IFRS – The American dream?

In a few short months most of Europe’s major companies will close off their books under their national GAAPs for the last time. After that, all new business will be booked under IFRS.

Of course, the road to 1 January 2005 is not yet clear of obstacles. First, the standard setter is still trying to finalise some issues. Second, we need the politicians to move toward their endgame – unfortunate as it may be, partial endorsement of IAS39 has just been given the go-ahead. Finally, the imperative for companies now – and no one should underestimate the enormity of this task – is to apply IFRS ‘in anger’, to every transaction, every deal, every structure, every day.

So is that it – one last big push for companies to put IFRS into practice? By no means, in this period of intense effort and focus on first-time adoption of IFRS around Europe, we must not lose sight of the larger, ultimate objective – global convergence. Global capital markets mean that there is no longer a good reason, if there ever was one, why the accounting language should differ around the world.

We have, just about, achieved convergence on IFRS in Europe. Several other countries, such as Australia, have gone – or are going down – a similar road. But for the project’s momentum to become truly irresistible, we need to bring in the US. So the next strategic priority is to achieve convergence of US GAAP and IFRS. How do we move forward to that position?

We can’t realistically expect the US to make the kind of big-bang change that Europe has made. There are many political, cultural and practical reasons why this can’t happen. Instead we need to move progressively to a position where IFRS and US GAAP come ever closer to meeting each other.

Only when the remaining GAAP differences have thus been ground down to a modest level can there be any hope of any sort of constitutional change in US standard setting.

Of course, the European Commission or similar bodies amending the standards promulgated by the International Accounting Standards Board, as has been the case with IAS39, will not help the goal of convergence.

Should the IASB follow a US lead as the safe route to convergence? I don’t think so. Not only would that mean a loss of credibility for IASB, which would be to the detriment of everyone, including the long-term interest of the US Financial Accounting Standards Board itself, but also a lost opportunity. The IASB’s strategy is to adopt the best solutions available globally, or to work with others to generate them where sufficiently good solutions don’t yet exist. That has to be right. Tracking US GAAP alone would take other potential solutions off the menu. No one would support that, including FASB. Sometimes the IASB should take a FASB solution. Sometimes FASB should take a solution worked up by the IASB and, say, one of its European partners.

The willingness of FASB is there. The difficulty is in persuading constituents to accept change for change’s sake. So small alignments in otherwise satisfactory areas are not the way forward. There is a better chance when collaborating on medium and long-term projects in developing areas where the two bodies can move in step.

A good example is the business combinations phase II project. The IASB and FASB have been working on this for some time. What is new is that we now have the promise that, from the exposure-draft stage onwards, both sides’ documents will use the same words. This will be of immediate benefit to those with secondary US listings, as well as inching forward to the ultimate convergence goal.

It does of course raise some thorny issues. How might the consultation responses be assessed? Suppose the IASB’s constituents favour the proposals and FASB’s don’t, or vice versa. How to decide the way forward?

But FASB’s EITF does a roaring trade. Once there is a standard in place it begins to accumulate official interpretive guidance. So if that US process is not to set backdoor rules for the world’s IFRS users, we need to begin to think about joint IFRIC/EITF working arrangements. It will be equally important for regulators, such as the SEC, to approach the new standard in a collaborative way too.

So is this new way of the European and US bodies working together, as seen in business combinations phase II, a good thing – the right start to the next, important phase of the convergence project – or does it bring with it more problems than we can feasibly solve? Well, this is only one standard. So the risks are not pervasive. It should be used as a proving ground.

The global convergence goal is too important for us to pass up opportunities that might move us forward.

Andrew Vials is a technical partner at KPMG – To sign up for our monthly electronic IFRS edition go to

Related reading