Convergence of US GAAP and IFRS May Be 10-15 Years Away Says FASB Chair as Boards Vow Int'l Fair Value Accounting Standard

FASB Chair Robert Herz told a meeting of the Financial Crisis Advisory Group that full convergence of US GAAP and IFRS could take as long as 10–15 years. While substantial convergence of the two sets of financial accounting standards will result from completion of
the Norwalk Agreement , he said, there will still be numerous areas of difference between IFRS and U.S. GAAP. IASB Chair David Tweedie mentioned that if the international and US accounting standard do not converge, constituents will be interested why it will have taken seven years for the US to realize it will not converge when the IASB and the Japanese Accounting Standards Board may adopt IFRS in less time. Mr. Tweedie also noted that some constituents have said that FASB should be cut out of the discussion. The meeting also revealed a consensus that FASB acted properly in adopting short-term guidance on fair value accounting in illiquid securities markets, while the two Boards plan a converged long-term standard for mark-to-market accounting.

The Financial Crisis Advisory Group is co-chaired by former SEC Commissioner Harvey Goldschmid and Hans Hoogervorst, Chairman of the Netherlands Authority for the Financial Markets. Other members of the group include: Jerry Corrigan, former President of the NY Fed, Gene Ludwig, former Comptroller of the Currency, Don Nicolaisen, former SEC Chief Accountant, and Lucas Papademos, Vice President of the European Central Bank. Acting SEC Chief Accountant James Kroeker was an observer at the meeting.

While reaffirming FASB’s commitment to a set of global accounting standards, Mr. Herz said that convergence is not the primary statutory responsibility of FASB. When emergency actions are required for the US financial market, he added, efforts may be taken without a thrust toward convergence. That said, Mr. Herz was quick to point out that convergence of US GAAP and IFRS is important to other US statutory bodies. For example, the Sarbanes-Oxley Act and the SEC 2003 policy statement state that FASB should look toward convergence where it is helpful to do so.

With regard to fair value accounting, Chairman Herz said that FASB’s recent guidance was a responsible and appropriate response, but that the Board does not view it as a long-term solution. Mr Herz explained that the long-term solution is the joint financial instruments project with the IASB, which is aimed at developing a single, high-quality standard on fair value accounting. Mr Herz said that if FASB and the IASB expose a joint draft on improving financial accounting and reporting for financial instruments by the end of the current year, a final standard might not be issued until 2010.

He noted that impairment will be a difficult issue because the Boards may have different perspectives. But the FASB Chair emphasized that impairment accounting would not need to exist if financial instruments were measured at fair value or current value.

The IASB Chair said that, while it took the IASB and its predecessors12 years to produce IAS 39, the two Boards have accepted the challenge of the G-20 to complete a comprehensive, high-quality, single standard to account for financial instruments within a shorter time frame.

Chairman Tweedie said that the Boards envision two classifications for financial instruments; one being full fair value and the other possibly current value. The determination of which classification a security is in will be based on either an entity’s business model, management’s intent, or the variability on cash flows. If the Boards agree on a single impairment model, it may be a modified incurred loss model, a dynamic provisioning model, or an expected loss model.

Mr Tweedie noted that tentatively the IASB believes that FASB’s fair value guidance is consistent with the principles of IAS 39. As for impairments, he said that the concept of other-than-temporary impairment does not exist in international standards. Although the IASB considered changing the fair value impairment model, it was deemed to be too large a change. Additionally, the FASB’s
impairment model is very different than the IASB’s impairment approach.


FCAG co-chair Harvey Goldschmid understands the arguments made to move away from a snapshot measurement of fair value, and agreed that stock exchange pricing is not always accurate in terms of valuation. However, the co-chair stated that active stock market valuations are the best valuation approach, as well as the most practicable and verifiable approach, now available in an imperfect world. Other FCAG members agreed that mark-to-market accounting is the best valuation model in well-functioning markets and, while markets may not be the best valuation mechanism in illiquid markets, it is still better than having management make an estimate of the value. FCAG member Tommaso Padoa-Schioppa, a former chair of the IASB’s oversight body, noted that a financial instrument may be more observable than another instrument at one instant; however, financial statements are used over a period of time, something that is not currently reflected in fair value measurements.