In this article we will discuss about:- 1. Introduction to International Accounting Standards Board 2. International Financial Reporting Standards (IFRS) 3. FASB-IASB Convergence 4. Response to SEC Concept Release.

Introduction to International Accounting Standards Board:

On completion of its core set of standards, the IASC proposed a new structure that would allow it and national standard setters to better work together toward global harmonization. The restructuring created the International Accounting Standards Board (IASB). In April 2001, the IASB assumed accounting standard-setting responsibilities from its predecessor body, the IASC.

The IASB consists of 14 members—12 full-time and 2 part-time. To ensure the IASB’s inde­pendence all full-time members are required to sever their employment relationships with former employers and are not allowed to hold any position giving rise to perceived economic incentives that might call their independence into question. Seven of the full-time IASB members have a formal liaison responsibility with one or more national standard setters; the other seven do not have such a responsibility.

A minimum of five IASB members must have a background as prac­ticing auditors, three must have a background as preparers of financial statements, and three as users of financial statements, and at least one member must come from academia. The most important criterion for selection as an IASB member is technical competence. The initial IASB members came from nine countries- Australia, Canada, France, Germany, Japan, South Africa, Switzerland, the United Kingdom (4), and the United States (3).

International Financial Reporting Standards (IFRS):


In April 2001, the IASB adopted all international accounting standards issued by the IASC and announced that its accounting standards would be called international financial reporting standards (IFRS). IAS 1, “Presentation of Financial Statements,” was amended in 2003 and defines IFRS as standards and interpretations adopted by the IASB.

The authoritative pro­nouncements that make up IFRS consist of these:

i. International Financial Reporting Standards issued by the IASB.

ii. International Accounting Standards issued by the IASC (and adopted by the IASB).


iii. Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC).

Under the new structure, the IASB has sole responsibility for establishing IFRS.

The IASC issued 41 IASs from 1975 to 2001, and the IASB had issued eight international financial reporting standards (IFRSs) as of January 1, 2007. Several IASs have been withdrawn or superseded by subsequent standards. For example, later standards dealing with property, plant, and equipment, and intangible assets have superseded IAS 4, “Depreciation Accounting,” originally issued in 1976. Other IASs have been revised one or more times since their original issuance. For example, IAS 2, “Inventories,” originally issued in 1975 was then revised as part of the compara­bility project in 1993.

As part of an improvements project undertaken by the IASB, IAS 2 was again updated in 2003. Unlike the US. FASB, which creates a uniquely numbered statement of financial accounting standards to amend a previous standard, the IASC and IASB recycle existing numbers. Of 41 IASs issued by the IASC, only 31 were still in force as of January 1, 2007. The IASB issued the first IFRS in 2003; it deals with the important question of how a company should restate its financial statements when it adopts IFRS for the first time.


Exhibit 11.7 provides a complete list of the 39 IASs and IFRSs in force as of January 1, 2008. Together these two sets of standards create what the IASB refers to as IFRS and what can be thought of as IASB GAAP. IFRS constitute a comprehensive set of financial reporting standards that cover the major accounting issues.

In addition, the IASB’s Framework for the Preparation and Presentation of Financial Statements, which is very similar in scope to the FASB’s Conceptual Framework, provides a basis for determining the appropriate accounting treatment for items not covered by a specific standard or interpretation. As was true for its pre­decessor, the IASB does not have the ability to enforce its standards. It develops IFRS for the public good and makes them available to any organization or nation that wishes to use them.

Use of IFRS:


A country can use IFRS in a number of different ways.

For example, a country could:

(1) Adopt IFRS as its national GAAP,

(2) Require domestic listed companies to use IFRS in preparing their consolidated financial statements,


(3) Allow domestic listed companies to use IFRS, and/or

(4) Require or allow foreign companies listed on a domestic stock exchange to use IFRS.

See Exhibit 11.8 for a summary of the extent to which IFRS are required or permitted to be used by domestic listed companies in countries around the world.

Of the 137 countries included in Exhibit 11.8, 76 require all domestic listed companies to use IFRS. Most significant among this group are the 27 countries of the European Union. All publicly traded companies in the EU have been required to use IFRS to prepare their consoli­dated financial statements since January 1, 2005. The only exceptions were those companies that were already using U.S. GAAP, which several jurisdictions allowed, or that had publicly traded debt securities only.


These companies began using IFRS in 2007. In most cases, EU companies continue to use domestic GAAP to prepare parent company financial statements, which often serve as the basis for taxation. With the EU’s adoption of IFRSs, the IASB has gained a substantial amount of legitimacy as the global accounting standard setter.

In addition to the EU, many developing countries require the use of IFRSs. This is espe­cially true for countries in Eastern Europe and the former Union of Soviet Socialist Republics (USSR), which may have found adoption of IFRS an inexpensive means of switching from a Soviet-style accounting system to one oriented toward a free market.

