Question

It is said that FASB Codification is a step towards convergence. Do you agree? Discuss with some examples of FASB and IASB convergence projects.

When we look at the remaining differences, what do you think is the major reason for the disagreements?

can u give me just a second question answer?

can u give me a reference also? please

Answer 1

Answer 1 : Yes, i agree that FASB codification is indeed a step towards convergence. The very objective of FASB and IASB is to eliminate the differences between IFRS (International Financial Reporting Standards) and US GAAP.  

First Let us understand a little bit about the two organizations -

FASB - stands for FINANCIAL ACCOUNTING STANDARDS BOARD. It is a private but non-profit organization whose objective is to establish and improve the accounting and reporting standards for private, public and not-for- profit organizations in the United States.

IASB - stands for INTERNATIONAL ACCOUNTING STANDARDS BOARD. It is again a private organization who issues International Financial Reporting Standards (IFRS) on an International level.

What they are trying to achieve through convergence ?

Now the two organizations are trying to converge IFRS and US GAAP so as to eliminate the differences between US GAAP and IFRS.

1) However, the road is not that easy. There may not be one size fits all accounting standard coming out any soon. But in their efforts towards convergence several standards have been indeed been completed while on some a partial agreement has been reached.

2) There are some projects on which the convergence has been completed and the Standards have been modified and reissued (For example - Borrowing Costs (IAS 23), Segment Reporting (IFRS 8) and there are also some projects on which convergence or the Joint work has been discontinued (For example - Government Grants, Income Taxes etc.)

3) The FASB and IASB Convergance also hold importance as the US SEC (Securities and Exchange Commission) was considering whether to adopt or allow the use of IFRS by domestic issuers in the United states and in this process the convergance of FASB-IASB was of special importance to SEC.

4) This point also deseves merit that with implementation, the codification will be the single source of authoritative US (Generally Accepted Accounting Standards) to all non-governmental entities, except for the rules issued by SEC (Securities and Exchange Commission).

The codification has been developed after disassembling and then reassembling many pronouncements into a unified code.

You can access the FASB Accounting Standard codification at website  http://asc.fasb.org.

5) Examples

1) In the Accounting Standard for Borrows Costs- In January 2009 the IASB amended IAS 23 to require capitalization (which is the U.S. principle).

2) In the Standars for Discontinued Operations - The IASB adopted IFRS 5 and the FASB adopted statement no, 144. Both the organization agreed on the timing when an operation would be termed as 'Discontinued operation' . However, there remains certain disagreements regarding the definition of 'What is a discontinued Operation'.

6) One major advantage is that during this process, both the boards have realized that there exists some fundamental differences between the two standards and that convergence is not a substitute for Adoption, a thought which both boards have advocated on several occassions.

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2) While the FASB and IASB Accounting Standards are similar but there are major differences between them :-

For example - In LEASE Accounting - the FASB retains the dual lease accounting model i.e. operating lease and finance lease. Whereas IASB has moved towards single accounting model with one finance lease.

Even after working together no consensus was reached regarding the accounting standard. The FASB decided to continue with its requirement to disclose qualitative items in the financial statement (lease term, nature of lease etc.) whereas IASB has allowed relaxation in terms to this disclosure keeping in mind the overall information disclosure objectives. The two board did not engage further regarding the disclosure of this accounting standard. Eventually the two board agreed to disagree regarding this accounting standard. The US companies are concerned about reporting more debt to the stakeholders and about giving up the long established practices of reporting.

The reasons for differences are many :-

1) First difference is their Methodology. US GAAP is rule based whereas IFRS is more principal based methodology. This had led to some major differences in areas of Income Tax, consolidation of books of accounts, EPS calculation etc.

2) IFRS give preference to Control Model where US GAAP gives preference to risk-and-reward model.

3) Also because US GAAP has been in use for such a long time, industries are vary of using a new method which would require a huge cost and a substantial changes in their financial statements.

4) As seen in the example above - for LEASE ACCOUNTING - No company wants to increase debt cost i.e. Finance cost in the face of their balance sheet. IFRS adoption for Lease accounting Standard would mean letting go of operating cost and recognizing all that in the debt portion of the financial statement which would have huge impact on the financial standing of the company hence, the organizations are also vary of adopting to the new standard.

