Views on improving the integrity of global capital markets
22 February 2011

Financial Reporting: Convergence Debate Is Going Condo

Posted In: FASB, IASB, US SEC

As if financial reporting rules were not already sufficiently technical, the U.S. SEC is making up new lingo to sell the idea of having a single accounting language in the U.S.

Currently, the average analyst and investor make do with whatever financial reporting “language” they get from various companies around the world. Indeed, they learn the basics of various accounting schemes and how different countries apply them, endeavoring to gain the best possible understanding of how a company is doing now and how well it will do in the future.

Then along came the idea of “convergence.” Introduced more than 10 years ago in the hopes of making company analysis easier with more consistent financial reporting rules, convergence is designed to create one global language, or a single set of high-quality standards consistently applied by companies everywhere as the means of reporting financial information and company performance. This would be achieved by upgrading the International Financial Reporting Standards (IFRS) and then replacing all other global financial reporting standards, including U.S. GAAP, with IFRS. No small task, mind you, but a laudable goal of creating a common and consistent global standard.

The two global standard setters, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working at a fevered pitch for the last 24 months to develop a converged set of standards on several key projects. They had established a goal of 30 June 2011. The SEC has said it would decree in 2011 whether the U.S. would move forward with IFRS conversion. This, of course, would hinge on the two standard setters making necessary progress on a range of projects to harmonize existing standards into a unified approach as well as demonstrating that the standards were of high quality and created by an independent and sustainable standard-setting body. Given the intervening financial crisis and the vast number and complexity of standards under development, June 2011 as a completion date for the key convergence projects looks unlikely. In fact, some are now thinking we may never get there. Enter a new concept: a completely made-up idea referred to as “condorsement.”

Here’s the condorsement theory — first introduced on 6 December 2010 in the remarks of SEC Deputy Chief Accountant Paul A. Beswick regarding the U.S. adoption of IFRS — in a nutshell. There is such concern that IFRS and U.S. GAAP will never converge into a single standard that we would be better off dropping the notion altogether. Instead, we would — in substance — set our sights on having multiple versions of the IFRS standard, much like multiple dialects of the same language: U.S. IFRS, Canada IFRS, even China IFRS, and so on. In other words, we would all have the same IFRS base language, but each country would have its own version of IFRS and processes for adopting new IFRS standards and enforcement. In the final analysis, we are not sure whether this actually offers much of an improvement in financial reporting.

As the discussion continues here in the U.S., what we do hear from many investors is another made-up word … “forgedaboudit,” as in let’s stick with U.S. GAAP.

About the Author(s)
Kurt Schacht, JD, CFA

Kurt Schacht, JD, CFA, is the Senior Head, Advocacy Advisor, Capital Markets Policy at CFA Institute, where he oversees advocacy efforts and the development, maintenance, and promotion of the highest ethical standards of practice for the global investment management industry.

2 thoughts on “Financial Reporting: Convergence Debate Is Going Condo”

  1. Chris Dreyer CFA says:

    Forgedaboudit? I hope that’s not to imply a forthcoming change in stance of CFA Institute towards convergence?

  2. Kurt Schacht, JD, CFA says:

    Thanks for your comment Chris. While we still find the prospect of a single set of standards with uniform application to be the most appealing of all the likely paths forward, we see growing recognition of the enormity of the task and, at least in some circles, disbelief that convergence is ever likely to be a reality.

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