Stormy waters for cross-atlantic convergence

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

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

Related reading

Fiona Westwood of Smith and Williamson.