IASB relaxing stance on convergence?

The International Accounting Standards Board (IASB) seems to be relaxing its stance on convergence between International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP), according to a review of its constitution published recently. Though convergence remains “a strategy aimed at promoting and facilitating the adoption of IFRS”, it is not “an objective by itself”, the IASB said. 

But it’s unclear just how much the IASB has actually softened its stance. In response to a report in the Financial Times, the chairman of the trustees at the IAS Committee Foundation, Garrit Zalm, wrote an open  letter saying that he was “surprised” that the newspaper had interpreted the review as a “weakening” of the IASB’s ongoing work to converge global accounting standards. “Nothing could be further from the truth”, he said.

“The Trustees of the IASC Foundation strongly support the work plan that the IASB has established with the US Financial Accounting Standards Board, which will reduce the differences between and improve IFRSs and US standards. By reducing differences and thereby reducing any cost of transition, convergence will ‘promote and facilitate’ the possible adoption of IFRSs,” Zalm wrote.

Both the IASB and the US’s Financial Accounting Standards Board (FASB) have been working to reach a common set of financial accounting standards, including a common fair value standard, in 2010. While both sides have been using a similar definition of fair value, they are still far apart on key issues like how financial instruments should be valued, according to Duff & Phelps managing director David Larsen.

Another problematic issue concerns consolidation. Private equity firms are exempt from consolidating their financial statements – which can lead to additional costs and reduced clarity – under US GAAP. As IFRS does not provide any such exemption for investment firms, few private equity firms have adopted the international standards.

The effort between FASB and the IASB to achieve common ground over such issues was expected to reopen deliberations over certain aspects of ASC 820, the sections of GAAP that deal with fair value, at a time when GPs and LPs in the US had hoped to be done dealing with all the “clarifications” to accounting standards in the last year. 

In January FASB released a new clarification which stated that sensitivity testing of fair value measurements would not be required of US firms – which puts GAAP at odds with international standards – after it received numerous complaints from firms in the US about the confusion and difficulty that would arise in having to come up with alternative inputs for the fair value of multiple investments.

While such considerations led FASB to remove the requirement, Larsen said the issue could resurface this year as FASB and the IASB seek convergence. But if the push for harmonisation is weakening, CFOs might not have to worry about sensitivity disclosures anytime soon.