Thursday, 18 September, 2014

Published July 24, 2014
A battle to find common ground
The search for a unified set of accounting standards appears to have stalled, but there is cause for optimism. FRANCIS KAN reports
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'While there have been ongoing efforts to converge, the two standard setters still face challenges finding common ground in areas such as leases, impairment and insurance contracts projects.'
- Ong Pang Thye, head of audit at KPMG Singapore

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WHILE global efforts to combine two key accounting standards into a uniform set of rules have made headway in the past decade, the momentum has slowed considerably in recent years as the two sides fail to find common ground on a few contentious issues.

The industry is keen to see the two dominant standards - the International Financial Reporting Standards (IFRS) and the US Generally-Accepted Accounting Principles (US GAAP) - converge, so stakeholders like banks and investors can more effectively compare financial information across different jurisdictions.

Supporters of the move believe that the same economic transaction should be accounted for in the same way, regardless of where it might have occurred.

These efforts took on greater urgency following the great financial crisis. Then, the leaders of the G-20 countries had called for global regulatory cooperation and collaboration, including the adoption of global accounting standards. However, as the crisis has receded and economies are regaining their footing, the momentum has slowed considerably.

Ong Pang Thye, the head of audit at KPMG in Singapore, said: "While there have been ongoing efforts to converge, the two standard setters still face challenges finding common ground in areas such as leases, impairment and insurance contracts projects."

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) are working on global accounting issues through a platform known as the Accounting Standards Advisory Forum. Progress has been made in various accounting issues such as non-controlling interests, consolidated financial statements, disclosure in interests of other entities and fair-value measurement.

But Mr Ong noted that the IASB has realigned its focus to the needs of IFRS adopters until further consensus can be reached with the FASB on remaining convergence issues - which he said was an endeavour which could take years to achieve.

Agree to disagree

To date, there are two remaining convergence projects: accounting for leases and financial instruments. This is down from three, with the two boards deciding to drop insurance contracts from the convergence path.

However, both parties are finding it difficult to converge lessee accounting model and impairment of financial instruments. Last December, FASB announced its decision to move forward and continue refining its own proposed impairment model.

While the two standard setters have reached an agreement that most leases need to be put on the balance sheet, they cannot fully agree on how the lease expenses should be recognised and presented in the income statement of the lessees, said Lim Ai Leen, the executive director of the Technical Knowledge Centre and Quality Assurance at the Institute of Singapore Chartered Accountants (ISCA).

Meanwhile, the idea of impairment of financial instruments by both boards is very different, and convergence would require a change of viewpoint, which proves difficult, she added.

"The boards appreciate that they have come to a standstill on these differences. Hence, they have agreed to disagree for the time being," she said.

IFRS extends its lead

However, there is cause for optimism. The adoption of IFRS by many countries means that it has become the de facto global accounting standard and a universal business language.

Currently, 105 jurisdictions require the use of IFRS for all or most companies, while 14 more permit the use of IFRS in their jurisdiction, noted IASB chairman Hans Hoogervorst at the IFRS Conference Singapore in May.

"The countries where IFRS is used already cover more than half of the world's GDP, and many more have plans to adopt IFRS in the coming years," he said at the IFRS Conference Singapore in May.

In Singapore, the Accounting Standards Council announced in May that Singapore-incorporated companies listed on the Singapore Exchange will adopt a new financial reporting framework identical to the IFRS (SG-IFRS) from 2018.

This growing adoption of IFRS around the world will continue to exert pressure on the US and other non-IFRS countries to either adopt this standard or move their national standards closer to it.

"With so many major economies hopping on the IFRS train, I do not think that FASB can or will ignore international convergence in its future standard-setting activities," said Ms Lim. Indeed, the (SEC) Securities and Exchange Commission in the US already permits non-US companies trading in US markets to report using IFRS, she added.

Indeed, Mr Ong believes that this ability for filers of IFRS statements to access US capital markets without the need to prepare US GAAP financial statements means that the call for convergence is no longer as urgent as it once was.

Déjà vu?

However, there are others who believe that the failure to develop a unified set of accounting standards could prove detrimental again in times of crisis. The International Federation of Accountants (IFAC) recently issued a statement calling for the G-20 to renew its focus on regulatory convergence, noting that too many countries appear to be reverting to national policy-making agendas.

In a recent article on the IFAC website titled Déjà Vu All Over Again, the former global chairman and chief executive of EY, James S Turley wrote: "Putting global convergence on the back burner practically guarantees that the global community won't be ready when the next crisis hits."

Despite the apparent lack of progress, some are still optimistic that the two standards setting can eventually overcome the obstacles in their way.

Ms Lim said: "The two boards have come a long way and therefore, it is not likely that they will abandon the notion of full convergence of their standards."