When the International Accounting Standards Board sat down yesterday to discuss the second phase of its project to change the accounting for mergers and acquisitions, it did so entering yet another storm of controversy.

Barely have the waters calmed in Europe over IAS39 – which has resulted in a less than satisfactory conclusion – than opposition to this new project has been whipped up.

This time, disagreements are surfacing from accountants. IASB chairman Sir David Tweedie and his US counterpart Bob Herz are still going to need a strong hand on the tiller if they want to make progress towards the convergence of the two regimes.

Business combinations phase two is the first major project to be undertaken jointly by the IASB and the US Financial Accounting Standards Board.

It is a crucial first step on the roadmap set out by the US Securities and Exchange Commission. The plan is to allow SEC-registered companies using IFRS to file accounts without reconciliation to US GAAP by 2009.

By the admission of its instigators, the changes proposed in the business combinations project are both ‘dramatic’ and ‘controversial’. Many of the comments that have been received from accounting bodies so far have certainly reflected this with many objecting to the direction the two boards are taking.

The ICAEW argues that the IASB had not followed ‘an acceptable development process for proposed changes of such significance’.

‘The IASB has put forward some far-reaching proposals without presenting any evidence of shortcomings in what we do now,’ says Andy Simmonds, chairman of the ICAEW’s financial reporting committee. ‘Current practice has no great conceptual flaws and works for preparers and users. We are not aware of any calls from users for radical changes.’

Similarly, Ian Mackintosh, chairman of the UK Accounting Standards Board, says he is unsure of the extent to which the proposals ‘address a deficiency in financial reporting’.

However, some members of the IASB are not impressed by the conclusions being drawn by the accounting community. Board member James Leisenring is concerned that, given the type of objections that are arising, many companies ‘are not applying IFRS3 correctly at the present time’.

But opposition from accountants to the project on business combinations is just one of a number of obstacles in the drive towards convergence.

Last month, EC internal markets commissioner Charlie McCreevy sent out a stark warning to the IASB on convergence.

‘I will not take on any revolutionary new standards,’ he says. ‘This should be a practical exercise, firmly anchored in business reality, for the interests of users and investors.’

Given the comments from accountants, revolutionary is exactly what the project seems to be, risking it not being endorsed by the EC and potentially muddying the waters further over what actually constitutes acceptable IFRS to the SEC.

Reaching an agreement between the two boards on standards is also proving rather troublesome. The FASB has halted its work on revenue recognition, originally another joint project with the IASB, but when it resumes, it will be going in a different direction from that of its counterpart.

‘We did not have enough support at our board to go forward with the fair value approach,’ says FASB chairman Bob Herz. ‘I think that the IASB continued, as the majority favoured the fair value approach, but nevertheless we proposed a different approach based on customer consideration.’

In addition, Herz believes the US isn’t ready for principles-based accounting. ‘I’m a big believer in a more principles-based system, but right now the environment is not conducive to it,’ says Herz. ‘Principles-based accounting is difficult when you don’t have principles-based enforcement or litigation around the system.’

More trouble is brewing on the horizon. Both boards want to press ahead with a financial performance project. The aim is to have one single statement of comprehensive income.

It is something that Herz believes ‘has the potential to do almost more good than any other project’.

The IASB’s Leisenring agrees, but warns that ‘nothing causes more consternation. We get hate mail virtually daily with respect to this project’.

He feels that the perception from companies is that ‘if you were to put the statement of comprehensive income on one piece of paper, the free world as we know it will disintegrate’.

Fortunately, the SEC is not expecting total convergence by its 2009 deadline, but it will want to see significant progress. Given the potential difficulties that are cropping up, and with more ahead, it is questionable how far things will have moved by then.

Timetable for convergence

Business combinations:
9 November; Public roundtable to discuss proposals held
2nd half of 2006: Final standards due
1 January 2007: Expected date

Conceptual framework:
1st half of 2006: Discussion paper on consolidation expected
2nd half of 2006: Exposure drafts on control and SPEs expected

Performance reporting:
2nd half of 2006: Discussion paper to be issued

Revenue and related liabilities:
2nd half of 2006: Discussion paper to be issued

Income taxes:
Q4 2005: Exposure draft expected

Segment reporting
Q4 2005: Exposure draft expected

Government grants:
Q4 2005: Exposure draft expected

Provisions:
30 June 2005: Exposure draft issued
2nd half of 2005: Final standard due