Convergence of Accounting Standards: A Comparative Analysis of the U.S. Revised Standard on Share-Based Payment and the International Accounting Standards Board's IFRS 2
Silliman, Benjamin Rue, Review of Business
The FASB's recently revised standard, SFAS 123(R), Share-Based Payment, converges closely with the IASB's identically titled standard, IFRS 2. Both standard-setting Boards continue to work closely together to achieve a coherent set of improved standards that will result in "greater international comparability." This article examines and compares the similarities and remaining differences between the two recently issued standards on share-based payments.
On December 16, 2004, the Financial Accounting Standards Board (FASB) published SFAS 123(R), Share-Based Payment, which was a nearly two-year effort by the Board to promulgate a revised standard that "provides investors and other users of financial information with more complete and neutral financial information by requiring that compensation cost relating to share-based payment transactions be recognized in financial statements" . FASB member Michael Crooch commented on the revised standard:
Recognizing the cost of share-based payments in the financial statements improves the relevance, reliability, and comparability of that financial information and helps users of financial information to understand better the economic transactions affecting an enterprise and supports resource allocation decisions .
SFAS 123(R) is a United States standard in which a majority of the accounting treatments converge with the recent standard passed by the international standard-setting body, the International Accounting Standards Board.
Since late 2002, the Financial Accounting Standards Board and the International Accounting Standards Board (IASB) embarked on a firm commitment to cooperate in order to achieve convergence on a whole host of accounting standards. Both standard-setting bodies issued a memorandum of understanding in October 2002 (known as the "Norwalk Agreement") that spelled out the commitment to the convergence of U.S. and international accounting standards . More recently, the IASB Chairman, Sir David Tweedie, in his September 9, 2004 testimony before the U.S. Senate's Committee on Banking, Housing, and Urban Affairs, argued that the FASB and IASB's recent efforts in developing more global accounting standards are to "eliminate the differences between ... existing standards in the near term and to work together on long-term projects to ensure that the principles behind, if not the wording of, new standards will be the same" . One important project where both the boards have worked simultaneously to promulgate convergence in standards is the accounting for equity-based compensation.
The reporting of equity-based compensation by public corporations has become one of the most controversial issues the FASB and IASB have ever placed on their respective agendas. Both boards began working in late 2002 on developing a coherent set of standards on share-based payments that would result in "greater international comparability" . In its exposure draft dealing with equity-based compensation, the FASB outlined the goal of developing a standard that would converge with that of the IASB, resulting in a common set of "high-quality accounting standards":
Converging to a common set of high-quality financial accounting standards on an international basis for share-based payment transactions with employees improves the comparability of financial information around the world and simplifies the accounting for enterprises that report financial statements under both U.S. GAAP and international accounting standards .
As indicated, the issue of equity-based compensation is the first major test of the effort of convergence of accounting standards. The IASB issued International Financial Reporting Standard 2 (IFRS 2), titled Share-Based Payment, in February 2004, which requires corporations to recognize an expense for "all employee services received (or consumed)" in exchange for the corporation's equity instruments, using a fair-value based method for measuring such compensation . …