounting standards and IFRS. That view was expressed by Russ Golden in an October 2013 speech in Japan in which he stated that while it is in the best interests of the world’s capital markets to work toward a common set of global accounting standards, “there are likely to be occasions when pre- serving the integrity of our national business cultures requires us to maintain some differences in national accounting standards.”48

48. Remarks of Russell G. Golden, Chairman, Financial Accounting Standards Board, Meeting of Keidanren and Financial Executives International, Tokyo, October 16, 2013.

International Convergence 169Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

That statement about the need to sometimes maintain differ- ences in a national accounting standards has been repeated in sub- sequent speeches by FASB board members and is also reflected in the April 2015 Strategic Plan of the FAF, Financial Accounting Standards Board, and the Governmental Accounting Standards Board which, in discussing action steps by the FASB relating to the international arena and working cooperatively with other stan- dard setters to share information and perspectives that can help reduce unnecessary differences among standards used internation- ally, states, “In some cases, however, the FASB (or other national standards setters) may conclude that the best interests of its own capital markets outweigh the goal of completely converged accounting standards.”49

I have had various conversations about these statements with both FASB board members and FAF trustees and with IASB board members and IFRS Foundation trustees. The former group seems to view them as statements of the obvious based on experience and not as an indication that they no longer support working with the IASB and other national standard setters in advancing the goal of common high-quality global accounting standards. On the other hand, for certain IASB board members and IFRS Foundations trus- tees, my sense is that these statements have become a source of considerable irritation as they regard them not only as clear evi- dence of the FASB and FAF’s disavowing the once-shared goal of a single set of high-quality international standards, but also as the FASB and FAF now trying to promote accounting nationalism in other parts of the world.

In countering the idea that national accounting differences will sometimes be needed because of differences in national business cultures, IASB board members and IFRS Foundation trustees have pointed to the compilation of “Jurisdiction Profiles” of IFRS appli- cation around the world on the official IFRS website (ifrs.org) which, as of May 2015, provides detailed profiles of the extent to which and manner of application of IFRS in 140 jurisdictions. An

49. See page 8 of the April 2015 FAF/FASB//GASB Strategic Plan.

170 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.ifrs.org

analysis of the profiles shows that 116 jurisdictions require IFRS for all or most of their domestic publicly accountable entities (i.e., listed companies and financial institutions) and that contrary to assertions by some, modifications to IFRS by individual juris- dictions have been limited and transitional in nature.

Thus, it would seem that a wide range of countries that clearly have very different “business cultures” have not seen it necessary to retain or create differences in accounting standards to fit their national circumstances. I will discuss this later in this chapter, using my experience as a member of the Accounting Standards Oversight of Canada of how our neighbor to the north has been able to adopt IFRS without feeling compelled to allow for differ- ences to specifically fit the Canadian business culture or capital markets. On the other hand, as I will also discuss later in this chapter, there are examples of other countries, such as India, that in trying to adopt IFRS or incorporate IFRSs into their national standards, have felt it necessary to modify particular provisions of IFRS. Also, there are many countries that continue to require the use of local GAAP for statutory reporting.

While the differing views of the FASB and FAF versus those of the IASB and the IFRS Foundation are interesting and important, as subsequently discussed in this chapter, the decision on whether and how the United States moves to or toward IFRSs ultimately rests with the SEC. Many paths have been suggested and are pos- sible. Some have supported a gradual approach that, although not achieving full convergence between U.S. GAAP and IFRSs, would be directionally consistent with continuing, over time, to move the two sets of standards closer together. That seemed to be the view expressed in the November 15, 2011, letter of the FAF trustees to the SEC that proposed a U.S. incorporation commitment “pre- mised on the belief that although the pursuit of a single set of global accounting standards is a worthy objective, a more practical goal for the foreseeable future is to achieve highly comparable (but not necessarily identical) financial reporting standards among the most developed capital markets that are based on a common set of international standards.” The FAF letter described this approach as

International Convergence 171Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

a model for incorporating into U.S. GAAP indepen- dently developed and investor-focused international standards that improve financial reporting in the U.S. or that maintain the quality of financial reporting under U.S. GAAP but also advance global comparability of standards. Under this recommended approach, the U.S. would retain sovereign authority over financial report- ing and standard setting for U.S. capital markets, with influential roles for the SEC and FASB that recognize the benefit of the global harmonization of financial reporting standards based on the common platform of IFRS.50

In contrast, the February 2012 report by the trustees of the IFRS Foundation argued for full adoption of IFRS, stating

Convergence may be an appropriate short-term strategy for a particular jurisdiction and may facilitate adoption over a transitional period. Convergence, however, is not a substitute for adoption … . There is a natural tempta- tion for countries (stakeholders within those countries) to argue against full adoption of IFRSs, to call for con- vergence of national standards and IFRSs rather than adoption, or to introduce national exceptions to IFRS rules. The temptation to pursue convergence rather than adoption should be resisted. Full adoption must be the goal.51

To me, these differences in views between the two organizations are not surprising given the different mission and roles of the two groups and the accounting standard-setting bodies they oversee. The primary mission and responsibility of FAF relates to account- ing standards used in the U.S. capital markets, but the clearly sta- ted mission of the IFRS Foundation since its establishment is to promote the achievement of a single set of high-quality global

50. See www.sec.gov/comments/4-600/4600-158.pdf 51. IFRSs as the Global Standards: Setting a Strategy for the Foundation’s Second Decade.

172 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.sec.org

accounting standards. Aligning these different missions and roles would require either that the FAF and FASB conclude that adoption of IFRS is in the best interest of the U.S. capital markets or that the IASB and the IFRS Foundation acknowledge that national differences in accounting standards will sometimes need to exist.

Moreover, some parties on both sides believe that the FASB- IASB convergence program was a big mistake and that each board should go its own way and focus on making its own standards as good as possible for its stakeholders without deliberately seeking to bring the two sets of standards closer together. For example, in an article in Accounting Today, professors Paul Miller and Paul Bahnson, commenting on the announcement in December 2011 by SEC Chief Accountant James Kroeker that the SEC would not be making a decision by the end of 2011 on the future of IFRSs in the United States, on what Miller and Bahnson see as mounting areas of disagreement between the FASB and the IASB on key issues in major projects, and on the IASB’s tilt toward continental European interests, state

The quixotic quest to create uniform international stan- dards is dead and done … . We ask, then, who could think it makes sense to subjugate U.S. standard-setting to Europe with its perennial political and economic pro- blems? The present disarray shows that attaining uni- form global standards is an ephemeral fantasy … . Going forward, incorporation means FASB will treat both old and new IFRS as potential helpful input to its delibera- tions. Instead of bending over backward to find common ground with the IASB, FASB will resolve its issues as it sees fit without pressure to go along to get along.52

Indeed, I have heard some in the United States analogize a potential move to IFRS to the likelihood and merits of the United

52. Miller and Bahnson (2012).

International Convergence 173Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

States adopting the metric system, that is, that the goal of getting to a single set of global accounting standards is not achievable and that we are doing just fine with our own U.S. standards. While there may be some truth to this analogy, I believe it is over sim- plistic, particularly when viewed in terms of the objective of com- parability. Conversions from the United States to metric measures and vice-versa are formulaic and straightforward, for example, every foot in length equals .2967 meters and every pound of weight equals .45359 kilos. In contrast, converting U.S. GAAP financial statements to IFRS or vice-versa can be a much more complex exercise given the many areas of continuing differences between the two sets of standards and how these affect the accounting for a particular company’s transactions and arrange- ments. Thus, for financial statement users wishing to make “apples to apples” comparisons of companies in an industry reporting under U.S. GAAP with companies in that industry reporting under IFRS, formulaic approaches or rules of thumb may not achieve the objective. And for companies that have to report under both U.S. GAAP and IFRS (e.g., foreign subsidiaries of U.S. companies that have to report locally using IFRS and to their U.S. parent using U.S. GAAP or U.S. subsidiaries of foreign companies here that report under U.S. GAAP but to their parent under IFRS), either need dual accounting systems or processes to identify and adjust their financial statements and disclosures for the impact of the differences between U.S. GAAP and IFRS.

Although all of this discussion and viewpoints are interesting and help inform the debate, as noted above, ultimately the deci- sion on whether and how reporting by U.S. public companies move to or toward IFRSs rests with the SEC and could also, in my view, involve Congress.

In the Meantime, Back at the SEC

In the wake of the Madoff scandal and due to ongoing events relating to the financial crisis, the SEC certainly had its hands full during 2009. So, it is not surprising that it would take until

174 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

February 2010 for the SEC to issue another release relating to the potential move to IFRSs for U.S. issuers. In the release Commission Statement in Support of Convergence and Global Accounting Standards, the SEC reiterated its long-standing support of the development of a single set of high-quality global accounting standards. It also sta- ted that it planned to make a decision in 2011 on whether, when, and how to incorporate IFRSs into the U.S. financial reporting sys- tem. In recognition of the concerns raised by commenters on the November 2008 “roadmap” proposal, the SEC directed the SEC staff to conduct an extensive work plan to address many of the issues raised in the comment letters, including whether IFRSs is sufficiently developed and consistent in application for use in the United States, whether the IASB is an independent standard setter that sets standards for the benefit of investors; the degree of U.S. investor understanding of IFRSs and the readiness of preparers and auditors to make the conversion to IFRSs; and assessing the impact of moving to IFRSs on U.S. laws and regulations and on companies in terms of accounting systems, contractual arrange- ments, corporate governance, and litigation contingencies. The release also indicated that if the SEC were to decide in 2011 to incorporate IFRSs into the U.S. reporting system, the first time U.S. companies would report under such a system would be no earlier than 2015.

