Academic journal article Review of Business

Cooperation between FASB and IASB to Achieve Convergence of Accounting Standards

Academic journal article Review of Business

Cooperation between FASB and IASB to Achieve Convergence of Accounting Standards

Article excerpt

The International Accounting Standards Board has a mandate to produce a single set of high quality, understandable, and enforceable global accounting standards and to encourage convergence on these standards. To achieve its goals, the Board works closely with national standard setters around the world. The Financial Accounting Standards Board in the US. is one of its most important partners.

Introduction

Recently, increasing pressure from the international financial markets has led to major restructuring of the International Accounting Standards Committee (IASC), an organization that has been setting International Accounting Standards (IAS) for nearly 30 years. The Committee was restructured in 2001 into the International Accounting Standards Board (IASB), a highly professional organization supported by industry and governments around the world. The IASB was modeled after the Financial Accounting Standards Board (FASB) in the U.S., and created with a mandate to produce a single set of high quality, understandable, and enforceable International Financial Reporting Standards (IFRS) and to encourage convergence on these standards (18). (1)

The demand for high quality global accounting standards increased significantly when the European Commission required all publicly listed companies within the European Union (EU) to prepare their consolidated financial statements in compliance with IFRS, beginning in the year 2005 at the latest. Upon this announcement, the IASB undertook three major sets of projects to meet this demand. The first project set provided leadership for the convergence of accounting standards. It included four projects: business combinations (phase I), insurance contracts, performance reporting, and share-based payments. The second project set included the first time application of the IFRS, and the activities of financial institutions, which were designed to make existing standards easier to apply. The third set of projects aimed to improve the basic standards that the IASB inherited from its predecessor, the IASC.

To achieve its goal of convergence, the IASB works closely with national standard setters around the world. The Financial Accounting Standards Board (FASB) is one of the IASB's most important partners. In face of the recent financial reporting crisis in the U.S., FASB has realized that it does not have all the answers to all of the accounting issues. There are some areas of U.S. standards that could be improved, where international standards seem to be more principles-based and more easily applied. Therefore, the FASB has become a proponent of improved international standards, and of a single set of standards to be used internationally and domestically. In its own report, "IAS Setting: A Vision for the Future," the FASB even suggests that the Board entertains the possibility that it may not be needed in the long run.

In the Memorandum of Understanding called 'The Norwalk Agreement," issued at their joint meeting in Norwalk, Connecticut on September 18, 2002, both the FASB and IASB pledged to use their best efforts to make their existing financial reporting standards fully compatible as soon as possible. The Boards also made a commitment to coordinate their future work programs to ensure that once achieved, compatibility is maintained. Based on this Memorandum, on October 29, 2002, the FASB and IASB jointly announced their commitment to achieving real convergence between their respective accounting standards by 2005, when listed EU companies will be required to apply IFRS. The European Commission enthusiastically welcomed the announcement.

The U.S. Securities and Exchange Commission (SEC) has also supported global standards, although it still does not accept LAS financial statements without reconciliation to U.S. Generally Accepted Accounting Principles (GAAP) From the U.S. perspective, the international standards are not yet adequately comprehensive and remain too ambiguous (17). …

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