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RESULTS OF CONVERGENCE A Look at the outcome of Key Joint IASB/FASB Projects Topic Borrowing Cost IASB/FASB Action In January 2009 the IASB amended IAS 23 to require capitalization (the U.S. principle). Was IFRS Improved? IFRS were improved because a free-choice option was removed. Whether capitalization or expensing is the better principle is debatable. Business Combinations New standards issued by both boards. Convergence Outcome Converged on the broad principle of capitalization of borrowing costs. Differences in how borrowing costs eligible for capitalization are defined and calculated and on which assets are eligible. Partial convergence. Differences remain, including: • Measurement of goodwill (the IASB allows either 100% of goodwill or only the parent's share. FASB is 100% only) • The level at which the goodwill impaiment test is imposed. Yes, particularly in eliminating pooling- of-interests accounting. Some argue that IFRS would have been further improved if the result had been a single measure for goodwill, rather than two. However, there was only limited support among IFRS preparers and users for the 100% goodwill approach. There was no standard, hence no improvement. Not converged. No action by the IASB.U.S. GAAP already requires "pooling of interests." Combinations of Entities Under Common Control Conceptual Framework Readability was improved, but many question replacement of prudence with neutrality Consolidation (including special- purpose entities) There is a more clearly articulated effective control principle, clearer guidance for consolidating special- purpose vehicles, and much-improved disclosures. Corrections of Errors Yes, though some question the need for an impracticability exception. Derecognition of Financial Assets and Liabilities In September 2010, the IASB and Converged on objective and FASB published virtually identical qualitative characteristics. Other parts chapters on "Objectives and Qualitative of the Framework were already Characteristics" of the new Conceptual broadly converged. Framework. No other sections finished, The IASB completed IFRS 10 in May Convergence broadly achieved for 2011. FASB did not agree with off-balance-sheet activities and effective control as the basic principle disclosures about unconsolidated and did not join the IASB in the structured entities. Not converged with project respect to control and de facto control as the basis for consolidation. The IASB amended IAS 8 to require Broadly converged. restatement, but the IASB added an impracticability exception that does not exist in U.S. GAAP. Despite a joint exposure draft, in the No success in convergence of end, the boards could not agree on derecognition principles. Substantial derecognition principles for removing success on converged disclosures. financial assets from the balance sheet. The boards agreed on broadly aligned disclosures in October 2010. The IASB adopted IFRS 5. FASB Substantial success. adopted Statement No. 144. Converged on timing for classifying an operation as discontinued. Not converged on definition of discontinued operation or on whether to present discontinued operations on the face of the income statement. In August 2008 the IASB issued an IAS 33 and U.S. GAAP were broadly ED proposing amendments to IAS 33. converged in the project. Nothing has This was never finalized. Nor did FASB changed. propose similar amendments to U.S. GAAP Improved disclosures, but no improvement to the principles for derecognition Discontinued Operations Yes, IFRS were improved. (And many prefer the IASB's answer to FASB's). Earnings per Share Because no action was taken, there was no improvement.
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Topic Insurance IASB/FASB Action Still in process. Convergence Outcome Joint project offers a prospect for partial success in convergence. Was IFRS Improved? This will be a significant improvement to IFRS when the project is finished (even if not converged with U.S. GAAP) because currently there is no IFRS and a wide range of practices are acceptable. Most people would regard replacing consolidation with FVTPL for an investment entity as an improvement. Investment Entities Prospect for partial success. In this joint project, the IASB has adopted a new definition of investment entity and requires such entities to account for subsidiaries at FVTPL. FASB has not finished its revised definition but already requires FVTPL. The IASB has a standard, IAS 40. FASB has been working on one, but work is deferred. Investment Property Not converged, and prospects are not good in the near term. Joint Ventures Not converged. The IASB completed IFRS 11 in May 2011. Proportionate consolidation is used in the United States in the real estate and extractive industries. U.S. GAAP on joint ventures differs from IFRS 11. This project would have involved FASB adopting IAS 40 in some way rather than the IASB changing IAS 40. No improvement to IFRS. Yes, distinguishing between different types of joint ventures was an improvement. However, many analysts will miss the information provided by proportionate consolidation, which remains available in the United States for real estate and extractive industries. This project is not yet complete. Putting right-of-use assets and lease obligations on the balance sheet would be an improvement of IFRS. However, the goal of a single accounting model for all leases does not seem to be achievable. There were no changes to IFRS, hence no improvement. Leasing Still in process. In November 2010 the IASB and FASB decided to defer work on this project Liabilities and Equity (distinction between) Also called Financial Instruments With Chara Characteristics of Equity (FICE) Liabilities- Measurement of Both boards expect to ballot a revised ED in the first half of 2013. Whether their final standards will be converged is hard to predict at this point. Note that IAS 17 and FASB Statement No. 13 were broadly converged before the joint project started. Not converged. The United States has not adopted the IAS 32 principle that an instrument is a liability if the issuer does not have the unilateral right to avoid paying cash. Also the United States has not adopted the "split accounting for the equity component of convertible debt issued. The United States did not finalize its narrow view of equity proposed in November 2007. Not converged. In November 2010 the IASB and FASB decided to defer work on this project The IASB's proposed measurement of all liabilities on an expected value basis would have been an improvement Yes, this was a significant improvement. Converged. Nonmandated Change in Accounting Policy In its 2003 improvements project that was not part of convergence, the IASB amended IAS 8 to require restatement. Subsequently, as part of convergence, FASB amended U.S. GAAP to require restatement