The use of the word incorporate versus adoption of IFRSs was interesting and suggested the possibility of a partial or piecemeal movement to IFRSs by U.S. issuers (e.g., by allowing but not requiring all or some issuers to use IFRSs or by requiring or allow- ing the use of some but not all existing IFRS standards). Moreover, incorporation could be achieved by continuing to have U.S. GAAP be the legal name of the standards in the United States but with all or some of those of those standards being the same as, or based on, IFRSs. In that regard, in December 2010, SEC Deputy Chief Accountant Paul Beswick floated a possible approach called “con- dorsement,” a combination of convergence and endorsement, under which U.S. GAAP would continue to exist, and the FASB would decide on a standard-by-standard basis whether par- ticular IFRSs pronouncements are suitable for use in the United

International Convergence 175Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

States.53 Such an approach was further detailed in the SEC staff paper54 issued in May 2011. The approach has some similarities to improve and adopt path we outlined in 2007.55

However, in other important respects, this approach would be similar to the endorsement processes followed in certain parts of the world for IFRSs. Although aimed at ensuring the suitability and acceptability of IFRSs in those jurisdictions, these can result, and have resulted, in variations of IFRSs across the world. That would seem to run counter to the avowed and often reiterated and reaffirmed goal of a single set of global standards. Thus U.S. adoption of such a process could not only create a U.S. version of international standards but might also encourage other countries and jurisdictions to maintain or put into place IFRSs endorsement mechanisms, thereby potentially further undermining the goal of achieving a single set of international standards. For U.S. compa- nies and other stakeholders in the U.S. reporting system, a condor- sement approach could result in a lengthy period of serial changes in U.S. GAAP that could increase the overall cost and effort involved in moving to international standards.

On the other hand, incorporation of IFRSs into U.S. GAAP could avoid or significantly mitigate a number of legal and regula- tory issues that might arise if IFRSs supplanted U.S. GAAP as the legally recognized accounting standards in this country. Because the terms “U.S. generally accepted accounting principles” and “U.S. GAAP” are embedded in many places in our federal and state laws; in U.S. tax rules and regulations; in the rules and regulations of the SEC, U.S. banking regulators, and those of other regulatory agencies; and in many contracts entered into by

53. Remarks by Paul A. Beswick, Deputy Chief Accountant of the SEC, at the 2010 AICPA National Conference on Current SEC and PCAOB Developments on December 6, 2010. 54. Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: Exploring a Possible Method of Incorporation. 55. Orenstein, Edith. “Beswick’s ‘Condorsement’ and Herz’s ‘Improve and Adopt’.” FEI Financial Reporting Blog, May 31, 2011. The author compares the two approaches and con- cludes, “Although Herz’s ‘improve and adopt’ model circa 2007 is not precisely the same as Beswick’s 2010�2011 ‘condorsement,’ … I believe at the very least that Herz, through his ‘improve and adopt’ model can be viewed as the uncle, if not the father of condorsement.”

176 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

companies, providers of capital, and other parties, changing the legal name of the standards in use in United States could raise widespread legal and regulatory issues. In effect, incorporation would allow IFRSs to be embedded in the legal wrapper of U.S. GAAP such that the actual standards would be IFRSs but would, for legal purposes in the United States, still be called U.S. GAAP.

Incorporation of IFRSs into U.S. GAAP over time could also miti- gate the challenges to the U.S. reporting system associated with a one-time complete, or “big bang,” conversion to IFRSs. Despite the very significant progress that has been made in narrowing differ- ences between IFRSs and U.S. GAAP, there are still numerous remaining differences between the two sets of standards, some of which can have significant impacts on the reported results and financial condition of companies. Further differences are created as the FASB and the IASB issue new standards that are not the subject of joint projects between the two boards. Ironing out these differ- ences could be challenging and could take many years. An endorse- ment approach would enable the FASB to continue to be involved in determining the standards used in the United States and might also facilitate the United States, through the FASB, to continuing to play a significant role in the development of international stan- dards. Finally and importantly, an endorsement approach would seem to be consistent with the previously discussed requirements of Section 108 of SOX that require the designated U.S. standard setter to consider “the extent to which international convergence on high quality accounting standards is necessary or appropriate in the pub- lic interest and for protection of investors.”

The SEC staff continued its execution of the February 2010 work plan on IFRSs through 2010 and 2011 and into 2012. During that period, the staff (a) issued two requests for comment in August 2010, one soliciting input from issuers on incorporating IFRSs into financial reporting by U.S. issuers and the other solicit- ing input from investors on this subject;56 an interim progress

56. Both releases were titled Notice of Solicitation of Public Comment on Consideration of Incorporating IFRS into the Financial Reporting System for U.S. Issuers.

International Convergence 177Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

report in October 2010 on their work plan activities;57 three staff papers, the aforementioned one in May 2011 on the condorsement approach,58 one comparing U.S. GAAP and IFRSs,59 and the third analyzing the application of IFRS in practice,60 (b) had received comment letters, (c) held public roundtables, and (d) did an exten- sive amount of fact gathering and analysis on the wide range of issues relating to the potential use of IFRSs by U.S. issuers.

Although the SEC had said it intended to make a decision on this important matter in 2011, in December 2011, Chief Accountant Jim Kroeker announced the staff would need some more time to finalize and draft its final report on the work plan. That report,61 was issued on July 13, 2012, which was also Jim Kroeker’s last day at the SEC. (As noted above, in September 2013 Jim joined the FASB as Vice Chairman.) Although the SEC report provided a very comprehensive summary of the SEC staff’s work, findings, and observations, it did not contain any recommenda- tions to the SEC on whether, when, and how to incorporate IFRSs into the financial reporting system for U.S. issuers. Moreover, the introductory note to the report stated

The Commission believes it is important to make clear that publication of the Staff Report at this time does not imply — and should not be construed to imply — that the Commission has made any policy decision as to whether International Financial Reporting Standards should be incorporated into the financial reporting sys- tem for U.S. issuers, or how any such incorporation, if it

57. Work Plan for the Consideration of Incorporating Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: Progress Report. 58. Work Plan for the Consideration of Incorporating Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: Exploring a Possible Method of Incorporation. 59. Work Plan for the Consideration of Incorporating Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: A Comparison of U.S. GAAP and IFRS. 60. Work Plan for the Consideration of Incorporating Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: An Analysis of IFRS in Practice. 61. Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: Final Staff Report.

178 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

were to occur, should be implemented … . Additional analysis and consideration of this threshold policy ques- tion is necessary before any decision by the Commission concerning the incorporation of IFRS into the financial reporting system for U.S. issuers can occur.

I will not go over in detail the many findings and observations of the SEC staff in the July 2012 final report and would refer inter- ested readers to the report. However, as I read the report, it seemed to me that it did a good job explaining the many issues associated with direct and full adoption of IFRSs and why some sort of endorsement approach might eliminate or at least alleviate many of these issues. These included the aforementioned discus- sion of the legal, regulatory, and contractual issues associated with replacing U.S. GAAP as the legally designated set of standards; the burden on U.S. companies in terms of cost and effort that would accompany a one-time “big bang” approach to switching to IFRSs; and concerns about ensuring that there is a proper vet- ting of IFRSs to ensure its suitability for broad use in the United States. The report also contained some observations regarding areas in IFRSs that are underdeveloped relative to U.S. GAAP, such as the accounting for extractive industries, insurance, and rate-regulated activities; the many areas of continuing difference between IFRSs and U.S. GAAP; the need for the IASB to have a more active and effective interpretive process and to make greater use of national accounting standard setters; the need for continued improvement in the global application and enforcement of IFRSs and for broader and more stable funding of the IASB and IFRS Foundation that does not include obtaining funds from public accounting firms; a recommendation that the post-implementation review of IASB standards be conducted by the IFRS Foundation rather than the IASB itself; and the need for greater investor edu- cation and engagement relating to the development and use of accounting standards.

When viewed from a U.S. perspective, none of these findings and observations were, in my view, particularly surprising. However, to some, if not many, at the IASB, the IFRS Foundation, and its broader

International Convergence 179Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

constituencies around the world, the SEC staff report may have been disappointing and frustrating, both because it did not contain any recommendations to the SEC on a path forward for IFRSs in the United States and seemed to leave that in limbo for the time being and because, to some, it may reflect an overly U.S. centric view of financial reporting in increasingly globalized capital markets. For example, Michel Prada, the chairman of the IFRS Foundation trus- tees, was quoted in the July 16, 2012, article “IASB Takes Swipe at SEC Delay over IFRS” in Accountancy Age as follows:

While recognising the right of the SEC to determine the method and timing for incorporation of IFRSs in the US, we regret that the staff report in not accompanied by a recommended action plan for the SEC. Given the achievements for the convergence programme inspired by repeated calls of the G20 for global accounting stan- dards, a clear action plan would be welcome.

