Diversity in accounting practices across countries makes it difficult to prepare consolidated financial statements for companies with foreign operations. General Motors Corporation (GMC), while headquartered in Detroit, Michigan, conducts business on six continents, in 396 facilities, in more than 100 countries, across 23 time zones, in 70 languages1, with each subsidiary preparing financial statements in accordance with their local regulations and in their local currency. Not only does GMC have to reconcile the accounting practices with U.S. Generally Accepted Accounting Principles (GAAP), if their stock is traded in a foreign capital market, they need to report their consolidated financial statements in accordance with local GAAP, or International Financial Reporting Standards (IFRS). All of the options make it difficult for the users of the financial statements to compare information from different companies, and requires accountants who prepare and audit financial statements to be fluent in multiple sets of accounting standards. From an accounting perspective in a global economy it makes sense to have one set of global accounting standards. So, what is taking so long?
As the global economy began growing exponentially investors, regulators, audit firms, businesses, and accountants around the globe began clamoring for a single set of high quality international standards. According to the International Monetary Fund, in the past 50 years, “global trade in goods and services has risen rapidly, aided by the liberalization of trade policies around the world. As more countries have embraced the benefits of permitting the free movement of capital, international financial flows have increased markedly. Total global financial assets rose from $250 billion in 1970 to almost $70 trillion in 20102.” To address the issue, in 1973, 10 countries created the International Accounting Standards Committee (IASC). Their objective was to create a set of standards that could be used by countries to harmonize their local standard with other countries; reducing alternatives while maintaining a high degree of flexibility in accounting practices, thus the principles based approach. This resulted in 26 generic standards; few countries adopted them, even for cross border public sales for securities. In 2000 things began to heat up. The IASC was replaced by International Accounting Standards Board (IASB) and endorsed by the International Organization of Securities Commissions (IOSCO) for cross border securities offerings in the world’s capital markets. The mission of the IASB was to develop a set of high quality accounting standards and to focus on convergence and enforcement of a single set of international financial reporting standards (IFRS). In October 2002 the IASB and the Financial Accounting Standards Board (FASB) signed a memorandum of understanding known as the “Norwalk Agreement”, pledging to work together to make their existing standards compatible and coordinate their future programs to ensure future compatibility. The European Union followed shortly, requiring all public companies to use IFRS as of 2005. In November 2007, the U.S. Securities and Exchange Commission (SEC) eliminated the requirement that foreign issuers using IFRS who were listed on U.S. capital markets must reconcile with U.S. GAAP. It seemed like we were getting closer to one set of standards. However, the process was taking longer than expected. The original timeline was probably overly ambitious, the 2008 financial crisis contributed to some delays, and differing objectives of the two boards further hindered progress. Since its inception, the International Accounting Standards Board has taken the initiative to enhance its role as the global accounting standard setter. While FASB’s mission has been to improve U.S. financial accounting standards for the benefit of present and potential investors, lenders, donors and creditors, with the ultimate goal of a single set of quality international accounting standards that companies across the globe could use for both domestic and international reporting. Both organizations want the same thing, but have different and sometimes conflicting ideas on the best way to achieve that goal.
To date, several joint initiatives have been completed successfully, others have been completed with partial success with some differences remaining. Some projects were discontinued or resulted in different FASB and IASB standards. Fifteen years later FASB and IASB continue to work together on a several projects such as leases and financial instruments. The completed joint initiatives have improved both IFRS and U.S. GAAP. During the same 15 years, “119 of the 143 (83%) jurisdictions require the use of IFRS for all or most publicaly traded companies. Most of the remaining jurisdictions permit their use3.” according to IASB. Support for IASB continues to grow, in 2011, Japan, Canada, India, Brazil and Korea adopted IFRS. In 2009, IFAC G20 accountancy summit renewed its mandate for adoption of global accounting standards. The latest IFAC Global Leadership Survey emphasized the need for more useful investor information. Both the American Institute of CPA’s (AICPA) and SEC support U.S. “adoption of a single set of high quality, globally accepted accounting standards and believe it will benefit U.S financial markets and public companies by enabling preparation of transparent and comparable financial reports throughout the world4.” The SEC is currently considering giving U.S. companies the option to use IFRS for financial reporting, but nothing has been decided yet. Despite global and U.S. support, FASB and the SEC are reluctant to adopt IFRS, whether it is the political concern of losing control over standard setting, or concern of standard quality, FASB does not appear to be in a hurry to converge.
Adoption of one set of global standards seems inevitable and U.S. accountants, corporations, and investors are waiting for the SEC to set a date for public companies to adopt IFRS. Based on AICPA member surveys, it will take three to five years for U.S. public companies to transition to IFRS, so a single set of global standards is at least six to ten years away.