Topic Emissions Trading Convergence Outcome Not converged. Neither the IASB nor FASB has standards directly on point. Was IFRS Improved? There was no standard, hence no improvement. Extractive Industries Not converged. IASB/FASB Action In November 2010 the IASB and FASB decided to defer work on this project In April 2010 the IASB published a Discussion Paper. No action since. FASB already has an oil and gas standard. IASB issued IFRS 13 as a virtually word-for-word equivalent to FASB Statement No. 157. There was no standard, hence no improvement. Substantial success. Fair Value Measurement Yes, the guidance on fair value in IFRS is much improved and made consistent across standards, plus disclosures were enhanced significantly. There was no change to IFRS, which already had a fair value option. Fair Value Option for Financial Assets FASB has added a fair value option to its financial instruments standards similar to what the IASB had. Converged regarding fair value option. But the is under reconsideration in the broader joint project on classification and measurement of financial instruments. Not converged. Financial Instruments- Hedge Accounting Despite lack of convergence, the LASB's new general hedge accounting standard is a significant improvement to IFRS. Currently, IAS 39 and U.S. GAAP are substantially converged on hedge accounting (other than macro hedging). The IASB will soon issue a new general hedge accounting standard that will result in significant divergence from U.S. GAAP. Still in process. Financial Instruments- Impairment of Assets Carried at Amortized Cost Moving to an expected loss approach is an improvement in principle. The specifics have not yet been decided. Both boards have agreed to adopt an expected loss approach rather than today's incurred loss approach. However, the two boards are currently heading toward different ways of implementing that approach. Limited success in convergence. Financial Instruments- Classification and Measurement The two boards went different ways: The IASB issued IFRS 9 in November 2009 (for assets) and October 2010 (for liabilities). Some financial assets amortized cost and some fair value through profit or loss (FVTPL), (and some equity instruments at through other comprehensive income, or FVOCI). Most liabilities at t amortized cost, but with fair value option (FVO) and other comprehensive income (OCI) option for own credit. FASB proposed a full fair value model, but is now moving to a mixed measurement model different from the IASB's. No action. Many thought IFRS 9 was an improvement over IAS 39. But those improvements are being eroded in the interest of convergence because of additional categories of financial assets, greater use of OCI, recycling, and inconsistent treatment of "available for sale" debt and equity instruments. at fair value Not converged. There was no change in IFRS. Not converged. Government Grants Impairment of Nonfinancial Assets Income Tax In 2008 the boards decided to defer pending completion of other work! There was no change in IFRS. In March 2009 the IASB issued an ED (not with FASB) proposing amendments to IAS 12 basically to eliminate exemptions from recognizing deferred taxes. Responses were generally not supportive. The IASB did not finalize the ED. Small amendments to IAS 12 were made later. Even before convergence work began, IFRS and U.S. GAAP were converged on the principle of the temporary difference method, although not converged on how that method is implemented. There has been no success in eliminating the differences. Even though there was no convergence, the process did result in a few amendments to IFRS 12 that are considered improvements.