European Commission spokesman Stefan De Rynck, in the July 18, 2012, article “EU Queries U.S. Seat on Global Accounting Body” on Reuters.com, stated that discussions over whether the United States will adopt IFRSs have been going on for a

very long time and, despite repeatedly expressed com- mitments from the U.S., things are advancing very slowly …. The lack of a clear vision from the U.S. creates uncertainty and hampers the IFRS from becoming a truly global accounting language …. It is also becoming more difficult to justify the representation of jurisdictions not applying IFRS in the IASB governance framework.

In October 2012, the staff of the IFRS Foundation issued a report to the Trustees of the IFRS Foundation analyzing the findings in the July 2012 SEC staff report on IFRS.62 That report provided a status report on the findings and issues in the SEC staff report,

62. IFRS Foundation Staff (2012).

180 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.Reuters.com

discussed actions that have already been undertaken in regard to a number of the findings in the SEC staff report, tactfully took issue with certain findings and observations in the SEC staff report (e.g., in regard to funding of the IASB) by providing additional information and perspectives on these matters, questioned the sus- tainability and viability of a gradual approach to moving toward IFRS on a standard-by-standard basis, and contained an appendix discussing arguments and evidence in support of the case for global accounting standards. Overall, the IFRS Foundation staff concluded “While the size of the US economy relative to other jurisdictions presents significant challenges in transition that are unique to the US, the experience of other countries suggests that many of the challenges can be overcome with the appropriate poli- tical will to make a commitment to the mission of a single set of global standards. Moreover, in many areas the US is better pre- pared than other jurisdictions to consider the adoption of IFRS.”63

And, as noted above, recent surveys by the IFRS Foundation on the application of IFRS by jurisdictions around the world indicate that in adopting IFRS countries have generally refrained from making modifications to the standards to try to suit their national interests.

From the time the SEC staff issued the July 2012 report until early 2014 there was essentially radio silence from the SEC on the subject use of IFRS by U.S. issuers. In January 2014, Mary Jo White was appointed Chair of the SEC. In February 2014, the SEC published a draft strategic plan for fiscal years 2014�2018 that stated “due to the increasing global nature of capital markets, the agency will promote higher quality financial reporting worldwide and will consider, among other things, whether a sin- gle set of high-quality global accounting standards is achiev- able.”64 That statement was also included in the final SEC strategic plan for fiscal years 2014�2018 that was issued in

63. ibid., p. 19. 64. See page 8 of Strategic Plan, U.S. Securities and Exchange Commission, Fiscal Years 2014�2018, Draft for Comment, available at sec.org

International Convergence 181Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.sec.org

September 2014.65 Additionally, in speeches in 2014 Chair White indicated that the SEC would be soon addressing the subject of use of IFRS in the U.S. reporting system.

In October 2014, James (Jim) Schnurr, who had retired from Deloitte earlier in 2014, became the new Chief Accountant of the SEC. At the AICPA Conference on Current SEC and PCAOB Developments in December 2014, Schnurr floated the idea of allowing U.S. public companies to voluntarily provide supplemen- tary financial information based on IFRS. As described by Schnurr, under this approach companies could determine whether to provide any such information and, if so, what particu- lar IFRS information to provide. It could range, for example, from a full set of supplementary financial statements prepared under IFRS, to summary or partial financial statements under IFRS, to piecemeal disclosures of what the company would have reported under IFRS for selected income statement or balance sheet items.

Schnurr floated the idea as a possible way to continue to move forward the use of IFRS in the U.S. capital markets consistent with the SEC’s long-standing support of the ultimate goal of a single set of high-quality global accounting standards. However, Jim also made it clear that under his proposal U.S. registrants would be required to continue to also provide full, audited U.S. GAAP financial statements, thereby reinforcing and preserving the pri- macy of U.S. GAAP reporting by U.S. public companies. Thus, this proposal was quite different from allowing U.S. registrants an option to use IFRS instead of U.S. GAAP as their primary report- ing language, that is, under the Schnurr proposal the IFRS infor- mation could be provided in addition to and not instead of the U.S. GAAP financial statements and related financial information.

Not surprisingly, there were mixed reactions to the Schnurr proposal. Some welcomed and applauded it as a market-based way of determining whether there truly is demand for IFRS

65. See page 13 of Strategic Plan, U.S. Securities and Exchange Commission, Fiscal Years 2014�2018, available at sec.org

182 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

http://www.sec.org

reporting by U.S. companies. On the other hand, some compa- nies and industry groups indicated that the added costs of pro- viding supplementary IFRS information would likely deter them from voluntarily doing so. To those who would prefer that the SEC provide an outright option for U.S. registrants to switch from U.S. GAAP to IFRS, the Schnurr proposal was not viewed as a valid market test of the appetite for IFRS reporting by U.S. public companies and more akin to a trade tariff that would impose additional costs on U.S. companies that, given the option to do so, might want to report under IFRS instead of U.S. GAAP.

In May 2015, speaking at the annual Baruch College Financial Reporting Conference, Jim Schnurr focused his remarks on the subjects of international convergence and potential use of IFRS by U.S. registrants, stating:

Subsequent to my comments at the AICPA conference in December, the staff has heard reactions from a number of constituents: preparers, investors, auditors, regulators and standard setters. In many cases, this was the first time these constituents had discussed their views on IFRS with the staff since completion of the work plan in 2012 … . Some of the key themes we heard from our dis- cussions were as follows:

� There is virtually no support to have the SEC man- date IFRS or all registrants.

� There is little support for the SEC to provide an option allowing domestic companies to prepare their financial statements under IFRS.

� There is continued support for the objective of a sin- gle set of high-quality, globally accepted accounting standards.

My goal is to deliver on my commitment to Chair White in the near term. The staff is currently developing a

International Convergence 183Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

recommendation that will be able to provide some clarity to investor.66

The speech went on to discuss the similarities between IFRS and U.S. GAAP, how the convergence efforts had brought stan- dards closer together in the past decade, the importance of consis- tent implementation and application of converged standards, and how the FASB and IASB working together “have moved forward along the road towards achieving the objective of a single set of high-quality, global accounting standards.” In concluding his remarks Schnurr stated,

It is fair to say the FASB and IASB collaborative relation- ship is at a critical juncture. How often and what kind of interaction is going to occur after the leasing standard is finalized and issued? What happens to the Norwalk Agreement? Ultimately, how the boards decide to inter- act in the future is important. I believe that, for the foreseeable future, continued collaboration is the only realistic path to further the objective of a single set of high-quality, global accounting standards. In making my recommendation to Chair White about IFRS, and as the Commission considers how best to resolve or lessen the uncertainty existing today we collectively need to consider the best approach forward to support the objective of high-quality, globally accepted accounting standards.67

As of the time of writing this edition of this book in early 2016, my understanding is that the SEC staff has developed and is discussing with the SEC Commissioners a recommendation along the lines of the Schnurr proposal to allow the use of supplementary

66. Remarks of James Schnurr, Chief Accountant of the SEC, before the 2015 Baruch College Financial Reporting Conference, May 7, 2015. 67. ibid.

184 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

IFRS data by U.S domestic issuers. That, plus encouraging the FASB and IASB to continue to work together toward the goal of a single set of high-quality global accounting standards seems to be a far as the SEC is willing to go for the foreseeable future in terms of continuing to further the use of IFRS in the U.S. reporting system.

For those in the IFRS world, this is disappointing, In contrast, I believe most U.S. stakeholders feel that Jim’s Schnurr’s com- ments at the May 2015 Baruch conference reflect a realistic assessment of the situation in the United States. From that per- spective, the Schnurr proposal on supplementary IFRS data can be viewed as a way for the SEC to try to reconcile its continued expressed support for the goal of a single set of high-quality glo- bal accounting standards with the fact that there is little appetite in the United States for moving to IFRS or for even an allowing U.S. registrants an option to use IFRS in preparing their financial statements.

For good or bad, most stakeholders in the U.S. financial report- ing system seem to have grown comfortable with the idea of a two-GAAP world in which the U.S. continues to use U.S. GAAP and (most of) the rest of the world uses IFRS, including the grow- ing number of foreign companies listed in the United States now numbering over 500 and totaling trillions of dollars of market capitalization. Without stakeholder support for mandating or even allowing the use of IFRS by U.S. registrants, it seems that the only realistic alternative for the SEC to demonstrate its continued sup- port of the goal of a single set of global standards is to encourage continued collaboration between the FASB and IASB to further narrow the differences between U.S. GAAP and IFRS. But how strong can and will that encouragement be, particularly as the SEC also continues to advocate for and respect the independence of both the FASB and IASB?