Most countries in the Western Hemisphere require or permit domestic listed companies to use IFRS in preparing their financial statements. The most important exceptions are Canada and the United States. This situation will not continue for very long. In January 2006, the Accounting Standards Board in Canada ratified a strategic plan for converging Canadian GAAP with IFRS over a period of five years, and at the end of that period, “Canadian GAAP will cease to exist as a separate, distinct basis of financial reporting for public companies.”


Several countries that do not allow domestic listed companies to use IFRS nevertheless allow foreign companies listed on domestic stock exchanges to use them as recommended by IOSCO. For example, Japan allows foreign companies listing on the Tokyo Stock Exchange to prepare IFRS-based financial statements without reconciling them to Japanese GAAP. The SEC in the United States also allows foreign registrants to prepare their financial statements in accordance with IFRS, or any other non-U.S. GAAP for that matter.

However, in those cases, the foreign company must also provide a reconciliation of net income and stockholders’ equity to U.S. GAAP in the notes to the financial statements included in its annual report filed on Form 20-F with the SEC. The SEC has been under pressure for a number of years to elim­inate its GAAP reconciliation requirement for those foreign registrants that use IFRS. With the adoption of IFRS in the EU in 2005, pressure from Europe has intensified.

As the IASC was completing its core set of standards under the IOSCO agreement in the 1990s, the SEC put the IASC and the rest of the world on notice that it would not necessarily approve the use of IFRS simply because IOSCO recommended that it do so. The SEC began its assessment of the IASC’s core set of standards in 1999 and issued a Concept Release in 2000 to solicit comments on whether it should modify its GAAP reconciliation requirement.

Finally, in July 2007, the SEC took a large step toward making this change by issuing a proposed rule that would allow foreign companies with securities registered in the United States to prepare financial statements in accordance with the English language version of IFRS without providing a reconciliation to U.S. GAAP.

In November 2007, the SEC approved rule amendments to effect this change. The new rule applies to financial statements covering years ending after November 15, 2007. As a result of this rule change, approximately 180 foreign companies were able to file their 2007 annual reports with the SEC without providing a reconciliation to U.S. GAAP.

Earlier, in August 2007, the SEC issued a Concept Release “to obtain information about the extent and nature of the public’s interest in allowing U.S. issuers to prepare financial statements in accordance with International Financial Reporting Standards as published by the International Accounting Standards Board for purposes of complying with the rules and regulations of the Com­mission.” With this Concept Release, the SEC initiated a public debate whether U.S. companies should be allowed to choose between U.S. GAAP and IFRS in preparing their financial statements.

FASB-IASB Convergence:


At a joint meeting in Norwalk, Connecticut, in September 2002, the FASB and IASB agreed to “use their best efforts to- (a) make their existing financial reporting standards fully compat­ible as soon as is practicable and (b) to coordinate their work program to ensure that once achieved, compatibility is maintained.” Both the SEC chairman and the EU commissioner for the internal market immediately welcomed the so-called Norwalk Agreement.

The six key FASB initiatives to further convergence between IFRS and U.S. GAAP follow:

1. Short-Term Convergence Project:

The objective of the short-term convergence project is to eliminate those differences between U.S. GAAP and IFRS in which convergence is likely to be achievable in the short term. Convergence is expected to occur by selecting either existing U.S. GAAP or IASB requirements as the high-quality solution.

2. Joint Projects:

Joint projects involve sharing FASB and IASB staff resources and working on a similar time schedule.

3. The Convergence Research Project:

The FASB staff embarked on a project to identify all substantive differences between U.S. GAAP and IFRSs and catalog differences based on the FASB’s strategy for resolving them.

4. Liaison IASB Member on Site at the FASB Offices:

To facilitate information exchange and foster cooperation, a full-time IASB member is in residence at the FASB offices. Former FASB Vice-Chair James Leisenring was the first IASB member to serve in this capacity.

5. Monitoring IASB Projects:

The FASB monitors IASB projects based on the level of inter­est in the topic being addressed.

6. Explicit Consideration of Convergence Potential in Board Agenda Decisions:

As part of the process for considering topics to add to its agenda, the FASB explicitly considers the poten­tial for cooperation with the IASB.

Short-Term Convergence Project:

The short-term convergence project is intended to remove a variety of individual differences between IFRSs and U.S. GAAP that are not covered in broader projects and for which a high-quality solution appears to be achievable in a short time period. The short-term convergence project already has resulted in several changes to U.S. GAAP.

Topics covered under this project include these:

1. Inventory Costs:

The FASB issued SFAS 151, “Inventory Costs—An Amendment of ARB 43, Chapter 4,” in December 2004 to converge with the IASB’s treatment of items such as idle facil­ity expenses, excessive spoilage, double freight, and rehandling costs as current period expenses.

2. Asset Exchanges:

APB Opinion 29 provided an exception to the general rule that asset exchanges should be measured at fair value. That exception related to nonmonetary exchanges of similar assets. To converge with IFRS, SFAS 153, “Exchanges of Nonmonetary Assets—An Amendment of APB Opinion 29,” issued in December 2004, eliminates this exception.