Topic Offsetting of Financial Assets and Financial Liabilities Convergence Outcome Not converged on offsetting, but converged on disclosure. Was IFRS Improved? Significant improvement in disclosure. Some improvements. Also the IASB improved the gross presentation approach in IAS 32. Post- Retirement Benefits IASB/FASB Action The two boards issued a joint ED along the lines of the gross presentation in IAS 32. But after reviewing comments, FASB decided not to pursue requiring a a gross presentation. Joint disclosure standards were issued, though FASB now plans to defer part of it. Both boards made some changes, but not a converged standard: 1. Past service cost treatment unchanged by either board. 2. FASB has eliminated the corridor for balance sheet purposes, but has retained it for income statement purposes. The IASB has eliminated the corridor for both income tatud statement and balance sheet purposes. However, when eliminating the corridor, the IASB changed the rate that is used to calculate the return on plan assets whereas FASB continues to use an expected return (previously converged). 3. Termination benefits are broadly Not converged. The resulting differences in the rates used to calculate return on plan assets are significant Yes, there were significant improvements to IFRS. Converged. 4. Neither board has fixed cash balance plans. The IASB amended IAS 39 to permit reclassification, which U.S. GAAP had allowed. Reclassification of Financial Assets Substantially converged. Most would say this was not an improvement to IFRS, but they acknowledge that this was a necessary move during the financial crisis. There were no changes to IFRS, hence no improvement. Not converged. In November 2010 the IASB and FASB decided to defer work on this project Reporting Financial Performance (morphed into Financial Statement Presentation) Research and Development There was no change to IFRS, hence no improvement The IASB added intangible assets to its research agenda, but it has not become an active project. Joint ED June 2010 proposing joint standard including nearly identical wording. Revised joint ED November 2011 with some wording differences, but substantively same accounting. The IASB adopted FASB Statement No. 131 as IFRS 8 with some minor changes. Not converged. All R&D expensed under U.S. GAAP. Some development costs capitalized under IAS 38. Both boards expect to ballot converged standards in the first half of 2013. Revenue Recognition Yes, this project will lead to a significant improvement in revenue recognition and measurement when completed. Segment Reporting Converged. Some would say yes, but others (including many research analysts) would say no. A post-implementation review is under way. Yes, IFRS 2 was a major improvement to IFRS. Converged. Share-Based Payment (SBP) Both the IASB and FASB issued standards requiring accrual of SBP expense. Similar but not identical measurement.

Topic Single Performance Statement Convergence Outcome Converged, but the outcome was different from the joint EDs. Was IFRS Improved? From an IFRS perspective, the only change was to require segregation and disclosures relating to recyclable items. This was a modest improvement. The proposed significant improvement of a single performance statement was not achieved. IASB/FASB Action In May 2010 the two boards jointly proposed to require a single performance statement (a single statement of comprehensive income (SOC)). Both boards received mixed views but more negative in the United States. The IASB was willing to finalize the ED, but FASB was not. In June 2011 FASB amended its standards to require a SOCl and to allow an option of a single performance statement or two (income statement and SOCI). These were already IFRS requirements. The IASB made some changes to converge its SOCl format with FASB's. FASB adopted U.S. guidance on subsequent events that had been in the U.S. auditing standards. Some of that guidance was consistent with IFRS. But FASB did not amend the U.S. guidance to conform to IFRS on (a) classification of liabilities refinanced after balance sheet date or (b) date through which subsequent events must be evaluated. Subsequent Events Not converged, but closer. No change to IFRS, which most believe has the better answer. Also called Events After Balance Sheet Date > Source: Former IASB member Paul Pacter.
This workpaper can be downloaded from the website https://www.journalofaccountancy.com/issues/2013/feb/20126984.html

I would highly recommend you to visit their website for this resourceful material (Checklist).

Disclaimer - Please note the above IASB-FASB convergence worksheet is work of Journals of Accountancy and not mine.

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