Financial Reporting - IASB - Finding common ground

The US/IAS convergence project is not moving as quickly as hoped for Liz Fisher reports from a recent IASB meeting at FASB's headquarters.

In October, the International Accounting Standards Board made one of its regular trips to meet overseas. The June meeting, held in Oslo, showed that while the IASB's commitment to meet overseas once or twice a year is admirable, it is not always successful.

Overseas meetings are invariably held in borrowed chambers, without the dedicated technology (such as the webcasting equipment) that make the meetings available to observers who are unwilling to travel to the IASB's headquarters in London. The overseas meetings have also failed, to date, to attract a significant number of observers from the host country.

The October meeting, though, had another purpose since one of the three days was dedicated to a joint meeting with the US Financial Accounting Standards Board. Both meetings were held at the FASB headquarters in Norwalk, Connecticut and progress was made on a number of joint IASB/FASB projects.

Addressing the differences between US and international requirements has been seen as vital to the acceptance of IASs in the US. The IASB and FASB produced a memorandum of understanding in September 2002, detailing their agreement to work towards convergence of existing US and international accounting requirements, as well as joint development of future standards.

The aim was to minimise the significant differences between US and international requirements as soon as possible, although the section of the project that was designated 'short-term' has already taken longer than originally envisaged.

Conceptual framework

During the joint meeting the two boards formally agreed to add a project to their agendas that would develop a common conceptual framework. The project is likely to be complicated and lengthy - the joint staff estimated that it would take at least five years to complete, and possibly closer to 10 years.

The two boards feel that, while the international and US conceptual frameworks have a number of elements in common, a common framework is important because the two documents are different in many areas and there are a number of gaps where issues are not addressed in either document.

Some of these differences are fundamental. For instance, the IASB framework applies to all business entities in the private and public sectors. The FASB framework, however, applies only to business and not-for-profit entities in the private sector. The Governmental Accounting Standards Board (GASB) holds responsibility in the US for setting standards for not-for-profit entities in the public sector. The project to produce a joint framework, as a result, could run into difficulties if it is seen to be encroaching on GASB's territory (or, indeed, on the territory of the International Federation of Accountants' Public Sector Committee).

The discussions in Norwalk concentrated on the basic foundations of the project, but the boards did agree that the project should initially concentrate on the private business sector initially, and then consider the implications for not-for-profit entities. The boards also agreed to take a phased approach to the project, along the lines of the approach taken by the ASB when it developed its conceptual framework in the UK.

The aim will be to converge the frameworks but also to improve them at the same time. The first phase is expected to take in the objectives of the framework, as well as qualitative characteristics, elements, recognition and measurement.

FASB staff members proposed that the boards issue a joint document in the next few months, explaining the importance of a conceptual framework and setting out the objectives of the project. IASB chairman Sir David Tweedie urged caution, as he was worried that the document could attract too much adverse comment at too early a stage. The staff will put together firmer proposals for the boards on a communication document over the next few weeks.

Income taxes

The boards' discussions on the short-term convergence project on income taxes highlighted some frequently expressed concerns both sides of the argument that the IASB was too concerned with converging with US GAAP, at the expense of the rest of the world.

The question at hand in Norwalk was the issue of the recognition of income tax consequences for temporary differences related to foreign subsidiaries and joint ventures. The joint staff had recommended, for the purposes of the short-term convergence project, that the existing exceptions in both

IAS 12 and SFAS 109, which exempt foreign subsidiaries from deferred tax provision on unremitted earnings, should be retained.

It was clear from the discussions that very few members of either board were in favour of any sort of exemption when it came to their standards.

It was also clear, though, that the boards had little choice in the matter but to retain the exemptions for the purposes of short-term convergence until a wider project on income taxes can be discussed at length.

A lengthy educational session at the meeting, presented by a PricewaterhouseCoopers tax partner, highlighted the difficulties they face. The US tax system relating to unrepatriated earnings is among the most complicated in the world. It involves recomputing foreign income through US GAAP rules and integrating it with domestic income. The complicated foreign tax credit system is designed to minimise the impact of double taxation.

IASB board member Warren McGregor argued during the debate that while the US tax system was undoubtedly complicated, the system in many other countries was not. Why, he asked, should the IASB raise the barrier so high in order to account for the requirements in just one country?

While this was a US issue, though, a number of IASB board members pointed out that it was an issue that could affect a great many large companies, wherever they were based. Two IASB board members made the point that there was no such thing as a purely French or German company any more and others agreed that this point would affect any multinational with a US subsidiary.

Board member Jan Engstrom added that he had heard that Volvo in Sweden had been visited by Internal Revenue Service officials who felt that they had the right to 'go upstream' from the US subsidiary as part of the foreign income issue.

In the event, the boards voted in favour of retaining the exemptions and

IAS 12 will be reworded to bring it in line with SFAS 109.

SME accounting

The first two days of the Norwalk meeting saw the IASB continue with its discussions alone and while the change of scenery was welcome for some, the arguments were often painfully familiar.

Accounting for small and medium-sized entities remains one of the most challenging areas for the IASB, simply because the board members seem to disagree fundamentally on whether a separate standard (or set of standards) for SMEs is necessary. To date, discussions on the progress of the project, which is headed by Paul Pacter, have been characterised by lengthy and often repetitive arguments over which types of entity should be covered by separate standards, and why the full standards cannot just be applied to everyone. The Norwalk meeting was no exception.

The project, though, continues to be of great interest to the outside world, as Pacter told the board members in Norwalk. The IASB's first discussion paper on the topic has so far attracted more than 100 comment letters and a recent European Federation of Accountants (FEE) conference on the subject drew more than 300 delegates.

The discussions in Norwalk, intended to be a preliminary discussion of comments received on the discussion paper, again failed to solve any significant problems. IASB deputy chairman Tom Jones warned the board that 'dozens of people' were watching its discussions and waiting for it to fail, so they could set their own SME standards.

In October the board set up a sub-committee to analyse the responses received so far and this same sub-committee has also been asked to discuss the potential target audience for an SME standard. After a fruitless debate in Norwalk, the board will now wait for the outcome of the sub-committee discussions before broaching the subject again.

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