In contrast, from my travels to many parts of the world over the past decade, including many countries that have adopted IFRSs, there seems to be disappointment and frustration over the reluctance in the United States to embrace IFRS. In many of these countries, a great deal of time, effort, and cost was

International Convergence 185Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

devoted to carefully planning and implementing the adoption of IFRS. And in some countries and jurisdictions, the move from their existing accounting standards to IFRS also required the exercise of considerable political will by the relevant authorities in the face of opposition in their country. So, I think it is under- standable that there have been expressions of disappointment, frustration, and criticism by some in the IFRS world over what they seem to view as continued “foot dragging” by the United States.

However, I believe it is also clear that the United States is dif- ferent from any other country in the world, including in the size and breadth of our capital markets and in our financial report- ing, regulatory, and legal systems, and, rightly or wrongly, the perceived benefits of moving to global standards are not viewed by many in the United States as worth the cost and effort that such a change would entail. I sense that despite their continued frustration with the U.S. stance regarding IFRS, many in the IFRS world have become resigned to the reality that, for the foreseeable future, the United States is not going to adopt or continue to try to systematically achieve convergence between U.S. GAAP and IFRS. While continuing to encourage U.S. stake- holder involvement in the development of IFRS, the reality of the situation in the United States was acknowledged by IASB Chairman Hans Hoogervorst in his December 2015 speech at the annual AICPA SEC Conference in Washington, D.C. in which he stated:

We ask you to continue working with us and to respond to our various consultations. We know that the next sev- eral years are unlikely to bring big progress towards domestic use of IFRS in the United States. Still there are substantive American interests at stake. IFRS strips out significant costs for American investors, multinational preparers and global accounting networks. More gener- ally, the US has a big interest in a strong infrastructure for the global economy, of which IFRS is an important part. That’s why we encourage you to stay engaged

186 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

and help us in continuing to build our standards in the future.68

So, as of early 2016, we continue to watch whether the SEC decides to move forward with a formal proposal for supplemen- tary IFRS reporting along the lines floated by Jim Schnurr, or decide to propose some other approach to trying to advance the use of IFRS by U.S. issuers, or continue to either study further or just defer consideration of this matter.

As the World Turns

To say a lot has happened since the start of the 21st century in terms of the world of accounting standards would be a great understatement. At the beginning of 21st century, before the IASB was established, there were myriads of national accounting stan- dards being used by companies listed on their domestic stock exchanges. In some, predominantly smaller countries that did not have their own accounting standard-setting body, their companies were required or allowed to use U.S. GAAP or what at that time were the International Accounting Standards (IASs) issued by the IASC, the predecessor of the IASB. Foreign companies seeking to list in the United States either had to prepare financial statements using U.S. GAAP or reconcile their financial statements to U.S. GAAP. As a result, U.S. GAAP was used by a number of major foreign companies that were listed in the United States.

As we look around the world today, the situation is now quite different. The spread of IFRS has been quite remarkable, with over 115 countries requiring IFRS for all or most of their listed compa- nies and financial institutions and a number of other countries allowing the use of IFRS. The list of countries that have adopted spans the globe and includes countries in all regions of the world, including most of Europe, our neighbor to the north, Canada, our neighbor to the south, Mexico, and by most of the countries in

68. Hoogervorst (2015).

International Convergence 187Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Latin America and the Caribbean, and other developed economies with close economic and other ties to the United States such as Israel and South Korea.

The adoption of IFRS around the world came largely in two waves, first in the early days of the IASB when the European Commission decided to require it for listed companies in the EU and with other countries such as Australia and South Africa also deciding to adopt IFRS. The second wave came after the SEC’s 2007 decision to drop the reconciliation requirements for foreign private issuers using full IFRS as published by the IASB, thereby effectively making IFRS an international passport for non-U.S. companies seeking to raise capital in the United States and other major capital markets around the world.

There are many interesting case studies of how particular coun- tries transitioned from their national accounting standards to IFRS. Let me briefly discuss one case with which I am quite famil- iar, that of Canada. In early 2011, I became a member of the Accounting Standards Oversight Council of Canada (AcSOC). Like the FAF in the United States, AcSOC has oversight over the two accounting standard setting boards in Canada, the Accounting Standards Board of Canada (AcSB) and the Public Sector Accounting Standards Board. At the time I joined AcSOC, Canadian listed companies, other publicly accountable entities, and certain governmental enterprises were just beginning the switchover from their existing accounting standards to IFRS as part of what had been a well-planned transition over several years.

Interestingly, for a number of years, AcSB had been pursuing a deliberate policy of trying to converge its accounting standards with U.S. GAAP. That strategy seemed to make sense in light of the significant economic and trade linkages between Canada and the United States. However, in 2006, after extensive consultation with Canadian stakeholders, AcSB with the support of AcSOC and the Canadian Securities Administrators, decided to change course and transition to IFRS for listed companies, other publicly accountable entities, and certain governmental enterprises. Reasons cited for this change in direction included the perception that U.S. GAAP was too complex and detailed for the Canadian

188 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

market, the growing use and acceptance of IFRS around the world, and a belief that moving to IFRS would better position Canadian companies and capital markets internationally.

Accordingly, in 2006, AcSB issued a Strategic Plan that outlined moving to IFRS for Canadian listed companies and other publicly accountable entities through a systematic process of convergence and endorsement. It called for the changeover to occur starting on January 1, 2011 and laid out a number of issues that would need to be addressed and actions by various stakeholder groups that would help effect a smooth and successful transition. While the goal was to fully converge to and endorse IFRSs as issued by the IASB without modification, AcSB issued three omnibus exposure drafts covering the body of IFRSs, explaining the IFRS require- ments, how they differed from existing Canadian standards, and specifically soliciting input into reasons why AcSB should either reject or modify particular provisions of IFRS to suit unique Canadian circumstances. AcSB also conducted significant outreach to help constituents understand the issues, challenges and poten- tial impacts of adopting IFRS and to learn about stakeholders’ perspectives and concerns about the change process. And for their part Canadian listed companies and other affected entities began identifying and working through the data, systems, and other changes they would need to make in order to implement IFRS in 2011 and the Canadian auditors, securities regulators, users of financial information, and accounting educators began to plan for the changeover.

The change occurred as planned starting on January 1, 2011. How did it go? Pretty well by most accounts. While there were a few bumps along the road, overall the changeover went quite smoothly without any noticeable disruption or impact on the Canadian capital markets and with fewer issues and at a lower cost than many had predicted. I believe that was due, in large part, to a combination of the careful planning and hard work of Canadian companies and other stakeholders leading up the effec- tive date.

I think it also important to note that at the time of the switch- over, over three hundred Canadian companies were also foreign

International Convergence 189Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

registrants filing with the SEC in the United States. As allowed by the Canadian Securities Administrators, many of those companies had adopted U.S. GAAP in both their Canadian and U.S. filings. While some of them have now switched to IFRS, many continue to use U.S. GAAP and so AcSB maintains strong working relation- ships with both the IASB and the FASB.

AcSB has ongoing responsibility in Canada for reviewing and endorsing new standards issued by the IASB. That is accomplished through close monitoring of IASB projects and developments by AcSB and its staff, issuance of “wraparound” exposure documents by AcSB for public comment explaining the proposed changes in IFRS and soliciting input on whether there are unique circum- stances in Canada that would warrant AcSB rejecting or modifying the particular IFRS for use in Canada, extensive ongoing outreach to Canadian stakeholders on these matters, and deliberation by AcSB before endorsing a new IASB standard for use in Canada. AcSB also carefully considers the completeness and quality of the IASB’s due process in developing standards, including whether that process has been free from undue political influence.

Thus far, except for allowing for temporary delays in implemen- tation of IFRS in a couple of areas while the IASB addressed parti- cular issues relating to those areas, AcSB has not felt it necessary to make changes to IFRS to meet specific Canadian circumstances.

AcSOC provides oversight over how the AcSB discharges its responsibilities relating to use of IFRS in Canada, as well as over AcSB’s direct setting of accounting standards for Canadian private companies and not-for-profit entities.

I think our neighbor to the north provides an interesting exam- ple how one developed economy made the switch to IFRS and of a country where financial reporting by listed companies under both IFRS and U.S. GAAP coexists. As noted, there are scores of other examples of how particular countries made the transition from their national accounting standards to IFRS.

But that’s not to say that except for the United States, every other country has adopted IFRS. In addition to the United States there are other very major countries — China, Japan, and India — to cite three, where all or most listed companies and other publicly

190 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

accountable entities continue to use national accounting standards, that to varying degrees differ from IFRS.

In China, companies whose securities trade in a public market are required to use the Chinese Accounting Standards for Business Enterprises (ASBEs), which purport to have been based, to a significant extent of IFRSs at the time. (However, the approxi- mately 300 Chinese companies listed on the Hong Kong Stock Exchange can use IFRS, ASBEs, or Hong Kong Financial Reporting Standards.) The ASBEs were issued in 2006, with a commitment under the 2005 Beijing Agreement between the IASB and the Chinese Ministry of Finance to converge over time to IFRS. Additionally, in April 2010 the Ministry of Finance of China issued a Roadmap for Continuing Convergence of Chinese Accounting Standards for Business Enterprises with IFRSs under which the ASBEs will be revised and improved in order to continue to nar- row the differences between the two sets of standards as the IASB makes changes to IFRS. And in November 2015, the IASB and the Ministry of Finance announced the formation of a joint working group to explore ways and steps to advance the use of IFRS stan- dards within China, especially for internationally oriented Chinese companies.