3. Accounting Changes:

The FASB issued SFAS 154, “Accounting Changes and Error Corrections—A Replacement of APB Opinion No. 20 and FASB Statement No. 3,” in May 2005. This statement changes the reporting of certain accounting changes to be con­sistent with their treatment under IFRS. Reporting the cumulative effect of a change in accounting principle in current period net income is no longer permissible. Instead, retro­spective application of the new accounting principle is required.

4. Earnings per Share:

In September 2005, the FASB issued the revised Exposure Draft, “Earnings per Share—An Amendment of FASB Statement No. 128,” which would amend the guidance for computing earnings per share. The FASB indicates that this proposed stan­dard would improve financial reporting by enhancing the comparability of financial state­ments prepared under U.S. GAAP and IFRS.

Although not formally a part of the short-term convergence project, the issuance of SFAS 123 (revised 2004), “Share-Based Payment,” in December 2004, which requires share-based payments to be measured at fair value, was at least partially justified through convergence with IFRS.

As one of the principal reasons for issuing this statement, the FASB provided the following explanation:

Converging with international accounting standards. This Statement will result in greater inter­national comparability in the accounting for share-based payment transactions. In February 2004, the International Accounting Standards Board (IASB), whose standards are followed by entities in many countries, issued International Financial Reporting Standard (IFRS) 2, Share-Based Payment.

IFRS 2 requires that all entities recognize an expense for all employee services received in share-based payment transactions, using a fair-value-based method that is similar in most respects to the fair- value-based method established in Statement 123 and the improvements made to it by this State­ment.

Converging to a common set of high-quality financial accounting standards for share-based payment transactions with employees improves the comparability of financial information around the world and makes the accounting requirements for entities that report financial statements under both U.S. GAAP and international accounting standards less burdensome.

Joint Projects:

The IASB and FASB are jointly working on several projects that deal with broader issues expected to take longer to resolve than topics covered by the short-term project. We describe four of these projects.

1. Business Combinations Project:

After separately eliminating the pooling of interests method, the FASB and IASB jointly developed a common solution in 2007 with respect to- (1) the measurement at full fair value of an acquired company’s assets and liabilities and (2) the measurement and presentation of non- controlling interests. The tangible results of this joint project in U.S. GAAP are SFAS 141R, “Business Combinations,” and SFAS 160, “Non-controlling Interests in Consolidated Financial Statements,”.

2. Performance Reporting Project:

This project deals with the presentation of information in the financial statements. The objec­tive is to enhance the usefulness of information in assessing the financial performance of the reporting enterprise. The FASB issued an initial proposal related to this project in August 2001. In April 2004, the FASB and IASB agreed to work together on this project in the future.

Issues being considered include whether a single statement of comprehensive income should be required to be presented as a primary financial statement, whether the direct method should be mandated for reporting cash flow from operations in the statement of cash flows, how many years should be included in comparative financial statements, and which totals and subtotals should be reported on each required financial statement.

3. Revenue Recognition Project:

This project’s objective is to develop a common, comprehensive standard on revenue recogni­tion grounded in conceptually based principles. More than 140 U.S. authoritative pronounce­ments relate to revenue recognition. Finding the answer to a specific revenue recognition question can be difficult, and gaps exist. Unlike U.S. GAAP, IFRSs contain a single, general standard on revenue recognition (IAS 19, “Revenue”).

However, this standard is of limited use in determining the appropriate recognition of revenue in many cases. This project is expected to result in a single standard that will- (1) eliminate inconsistencies in existing literature, (2) fill the gaps that have developed in recent years as new business models have emerged, and (3) provide a conceptual basis for addressing issues that arise in the future.

4. Conceptual Framework Project:

This project seeks to develop a common conceptual framework that both boards could use as a basis for future standards. Although the IASB Framework and the FASB’s Conceptual Framework (as embodied in its Statements of Financial Accounting Concepts) are substantially similar, differences do exist. More important, the existing frameworks have internal inconsis­tencies and are not comprehensive.

Response to SEC Concept Release:

As noted earlier, the SEC introduced the concept of allowing U.S. publicly-traded companies to choose between U.S. GAAP and IFRS in preparing their financial statements. Not surprisingly, the FASB has considerable interest in this proposal. On November 7, 2007, the chairmen of the FASB and the Financial Accounting Foundation (FAF), which oversees the FASB, wrote a joint letter to the SEC offering their opinion on the SEC’s Concept Release.

They concluded that: “Investors would be better served if all U.S. public companies used accounting standards pro­mulgated by a single global standard setter as the basis for preparing their financial reports. This would be best accomplished by moving U.S. public companies to an improved version of International Financial Reporting Standards (IFRS)” (emphasis added).

However, the two chairmen do not believe the replacement of U.S. GAAP with IFRSs can happen quickly. Instead they believe that “a move to IFRS by all public companies would be a complex, multi-year endeavor.” They recommend the development of a blueprint that identi­fies- (1) target dates that will allow adequate time to make changes that would be needed in the U.S. financial reporting infrastructure, including changes in auditing standards, education sys­tems, and licensing requirements, and (2) the areas of IFRS that should be improved.

They believe that the continued joint development of common standards by the FASB and IASB will be the best way to improve IFRS.