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Convergence: In Search of the Best: CPAs Should Understand How U.S. and Foreign Accounting Standards Influence Each Other

EXECUTIVE SUMMARY * THE CONVERGENCE AGREEMENT BETWEEN FASB and the IASB is significantly affecting U.S. and international financial reporting. * THERE IS NO SINGLE PATH TO CONVERGENCE, but an open-minded pursuit of the highest quality guidance should result in standards that foster superior financial reporting. * CONVERGENCE WILL REQUIRE CHANGES in both U.S. and international standards. * INTERNATIONAL STANDARDS MAY CHANGE to follow accounting standards in a particular country. For example, international accounting standards resemble U.S. standards in accounting for discontinued operations. * U.S. STANDARDS ARE NOT ALWAYS SUPERIOR to international standards. For the reporting of accounting changes, for example, U.S. standards are converging toward international standards. * CONVERGENCE DOES NOT ALWAYS RESULT IN the adoption of either U.S. or international standards, as is currently the case for extraordinary items, in some instances, the eventual solution may be convergence to a third, superior approach. Ask CPAs to name a top priority in the development of accounting standards, and some will answer, "Convergence." Many others, though, will say the quest for global standards has little relevance for them. But international accounting standards and U.S. GAAP increasingly influence each other, making it important for all CPAs to understand how FASB's conforming a U.S. GAAP standard to an international financial reporting standard (IFRS) can significantly affect American companies--whether or not they do business internationally. The cross-fertilization that's going on is the result of an agreement between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to make their existing financial reporting standards compatible with each other to better respond to the complexity of the world's markets (See "The Urge to Converge," page 70). The IASB and FASB have taken a flexible approach to convergence and are focusing on issuing standards of the highest quality possible, regardless of where the principles underlying them originated. To illustrate their method, we'll look at the evolution of recent changes in FASB and IASB guidance on various aspects of accounting affecting the lower portion of the income statement. Once a modification to a reporting standard is agreed upon, it's crucial for firms and companies to promptly distribute the news to their staffs. Therefore, this article also offers practical tips on effectively communicating the latest convergence guidance to CPAs in companies and firms. QUALITY TRUMPS FAMILIARITY In developing high-quality accounting standards, standard setters may opt for either FASB or IASB guidance. If neither is adequate, they may emulate a third jurisdiction's standard or develop a completely new rule. The approaches FASB and the IASB have taken to income below continuing operations aptly illustrate this flexible and quality-focused convergence. Income below continuing operations includes discontinued operations, accounting changes and extraordinary items. To achieve the best guidance on these topics, FASB and the IASB decided to converge IFRSs to U.S. GAAP in one instance and U.S. GAAP to IFRSs in another. In the third, they developed a new approach altogether. IFRSs CONVERGE TO U.S. GAAP: DISCONTINUED OPERATIONS In developing their respective positions on this subject, FASB and the IASB reviewed their pronouncements--FASB Statement no. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and International Accounting Standard (IAS) 35, Discontinuing Operations--and jointly concluded that Statement no. 144 contained the preferable and more recent guidance. In this instance, U.S. GAAP did not change, and there were no unusual developments of significance to CPAs. Originally, IAS 35 had defined a discontinuing operation as a component that the enterprise was disposing of or terminating through abandonment, that represented a major line of business or geographical area of operations, and that could be distinguished operationally and for financial reporting purposes. …