With the increasing importance of China to the world economy and the growth of and recent attempts to open up its capital mar- kets through, for example, the new Shanghai-Hong Kong stock connect for direct trading of shares listed in Shanghai on the Hong Kong Stock Exchange, I believe that China’s influence on the development of international accounting standards is likely to grow as the Chinese economy and the Chinese stock market have become increasingly important to the rest of the world. This was dramatically demonstrated during the summer of 2015 and again in early 2016 as concerns over the slowing growth and stability of the Chinese economy sparked waves of selling shares on the Shanghai Stock Exchange that then spread around the world lead- ing to significant corrections in global stock markets, including in the United States.

While I was FASB Chairman and in recognition of the growing importance of China to the world economy, we established a

International Convergence 191Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

working relationship with the Accounting Regulatory Department (ARD) of the Ministry of Finance of China. The ARD has primary responsibility for regulating accounting and auditing practices in mainland China, including setting accounting and auditing stan- dards, ensuring compliance with these standards and inspections of and oversight over statutory auditors of Chinese companies. As such it has responsibilities that in the United States are carried out by a combination of the SEC, the FASB, the PCAOB, and the AICPA. The Chinese ASBEs were developed and issued by the ARD, a process which amazingly took under two years.

At the time I was FASB Chairman, the head of the ARD was Yuting Liu, or Mr. Liu to his staff. He was a very well known and important man in the world of accounting in China. He and his senior staff with whom we met periodically, both in China and in the United States, were always very interested in learning about and discussing accounting and reporting developments in the United States and internationally. I believe we established a very constructive working relationship between our two organizations, which included having two members of the ARD staff being seconded to work with us at the FASB, Ms. Lin Zhu and Mr. Haifeng Yang. Mr. Liu and his colleagues were also marvelous hosts on our visits to China, showing us the sights and treating us to wonderful dinners at local restaurants, such as the Peking Duck House in Beijing. An important aspect of these dinners were the numerous toasts in honor of us and of each other which, over the course of an evening, required the consumption of many glasses of Maotai, a quite strong Chinese liquor.

We also established a very good working relationship with the Accounting Standards Board of Japan (ASBJ). In March 2002, the IASB (including me) traveled to Tokyo for what would be the first of many future meetings between the IASB and the ASBJ. We were welcomed by Chairman Shizuki Saito and Vice Chairman Ikuo Nishikawa. As a new organization, the ASBJ was very eager to contribute to international convergence of accounting stan- dards. The 2007 Memorandum of Understanding between the ASBJ and the IASB (the “Tokyo Agreement”) formalized the work- ing relationship between the ASBJ and the IASB. Like the 2002

192 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Norwalk Agreement and the 2006 Memorandum of Understand- ing between the FASB and the IASB, the Tokyo Agreement embraced the goal of international convergence of high-quality accounting standards and helped ensure Japan’s role in this effort. At the time, Japan was the second largest national economy in the world, the United States being the largest. So it made sense for the accounting standard setting bodies of the two countries to work together.

The first of what we termed joint “representative” meetings between the FASB and the ASBJ occurred in May 2006 in Tokyo and continue to be held twice a year, alternating between Tokyo and Norwalk. In those meetings, which were attended by the Chairs and Technical Directors of the respective boards as well as certain other board members (in the case of the FASB at the Tokyo meetings Mike Crooch and then Tom Linsmeier) and senior staff of the two boards, we discussed the major joint FASB-IASB pro- jects and the progress and challenges of our respective conver- gence efforts. I found that the ASBJ board members and staff always came very well prepared to the meetings, eager to share and discuss their views on the issues we were addressing. I believe our discussions gave me a good understanding and appre- ciation for the Japanese financial reporting system and for Japanese accounting standards and some of the key concepts underlying them.

On our visits to Tokyo, Chairman Nishikawa and his fellow board members and senior staff were also wonderful hosts. Indeed, I happily returned to Tokyo in December 2014 to do a number of events in connection with the launch of the Japanese version of the first edition of this book Accounting Changes: Chronicles of Convergence, Crisis, and Complexity in Financial Reporting. I did a number of speaking events and panels, all hosted by the Japanese Institute of Certified Public Accountants (JICPA), in which I was able to reunite with a number of former colleagues including Tatsumi Yamada (now retired from the IASB and with KPMG), Ikuo Nishikawa (now retired from the ASBJ), Aki Fujinuma (formerly Chairman of IFAC when I chaired the Transnational Auditors Committee of IFAC and also formerly vice

International Convergence 193Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

chair of the IFRS Foundation and former Chairman of the JICPA and EY Japan), and Atsushi Kato (my former partner at C&L and PwC). It was a wonderful visit that, among other things, enabled me to get updated on reporting developments in Japan in recent years.

As with the United States, Japan has experienced a number of twists and turns in its efforts to converge Japanese accounting standards with IFRS and in deciding where to go in terms of adoption of IFRS. These have been influenced by events inside Japan, including changes in the ruling party, the 2011 major earth- quake and tsunami, and developments regarding IFRS around the world, including those in the United States. Rather than go through all of these developments, I can summarize things by say- ing that the current financial reporting landscape in Japan is pretty complicated. Most Japanese listed companies use Japanese accounting standards. However, a number of the largest Japanese companies have been SEC registrants for many years and use U.S. GAAP in both their Japanese and U.S. filings. Voluntary applica- tion of IFRS is permitted for most listed Japanese companies and as of May 2015 115 listed companies in Japan either use or have announced their intention to use IFRS. Although, as of May 2015, the companies that have adopted IFRS are only 3 percent of the total number of companies listed on the Tokyo Stock Exchange, they account for about 25 percent of the total market capitalization of the Tokyo Exchange and include some of the largest Japanese compa- nies, I also understand that, as of early 2016, many other Japanese listed companies are considering whether to adopt IFRS. To compli- cate matters further, recently Japan has been developing a fourth set of accounting standards based on IFRS with certain modifications, a kind of IFRS light or as the Japanese have dubbed it J-IFRS.

India also currently has a somewhat complicated reporting landscape. Companies listed in India must file or will soon be required to file consolidated financial statements with their stock exchanges using Indian Accounting Standards (Ind ASs). Banking, insurance, and other finance companies will also be required to prepare their financial statement using Ind ASs starting in 2018. There have been several convergence efforts over the past decade involving incorporation of IFRSs into the Ind ASs. While in many

194 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

cases the Ind ASs are converged word-for-word with IFRS, there have also been various deferrals of the provisions of IFRSs, a num- ber of modifications to particular IFRS requirements, and removal of certain options included in IFRS. Indian listed companies are also permitted to file consolidated financial statements prepared under IFRS as issued by the IASB. As of early 2016, 11 Indian com- panies (mainly ones with foreign listings) have chosen to use IFRS.

So that’s a quick, high-level tour of accounting standards around the world. In summary, it indicates significant and grow- ing use of IFRS by companies in well over 100 countries around the world, including an increasing number of the largest non-U.S. corporations, continued use of U.S. GAAP by U.S. companies and by a significant but decreasing number of foreign companies, and continued use of national accounting standards, in varying degrees of convergence with IFRS, in certain other major countries.

Finally, I would also note that in regard to local statutory reporting, while a growing number of countries either require or permit the use of IFRS, there are also many countries that continue to require the use of local GAAP in statutory filings by their domestic companies and by local subsidiaries of foreign compa- nies. Thus, for multinationals that operate in many countries around the world, some of the potential benefits of being able to report using a single set of accounting standards for both their consolidated financial statements and for local statutory reports have not yet been fully realized.

So, Bob, What Do You Really Think about Convergence and IFRSs?

Okay, having provided a lengthy chronicle of the convergence efforts between the FASB and IASB from 2002 to 2015, of the var- ious twists and turns in the SEC’s considerations relating to IFRSs, and of developments in and the current state of reporting under different accounting standards around the world, readers are probably wondering about my opinions on the subject. Indeed, I

International Convergence 195Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

often get asked, How was it working with the IASB? Do you think we will ever achieve complete convergence? Will the SEC ever approve IFRSs for use by U.S. companies?

First and foremost, for me and, I believe, also for many of my fellow FASB Board members, despite the many challenges, work- ing with the IASB on pursuing the goal of developing common high-quality international accounting standards in support of glo- bal financial reporting was a labor of love. If I did not believe in that goal, I would not have devoted a chunk of my career and life to it through chairing the Transnational Auditors Committee, ser- ving on the IASB, and through the joint efforts between the FASB and the IASB. I very much enjoyed working with and getting to know our counterparts at the IASB and other standard setters around the world, including those in Canada, Europe, Japan, and China, with whom we periodically met. For me, it reaffirmed the growing importance of global linkages and served as a reminder that not all accounting knowledge (or issues) reside in the United States.

