The prospect of International Financial Reporting Standards (IFRS) being fully adopted in the United States in the near future are growing less likely, as the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) continue to move away from full convergence of their standards, according to a new report from Fitch Ratings.
The two standard-setting boards have worked for many years on ironing out global accounting standards in four areas: financial instruments, insurance, leases, and revenue recognition.
So far, the joint projects on financial instruments, insurance, and leases remain unfinished. Differences in financial products between US institutions and those following IFRS, as well as differences in application, meant that a one-size-fits-all accounting approach for financial instruments was problematic, Fitch noted in its report, Scrutinizing Topical Accounting Issues (Fifth Annual Edition - IASB, FASB: Quietly Throwing in the Towel).
In addition, for the converged insurance standard, there were several concerns raised by US constituents, such as the proposal would ensnare both insurance and noninsuring issuers. These considerations resulted in the joint insurance project also falling by the wayside.
Discussions between the FASB and the IASB continue on a joint lease accounting standard that would bring leases onto corporate balance sheets. But Fitch noted in its report that some detailed issues remain to be resolved, and there may be some minor differences in application between US Generally Accepted Accounting Principles (GAAP) and IFRS.
During a speech in Singapore on May 29, IASB Chairman Hans Hoogervorst said he was hopeful that the two boards could hammer out a final converged leases standard by the end of the year.
“While we have reached agreement with the FASB that most leases need to be put on the balance sheet, we have less agreement about how the lease liability should be run off in the income statement,” he said. “More work needs to be done. In the next couple of months, we should be able to finalize our work.”
However, at the Institute of Management Accountants’ 95th Annual Conference and Exposition in Minneapolis on June 23, FASB Chairman Russell Golden was less optimistic, saying he did not expect the leases standard to be finished this year and added, “It probably won’t be done until the latter half of 2015.”
The FASB and the IASB did reach a milestone in late May when they released a converged accounting standard on revenue recognition, which standardizes how companies should recognize revenue from contracts with customers in financial statements under both IFRS and US GAAP.
Companies using IFRS will be required to apply the revenue standard for reporting periods beginning on or after January 1, 2017, and early application is permitted. For public companies using US GAAP, they will be required to apply the standard for annual reporting periods beginning after December 15, 2016, including interim reporting periods therein. US private companies and organizations are required to apply the revenue standard for annual reporting periods beginning after December 15, 2017, and interim and annual reporting periods thereafter.
However, for many companies, the new rules will affect the timing of revenue, and Fitch believes this has the potential of making margins less consistent over time due to sales deleverage. Transition to the new rules may provide an opportunity for companies to scrutinize their contracts. Changes to terms and conditions may then be considered to optimize revenue under the new rules or remove redundant conditions.
In the interim, accounting standards updates last year were mostly cleanups of previous pronouncements or updates, according to Fitch, and are unlikely to have minimal impact on corporate credit metrics and cash flows.