Convergence limps on…

29 November 2013

By John Hitchins

In 2002 the IASB and FASB signed up to the goal of accounting convergence as part of the Norwalk Agreement. Initially we saw commitment from both sides as they went full steam ahead to align existing standards and issue new standards where required.  More recently things appear to have slowed – dates missed and exposures re-exposed.  The once happy relationship appears to be more strained: if I liken it to a dating couple, they are still officially dating but have agreed to see other people.

At the 15th annual Meet the Experts conference convergence was mentioned by a number of key speakers. Hans Hoogervorst said “in the long run he remains optimistic” however appreciated that finding a converged leasing standard was going to be “tough”.

What does success look like?

Hans described the revenue project as the “jewel in the crown” of convergence. Taking thousands of pages of illustrative examples in US GAAP and fairly limited examples under IFRS and writing a converged standard is no mean feat. Given the significance of revenue I’m sure we’ll see lots of difficult implementation questions arising, no matter how well drafted the final standard is. There is an obvious danger that the very different approaches of the US EITF and the IFRS IC will result in differences in interpretation creeping in over time. There is a proposed joint implementation group, but this is only a temporary body, and is not expected to issue authoritative guidance.

Where can’t the Boards agree?

Looking at the rest of the agenda there are a number of key areas the Boards appear unable to agree on:

  • Impairment of financial instruments. Although both agree to an expected loss model, the measurement of that loss is different.
  • The IASB’s revision of hedge accounting principles is not being taken up by the FASB.
  • Insurance. There are differences in many areas between the two Boards’ respective exposure drafts.
  • Leases. Although currently aligned, Hans Hoogervorst warned at “Meet the Experts” that the range of objections expressed in over 600 comment letters would make it difficult for the Boards to maintain their alignment.

Was convergence ever a realistic goal?

The goal of the Norwalk agreement was to align standards but with an appreciation they would never be identical. Convergence has definitely seen some success, as the two frameworks are closer together today.

With lots of political pressure from different stakeholders, full convergence was always a little too idealistic.

The US will naturally focus on the US perspective first and foremost.  Russ Golden was quoted as saying “FASB's first priority is to improve financial reporting for the benefit of investors and other users of financial information in U.S. capital markets.” The question now is not whether US GAAP and IFRS will converge but rather whether the US will ever adopt IFRS. Clearly the US domestic capital market does not yet see the benefit in doing so.

Let’s hope that the Boards can avoid creating new differences. The mood seems now to be that further convergence is a “nice to have” but the IASB has more important priorities to address. 

What do you think? Has convergence been a success – albeit a qualified one? And is it time for the Boards to accept they’ve got as far as they can and go their separate ways?

John Hitchins:
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