I won’t reiterate all the many arguments for and against creat- ing a single set of high-quality international financial accounting standards. The real goal, in my view, is having common, high- quality, and comparable financial information for listed companies and other publicly accountable entities across the global capital markets. Achieving such a goal would, in the opinion of many commentators, prove beneficial to both investors and companies around the world and could provide significant economic benefits both globally and to the United States. Developing a single set of, or at least, accounting and reporting standards that achieve sub- stantially similar outcomes is a necessary (but not sufficient) con- dition for achieving this goal. So, although we may never fully attain the goal of having a single set of high-quality global accounting standards, I have believed and continue to believe it is goal worth pursuing. The goal helps drive standard setters toward continuing to narrowing differences between national standards and IFRSs, thereby resulting in increasing convergence over time. As stated in the November 2008 proposal Roadmap for the Potential

196 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers

The Commission recognizes that the use of a single widely accepted set of high-quality accounting stan- dards would benefit both the global capital markets and U.S. investors by providing a common basis for inves- tors, issuers and others to evaluate investment opportu- nities and prospects in different jurisdictions …. Capital formation and investor understanding would be enhanced if the world’s major capital markets all oper- ated under a single set of high-quality accounting standards that elicit comparable, high-quality financial information from public companies.

Most commentators on the “roadmap” proposal agreed with this notion.

A major potential benefit then is improving comparability of reported corporate financial information across the capital markets of the world. By facilitating cross-border investing, it could also increase liquidity in capital markets and lower the cost of capital for companies. Better international comparability of reported financial information might also improve corporate decision mak- ing. For companies operating on a multinational basis, the ability to prepare their financial reports using a single set of accounting standards across the jurisdictions in which they operate would lower costs and could improve quality and consistency in prepar- ing and communicating such information.

Now, I recognize that some people in the United States pose a number of important arguments against having a single set of high-quality international accounting standards or even common, but not identical, standards between the United States and other parts of the world, based on a number of considerations. Some maintain that the United States, as the world’s largest national economy and capital market, is a world unto its own — that U.S. companies can raise all the capital they need here and that U.S.

International Convergence 197Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

investors have a cornucopia of U.S. securities they can invest in. Further, as noted in the March 2009 FAF-FASB comment letter on the SEC “roadmap” proposal, the overall macroeconomic benefit to the United States of moving to IFRSs is not clear, and as noted in the SEC staff’s July 2012 final report on its IFRSs work plan, in the absence of virtually complete convergence between U.S. GAAP and IFRSs, a switch to IFRSs would likely entail significant cost and effort by U.S. issuers. In that regard, U.S. companies are very understandably tired from all the regulatory changes and economic and business challenges they have gone through in recent years: regulatory changes emanating first from SOX and now, more recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the effects of the global financial cri- sis and the ensuing economic recession, to name a few. So, the prospect of significant changes in accounting and financial report- ing requirements is not one that is welcomed by many in the corporate community.

Some also argue that the United States currently has a competi- tive advantage in terms of having a more robust financial report- ing system than most other countries of the world and that we could lose this edge if we go to international standards. Therefore, in their view, the primary goal should be to maintain and improve our system of financial reporting, including our U.S. GAAP accounting standards, seeking convergence only when it would clearly enhance our system and when the benefits of a change clearly exceed the costs. For these and other reasons, I believe that significant political challenges could accompany a decision by the SEC to mandate the use of IFRSs by U.S. issuers. Thus, as discussed above, while SEC officials continue to express support for the goal of a single set of high-quality global standards, they also seem to recognize that at present the only realistic way to advance this goal is through encouraging continued collaboration between the FASB and IASB (and presumably other major national accounting standard setters) in order to further narrow the differences between U.S. GAAP, IFRS, and other national standards that continue to be used in major capital markets.

198 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

I certainly do not dismiss or underestimate these factors and the continuing challenges in the United States of moving to or toward IFRSs. Although the United States is a very large economy, and our capital markets are large, deep, and liquid, I believe the argu- ments against the United States moving to international standards may not give proper weight to what seem to me to be trends in the global economy and capital flows and to the growing accep- tance of IFRSs around the world as the recognized set of interna- tional accounting standards. The fact is that the U.S. share of global gross domestic product (GDP) and global capital markets has now been steadily declining for many years. At the start of this century, we accounted for over 50 percent of the global equity markets; by 2011 that had fallen to approximately 30 percent.69

However, in recent years there has been some reversal of this trend such that in October 2014 the United States had risen to approximately 36 percent of the global equity markets.70

Nonetheless, differential growth rates between the slower- growing U.S. economy and those in China and other nations in the developing world mean that the U.S. share of global GDP, which in 2001 stood at around approximately 32 percent, had decreased to an estimated 16 percent in 2015, and is predicted to continue to decrease further over the next decade.71 As a result, U.S. investors seeking the potential for higher returns have been allocating more capital to foreign securities, with overall U.S. port- folio holdings of foreign securities at December 31, 2014, totaling almost $9.5 trillion, over four times the amount at the end of 2001.72

69. Anderson and Nkansah (2011). 70. U.S. Equities Share of Total Global Market Capitalization is Growing, First Trust, October 2014. 71. See World Bank statistics on country GDPs as a percentage of world GDP by year. 72. See January 2016 report of U.S. Portfolio Holdings of Foreign Securities from the Department of the Treasury, Federal Reserve Bank of New York, and the Board of Governors of the Federal Reserve System and the May 2003 “Report on U.S. Holdings of Foreign Securities as of December 31, 2001” from the Department of the Treasury, the Federal Reserve Bank of New York, and the Board of Governors of the Federal Reserve System.

International Convergence 199Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

However, my apparent exuberance for IFRSs or any set of inter- national accounting standards is tempered by three important considerations:

1. First, the standards must be high quality. It’s no good having a single set of standards if those standards don’t produce sound financial and transparent information. So, as pre- viously mentioned, the FASB-IASB convergence program was not just about convergence; it was also very much about trying to improve standards for the benefit of investors and other users of financial information both in the United States and around the world. In this regard, while there are some continuing gaps in the IFRS literature and particular stan- dards that, in my view, are in need of improvement (just as there are in U.S. GAAP), overall I believe IFRS does repre- sent a high-quality set of standards.

2. Second, those standards need to work in the United States with, for good or bad, all the other institutional and cultural forces that impact our financial reporting system. So, even though the U.S. share of global GDP and capital markets is decreasing, we are still a key force and major player in the global economy and financial system, such that a set of accounting standards cannot be truly international if they are not used or do not work in the United States. And for them to work in the United States, additional implementation gui- dance beyond that provided by the IASB and its interpreta- tions committee may be needed in some cases.

3. Third, as previously noted, although having a single set of high-quality accounting standards is a prerequisite for achieving the larger goal of comparable, high-quality finan- cial information across the global capital markets, it is not a sufficient condition for achieving that goal. That also depends very importantly on sound application of the stan- dards, strong auditing, and proper regulatory review and enforcement across the capital markets of the world. This point is, in my view, reinforced by the results of the SEC

200 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

staff’s 2011 review of the consolidated financial statements of over 180 companies that use IFRSs from 22 counties around the world. The November 2011 study73 found that, although the reviewed financial statements generally appeared to com- ply with IFRSs, there was diversity in practice, in some cases resulting from what appeared to be noncompliance with IFRSs requirements. Since then the IASB and IFRS Foundation Trustees have taken various steps aimed at pro- viding more implementation guidance and promoting greater consistency in the application of IFRS around the world. However, continuing and cooperative efforts by all parties, including companies, the major global accounting firms, securities regulators, and national accounting standard setters are needed to reduce this diversity in practice over time. In the final analysis, I think that having a single set of international accounting standards or at least common stan- dards provides a better starting point for achieving this goal than having multiple sets of accounting standards around the world.

Nobody Said This Would Be Easy

Like most labors of love, this one has had many challenging aspects and will likely continue to face a number of challenges. Although both boards share a commitment to a common goal, and the members of the boards have generally worked together in a very collegial manner, the fact that we were starting from differ- ent places and that we each also had to maintain our existing stan- dards, while also trying to converge, often complicated matters. At times, it was a bit like trying to ride two horses at the same time because as significant reporting issues arose relating to exist- ing standards, both boards had a responsibility to address them, sometimes resulting in short-term fixes that would later need to be

73. Work Plan for the Consideration of Incorporating Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: An Analysis of IFRS in Practice.

International Convergence 201Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

revisited in major joint convergence projects. This was particularly so during the financial crisis of 2008�2009.

Each board’s existing standards had been developed over the prior 30 years, and although there had been some harmonization efforts, they were largely developed separately. So there were many areas of difference between the two sets of standards. We were clearly starting from different places. That has caused, and continues to cause, differences in the technical agendas and priori- ties of the two boards. For example, for the IASB, completing a project on accounting for insurance contacts has been viewed as very important because IFRSs does not have a standard in this area. In contrast, U.S. GAAP has well-established standards covering insurance companies. Although these may be capable of improvement, it’s less of priority for the FASB.

