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This paper provides readers with: 1) An update on an institutional change that will focus the attention of worldwide accounting and financial reporting standard setters on the convergence of international and national standards, and 2) An analysis of “in-process” issues in the international accounting arena that will be critical to the success / failure of this convergence effort. Institutional Change rom its beginnings in the mid 1970s, the Board of the International Accounting Standards Committee (IASC) promulgated International Accounting Standards (IAS). This 13-member (all part-time) Board represented professional accounting groups from member countries. The total number of IASC member countries had grown from the 10 charter members to 134 at the end of 2000. Effective April 1, 2001, the Board of the IASC handed over responsibility for setting IAS to a new Board appointed by the newly established IASC Trustees. For an extensive chronicle of this momentous change, please refer to “The New Structure for International Accounting Standards” by Mary Ellen Oliverio (The CPA Journal, May 2000, pages 20-26 and 91). In accordance with the IASC‟s new constitution, the new International Accounting Standards Board (IASB) is comprised of 14 individuals (12 full-time members) as follows:  A minimum of five with a background as practicing auditors  A minimum of three with a background in the preparation of financial statements  A minimum of three with a background as users of financial statements  At least one member with an academic background  Seven of the full-time members will be expected to have formal liaison responsibilities with national standard setters in order to promote the convergence of national accounting standards and IAS (emphasis added). How Likely is it that National Accounting Standards and International Accounting Standards Will Converge? Seven liaison Board members actively seeking input from national standard-setting bodies should enhance the likelihood of national and international standard convergence. Furthermore, the IASC Board clearly indicated  Readers with comments or questions are encouraged to contact the authors via email. F International Business & Economics Research Journal Volume 2, Number 8 88 that convergence of national and international standards is the theme for the future for global accounting standards: The path established by IASC’s restructuring decisions for achieving agreement on global accounting standards is through convergence of national and international standards (emphasis added). (IASC Annual Review 2000, page 8). Considering this, it is not surprising that the outgoing Board of the IASC offered suggestions and advice to the new IASB; 18 issues were identified that it apparently viewed as important to the convergence effort. Some of these were actually on the IASC‟s final agenda and others were proposals for new projects under consideration. Analysis of “In-Process” Issues We have selected the seven issues (of the 18 identified by the IASC) that, in our opinion, will be most important to the convergence effort. The issues/topics (in alphabetical order) are: 1. Accounting for share-based payments 2. Business Combinations (including Goodwill) 3. Discounting and fair values 4. Framework (concepts) 5. Regulation to secure effective application of IAS 6. Reporting Financial Performance 7. Reporting on narrative discussions outside the notes to the financial statements. For each issue, we will discuss:  why its resolution is critical to convergence  treatments currently called for under US-GAAP and IAS, and  our opinion as to the resolution of the issue that would be the „best‟ to improve the quality of worldwide financial reporting (i.e., encourage convergence). 1. Accounting for Share-Based Payments (specifically, stock option plans) Why Resolution Is Critical to Convergence We see this issue as critical to convergence because of the importance of these compensation schemes to an ever-growing majority of companies. Once a primarily US issue, this has become an international issue coincidental with the increase in the number of companies around the world that have become capital market participants. This issue is especially important, in our view, because of the negative impact on company credibility caused when there is even a hint of suspicion about the compensation of key executives. Current US and IAS Treatments US-GAAP allows companies to choose between including the cost of share-based in the determination of net income and disclosing that cost in the notes to the financial statements. There is no existing IAS that addresses this issue. What Would Be “Best” for Convergence? We believe that a common standard for US-GAAP and IAS is definitely in order. In the US, accounting in this area has been highly contentious for over 10 years. This is one area where leadership by the IASB might benefit the FASB in that it would assist in “jumping over” some highly political hurdles. International Business & Economics Research Journal Volume 2, Number 8 89 2. Business Combinations (including Goodwill) Why Resolution Is Critical to Convergence Business combinations occur more and more frequently every year. Furthermore, it is through these combinations that the problematic asset Goodwill presents itself. As with accounting for share-based payments, any lack of uniformity in accounting in these areas is poor public relations for companies and auditors. This is especially true in recent years, as we have seen an unfortunate number of business combinations result in less than desirable outcomes. Accounting for the combination (purchase versus pooling), what percentage of voting shares triggers consolidation, and the initial recognition and future treatment of Goodwill are rich issues for which common worldwide answers will truly improve financial reporting. Current US and IAS Treatments As we write this paper, both IAS and US-GAAP allow both purchase and pooling-of interest accounting. Both regimes require amortization of Goodwill over periods of time, with the US allowing up to 40 years and the IAS allowing up to 20 years. Under IAS, consolidation is called for in cases where one entity controls the other. Under US-GAAP, ownership in excess of 50% of voting shares calls for consolidation. What Would Be “Best” for Convergence? There seems to be reasonable consensus around the world that the pooling of interests method should be disallowed, thus resulting in all combinations being treated under purchase accounting. With respect to Goodwill, a choice must be made between amortization over an agreed upon number of years and no amortization. The latter would necessitate annual consideration of impairment. 3. Discounting and Fair Values Why Resolution Is Critical to Convergence Historical cost versus current values – the seemingly endless debate for accounting theoreticians – never seems to go away! While in years gone by this was a fascinating topic within any country, its resolution within a particular country would not affect other countries. Unfortunately, that is no longer the case. Fundamental differences in measurement are simply not acceptable as we move into an economic world with no real borders. While it may be that the solution could be different depending upon the nature of the item (monetary versus at fair vale, non-monetary at historical cost, for example), at least some level of commonality is definitely required. Many, if not most, business decisions are made using discounting as a measurement tool. It makes sense that financial reporting also use discounting as a key tool in value measurement. Current US and IAS Treatments Both US-GAAP and IAS are guilty of being all over the place on this one. Fair values are required in some areas, but not in others. What Would Be “Best” for Convergence? Convergence would be best served, in our view, by stipulating that all monetary assets and liabilities (financial instruments) should be included in balance sheets at fair value. On the other hand, non-monetary items (land, buildings, etc.) should continue, for the foreseeable future, to be presented at their historical cost, less depreciation and impairments. International Business & Economics Research Journal Volume 2, Number 8 90 4. Framework (concepts) Why Resolution Is Critical to Convergence Both the FASB‟s Statements of Financial Accounting Concepts (often referred to as the Conceptual Framework) and the IASB‟s Framework for the Preparation and Presentation of Financial Statements include the claim that their major purpose is to guide standard setting. Most practitioners (auditors and preparers) have little use for these frameworks as they focus most of their attention on the standards themselves. It makes sense then that the primary audience for frameworks would be those who seek to establish standards. Convergence will be much more likely if the standard setters are referring to similar (if not the same) concepts. Current US and IAS Treatments For a comprehensive assessment of the differences between the US and IAS concepts, please refer to “Obstacles to International Accounting Standards Convergence” by J. Campbell, H. Hermanson and J. McAllister (CPA Journal, May 2002, pages 21-24). What Would Be “Best” for Convergence Convergence would be best served if agreement could be reached on a set of concepts. As noted in the above-referenced Campbell paper, the FASB and IAS frameworks have significant areas of agreement. Hence, we believe that eliminating the differences would truly facilitate convergence. 5. Regulation Re: Application of IAS Why Resolution Is Critical to Convergence No matter how good any set of standards is, they are meaningless if preparers of financial statements do not comply with such standards. This issue probably seems strange to US readers because we have long assumed that standards are applied considering the presence of the SE

Convergence Of US-GAAP And International Standards: The Critical Issues