By its very nature, convergence requires change, whether it be through developing common new standards or through one board agreeing to adopt the other’s standards in particular areas. Change is not regarded lightly by the boards or their constituents. The benefits of any change must be carefully weighed against the costs of the change. So, for individual board members, balancing the desire for convergence while also trying to ensure that the resulting changes are cost beneficial is a very important, but often a very difficult, exercise. Not surprisingly, because the boards have been starting with different existing standards, the respective constituents of each board often favor continuing with the existing standard (i.e., U.S. constituents may prefer sticking with the exist- ing U.S. GAAP approach, and constituents of the IASB may favor continuing with the current IFRS standard). Thus, the cost-benefit evaluations by each board can differ. Understandably, there were instances on joint projects (e.g., in regard to consolidation and off- setting of financial instruments) in which, after significant joint deliberation and input from their respective constituents, each board decided to continue with its existing approach, thereby not achieving convergence in these areas.

For often very understandable and valid reasons, people do not always enthusiastically embrace potential change, particularly

202 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

when they believe a change may disadvantage them relative to the status quo or when a change will require significant cost and effort on their part. So, it is not surprising that both the FASB and IASB encountered significant opposition to certain of the proposed changes resulting from the convergence effort. Those most opposed to particular changes sometimes attempt to block, delay, or overturn them through political processes. Politicians are not elected by, or accountable to, a global constituency. As the old saying goes, “All politics are local.” So, when lobbied by their con- stituents asking them to intercede against the FASB or the IASB on a particular proposed change, they may not be swayed by the asserted merits of international convergence of accounting stan- dards. As discussed in Chapter 3 we experienced that in regard to the accounting for stock options. Similarly, the IASB experienced significant lobbying of the European Commission against IFRS 8 by opponents to that IASB standard that converged the IFRSs reporting of segment information to that required by U.S. GAAP. Nevertheless, in both of these instances and notwithstanding the lobbying efforts, converged standards were issued and adopted.

Challenges in the convergence process also arise from the fact that that there are significant differences across the world in the cultural, institutional, economic, business, regulatory, and legal systems that surround the financial reporting system in different countries and jurisdictions. For example, aspects of the U.S. regu- latory and legal environment drive some participants in the U.S. reporting system to demand more detailed accounting guidance and clear rules than seems to be the case in other parts of the world. Differences in the cultural, business, regulatory, and legal environments can also result in some proposed changes being more opposed in the United States than in other parts of the world, and vice-versa.

Despite all these challenges, the boards made progress in jointly improving and converging their standards, with there now being converged or substantially converged standards in a number of major areas including accounting for business combinations, stock compensation, segment reporting, fair value measurement, and

International Convergence 203Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

most recently revenue recognition. Disagreement within each board and between the boards on particular technical issues is to be expected. In my view, that is a normal, healthy part of the standard-setting process. In a number of cases, with further effort, including joint redeliberation of such issues or by exposing alter- native approaches for public comment, these differences have been successfully resolved, but it requires persistence, determina- tion, hard work, and a lot of goodwill. Overall and despite the many challenges, during my years at the FASB and the IASB I believe those qualities were in plentiful supply by board members and the staffs of the two boards and that, although it has not achieved all its goals, I believe that the FASB-IASB convergence effort was, for many years, something of a shining example of international cooperation. But, as discussed above, the effort which began with the Norwalk Agreement in 2002 has now run its course.

Now Where?

As SEC Chief Accountant James Schnurr noted in his May 2015 remarks at the Baruch Financial Reporting Conference, the rela- tionship between the FASB and the IASB is now at a critical junc- ture. Whether and how they work together in the future will be very important to financial reporting in the United States and around the world.

Both boards will likely continue to face some opposition from affected stakeholders to some of the more significant changes they propose. For example, opposition to the new leasing standards that will significantly change accounting for leasing transactions has arisen, not surprisingly from the leasing industry and some companies that are major users of leased equipment and build- ings. Further, although politicians in particular countries and juris- dictions may try to halt or influence attempts at convergence on particular projects and overall, I believe that powerful geo- economic and global capital market forces will continue to exert pressure on both boards for continued convergence and on

204 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

the United States and other countries that have not yet adopted or committed to adopt IFRSs. The fact that well over 100 countries, including many major ones, have already adopted, or committed to adopt, IFRSs is testament to those forces as have been the declarations coming out of meetings of the G20 leaders from 2009 onward urging international accounting convergence.

The vision of a single set of high-quality international account- ing standards is, I believe, a powerful one. I also believe that a lot of credit for the success of the IFRS movement in the first decade of the IASB’s existence should go to Sir David Tweedie and other members of the IASB and to the trustees of the IFRS Foundation who traveled the globe articulating and promoting the vision. There have been prominent people in a number of countries who embraced the vision of a single set of high-quality international accounting standards and led the movement to adopt IFRSs in their countries. I also believe that the support of the SEC, FAF, and FASB were important to this success, particularly in the early years of the IASB’s existence. As previously noted, the SEC’s deci- sion in November 2007 to eliminate the reconciliation requirement for foreign filers using IFRSs also gave a significant boost to the movement.

The IASB and the IFRS Foundation trustees continue to work hard to advance the goal of a single set of global accounting stan- dards. And while IFRS is now required or permitted in well over 100 countries around the world, as discussed above, the three lar- gest countries in terms of national GDPs — the United States, China, and Japan — plus other major countries such as India con- tinue to have their own national standards that differ in varying ways from IFRS (though in both Japan and India some of their listed companies have availed themselves of the options in those countries to adopt IFRS). And U.S. GAAP continues to be used by many foreign SEC registrants.

So, although the growing use and acceptance of IFRSs has been remarkable and has, in my view, greatly enhanced the chances of getting to a common, if not completely identical, set of global accounting standards, the journey is far from over. The decade- long FASB-IASB convergence program has been a very important

International Convergence 205Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

part of that journey, but that convergence effort has drawn to a close. And while it has brought the two sets of standards closer together, many differences continue to exist. Some of these differ- ences are well-known and potentially controversial to U.S. stakeholders, such as the prohibition in IFRSs on using last in, first out as a method of inventory accounting; differences in the approaches to the impairment of long-lived assets, in the treat- ment of the costs of developing new products, in accounting by rate-regulated enterprises, in pension accounting, in the extent of “recycling” between other comprehensive income and earnings, and in accounting for contingencies; and many differences in dis- closure requirements. These differences and many others, as well as areas in which U.S. GAAP and IFRSs are converged or substan- tially similar, are described in the November 2011 paper74 issued by the SEC staff, and in their July 2012 final report on the IFRSs work plan.75

Additionally, several of the major MoU projects, including accounting for financial instruments, insurance, consolidation, and lease accounting have not resulted in substantially converged stan- dards, and ongoing projects by each board may result in creating additional differences between U.S. GAAP and IFRSs. Other conti- nuing areas of difference between IFRSs and U.S. GAAP may be more obscure but can nonetheless have significant impacts on reported financial information, and there are many differences in disclosure requirements. Ironing all these out through a joint con- vergence process between the FASB and IASB could take many years, such that achieving complete convergence between U.S. GAAP and IFRSs may be not be attainable. Even if it were to be attained, could it be maintained?

To me, that suggests if we are indeed serious about the goal of a single set of high-quality international standards, at some point, we will have to move to a single set of standards. Some believe

74. Work Plan for the Consideration of Incorporating Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: A Comparison of U.S. GAAP and IFRS. 75. Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: Final Staff Report.

206 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

that at least for now a more practical and realistic goal would be to try to achieve common, but not identical, standards that gener- ally produce comparable financial reporting. For example, in the aforementioned letter dated November 15, 2011, to the SEC, the trustees of FAF recommended a number of refinements to the con- dorsement approach that would support “a practical interim goal to achieve highly comparable high-quality accounting standards” that are increasingly based on IFRSs while continuing U.S. GAAP as the legally recognized standards in the United States and main- taining U.S. sovereignty over the accounting and reporting stan- dards used in our capital markets. Under this approach, the FASB and IASB would continue to work together to complete projects under joint development under the MoU; the FASB would develop a process to address substantial remaining differences between U.S. GAAP and IFRSs and new standards issued by the IASB for potential incorporation of the IFRS standards into U.S. GAAP; members of the FASB (and perhaps of other major national accounting standard setters) would participate as nonvoting observers in IASB meetings; and the FASB would not separately undertake new standard-setting projects on topics that are on the IASB’s agenda. As envisaged, the FASB and FAF would continue to undertake due process and U.S. stakeholder engagement and post-implementation reviews of IFRS standards following its long- standing criteria of investor primacy, independent standard set- ting, robust and participatory due process, benefits exceeding costs, and the need for clarity and adequacy of guidance in the standards.

Although the approach outlined in the FAF letter seemed like a constructive, practical path forward toward continuing conver- gence between U.S. GAAP and IFRSs, at the time it was put forward by the FAF those favoring global adoption of IFRSs as the single set of high-quality international standards seemed to view it as delaying and potentially diluting actual achievement of substantial convergence between U.S. GAAP and IFRSs and as potentially jeopardizing ultimate achievement of substantial com- parability in financial reporting across the major capital markets of the world. However, in retrospect I sense that some of those

International Convergence 207Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

parties may now view the approach outlined in the November 2011 FAF letter as having provided greater hope that the United States would systematically move toward IFRS than what has been occurring in recent years. The SEC continues to express sup- port for the goal of a single set of high-quality global accounting standards, but beyond encouraging the FASB and the IASB to continue to work together in pursuit of this goal, can it and will it take any substantive actions to advance the use of IFRS in the U.S reporting system? Whatever path forward, ensuring that such standards are high quality and work in the United States and that the body or bodies setting those standards are viable, capable, sufficiently insulated from undue political interference, and operate for the benefit of investors and the capital markets is critical.

I continue to be supportive of an endorsement approach under which the FASB would be charged with evaluating whether the United States should adopt the IFRS standards in particular areas, providing it is targeted and not too open-ended in terms of the criteria for evaluating whether a particular IFRS standard is suitable for use by U.S. registrants. In my view, those criteria should be focused on assessing whether the application of the IFRS standard provides understandable, decision-useful financial information to investors, and other users at a level comparable to, or higher than, existing U.S. GAAP and on whether it is opera- tional and can be implemented in a cost-effective manner in the United States. In many, if not most, cases, I believe those criteria will be met. In that regard, and as discussed above, I would again note that many other countries, including Canada, have been able to successfully transition to IFRS. Although Canada is certainly not the United States in terms of the size of its economy and depth and breadth of its capital markets or in terms of its regulatory and legal systems, its existing accounting standards were often based on or similar to U.S. GAAP, it has quarterly reporting by its listed companies, and it has capable securities regulators.

Moreover, as recommended in the November 2011 FAF letter, continuing proactive involvement by the FASB in the IASB’s standard-setting projects could also help minimize the frequency

208 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

and severity of instances of a new standard issued by the IASB getting a thumbs down by the FASB. However, there may be cases when adoption of an IFRS standard may prove problematic in the United States, in which case either the IASB would need to con- sider changing the standard to address the U.S. concerns, or there will be continuing long-term differences between U.S. GAAP and IFRSs. However, I feel somewhat troubled and torn by the concept of having a permanent standard-by-standard endorsement mechanism by which the FASB, the SEC, or some other body in the United States would decide whether the United States should adopt each particular standard issued by the IASB. On the one hand, the longer-term result of such a process could be a U.S. version of IFRSs or “GAAPFRS,” which, in my view, would encourage other jurisdictions to continue to do likewise, thereby potentially undermining the movement toward a single set of high-quality international standards. On the other hand, I recog- nize the very thorny issues of national sovereignty and geopolitics under which many other jurisdictions do have IFRS review and endorsement processes and that, therefore, the United States is likely to also retain such a mechanism. Moreover, I believe it is very important for the SEC or the FASB to have the tools neces- sary to ensure that the standards issued by the IASB are appropri- ately investor-oriented by counteracting the pressure on the IASB that may come from other parts of the world to gear its standards to other public policy objectives and, when necessary in the inter- ests of the U.S. capital markets, to be able to address reporting issues on a timely basis.

So, just as it did in the formation of the IASB at the turn of the 21st century, I believe the United States, in the form of the SEC and the FAF and FASB, needs to continue to take a proactive role in helping shape the global financial reporting system. In doing so, I believe they need to be clear on objectives and desired outcomes and must also be good global citizens by trying to impart the good aspects of our standard-setting regime and financial reporting system into the global system while avoiding trying to impose what may less desirable features of the U.S. system.

International Convergence 209Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

In my view, despite the aforementioned protestations and threats from certain parts of the world over the IASB having worked too closely with the FASB and delays and changes in direction by the SEC in making a decision regarding the path for- ward for IFRSs in the United States, the United States continues to have a major opportunity to help shape the future of a truly global financial reporting system, and I believe others in the world are looking for us to continue to take an active role in doing so. I think that makes sense both internationally and for the United States. On the one hand, an international reporting system is unlikely to work as effectively as possible without the United States being part of it, and we can help ensure that it works both for us and the global capital markets. On the other hand, in a world where the U.S. share of global GDP and global capital markets continues to trend downward, it may be precarious for us to try to go comple- tely our own way in terms of financial reporting. Thus, I believe the United States should not be excluded from or marginalized in actively participating in the ongoing development of the interna- tional financial reporting system, nor in my view should the United States be indifferent as to the direction and key features of this system.

My hope is that the SEC will continue to support the goal of getting to a single set of high-quality international accounting standards and to encourage the FASB and IASB to continue to work together to further improve and converge their standards. To do otherwise could potentially lead other countries that have not yet adopted or converged with IFRS to abandon their plans to do so and/or could result in the United States being on the out- side of a system that includes many of the other major capital mar- kets of the world but that may not operate in ways that are satisfactory from the viewpoint of U.S. investors who have been increasingly investing in foreign securities. It might also reduce the ability of the United States to influence the future direction of other aspects of the international capital markets and global regu- lation. Neither of these outcomes would be desirable in my view.

Another important issue that continues to confront the SEC is whether and when to allow all or some subset of U.S. issuers to

210 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

voluntarily adopt IFRSs. I understand that there are a few major U.S. multinationals that would like to have that option. However, as Jim Schnurr observed in his May 2015 speech at the Baruch Financial Reporting Conference, at present there is little demand by U.S. registrants for such an option. I would be supportive of an option to use IFRS but only if and when the SEC has established a more concrete plan and timeline for incorporating IFRSs into the financial reporting system for U.S. issuers. To allow an option to use IFRSs in the absence of a plan to require its use would result in a dual-GAAP system for U.S. issuers, which I do not support. Assuming at some time in the future there were to be a more con- crete timeline for getting to IFRSs in this country, an early adop- tion option would allow U.S. companies wanting to achieve comparability in reporting with international peers and to reduce their cost of producing financial information across their world- wide operations to do so sooner rather than later and could pro- vide valuable learnings for other U.S. companies considering moving to IFRS and for our overall reporting system It might also enable U.S. companies to get the change to IFRSs behind them rather than going through what could be a set of serial changes resulting from an extended effort to try to narrow the differences between U.S. GAAP and IFRS.

If we were to incorporate IFRSs into U.S. public company reporting over time, we would also need to consider whether and how those standards are interpreted in the United States and who interprets them. Would we leave it solely up to the IASB and its official interpretations body, IFRIC, or would there be a need for the FASB or the SEC to provide additional interpretative and implementation guidance for U.S. companies? My educated guess is that there would likely be cases where the FASB and/or the SEC staff would feel it necessary to provide additional guidance. But if the FASB or the SEC did provide additional guidance in the United States on converged standards, might that effectively cre- ate new areas of divergence in how those standards are applied in the United States with how they are applied in other countries? Achieving convergence is one thing, maintaining it is another. In that regard, some of the IASB’s constituents have expressed

International Convergence 211Co py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .

concern that if the United States goes to IFRSs, we will inevitably feel the need to provide all sorts of additional complex and detailed implementation guidance for the U.S. reporting system, the use of which might then spread beyond the United States, a potential result that they view as highly undesirable. We have seen a bit of this in the recent efforts by the boards to provide clar- ifications and implementation guidance in advance of the effective date of the new converged standards on revenue recognition, with the FASB (with encouragement from U.S. constituents including the SEC staff) choosing to provide such guidance in more cases than the IASB. This concern led Sir David Tweedie to declare from time to time that if the FASB or SEC started to issue additional detailed guidance on converged standards, the IASB might need to officially “ring fence” the additional U.S. guidance to prevent it from spreading to the rest of the IFRSs world and undermining the IASB’s goal of having more principles-based standards.

There would also be a question of whether the FASB or SEC should or would initiate and conduct U.S.-only standard-setting efforts in cases when the IASB is either unable or unwilling to undertake a project that is deemed important by U.S. stakeholders. As the number of countries and jurisdictions served by the IASB increases, it has inevitably faced increasing requests to undertake various standard-setting projects that may be considered less important in the United States. For example, the subjects of accounting for agriculture, inflation accounting, and accounting for Islamic transactions and instruments are important in parts of the world but probably less so in the United States. On the other hand, there will likely be continuing demands in the United States for standard setting in other major areas. An approach to dealing with this would be for the FASB or SEC to first refer such matters to the IASB and only embark on major new standard-setting pro- jects if the IASB is unwilling or unable to do so.

But would the FASB ever agree to be bound by such a con- straint, particularly if its stakeholders deemed such an arrange- ment unacceptable? And would the IASB be able to balance the competing demands and priorities from various parts of the world in a way that satisfies U.S. stakeholders? Experience in recent

212 More Accounting ChangesCo py ri gh t © 2 01 6. E me ra ld G ro up P ub li sh in g Li mi te d. A ll r ig ht s re se rv ed . Ma y no t be r ep ro du ce d in a ny f or m wi th ou t pe rm is si on f ro m th e pu bl is he r, e xc ep t fa ir u se s

pe rm it te d un de r U. S. o r ap pl ic ab le c op yr ig ht l aw .