Time to Surrender the Accounting Convergence “Pipedream”: Report

It’s time to throw in the convergence towel, one rating agency says.

Getting U.S. issuers to adopt International Financial Accounting Standards (IFRS) fully is a “pipedream” and the new focus should be the limited, but achievable, goal of getting companies to  implement already converged standards effectively, according to a report issued by Fitch Ratings earlier this week.

“Full U.S. adoption of IFRS seems unlikely to happen any time soon. As convergence in standard-setting projects for financial instruments and insurance has now ceased, significant disparity will persist between U.S. GAAP and IFRS,” said the Fitch report issued Monday titled “IASB, FASB: Quietly Throwing in the Towel.”

“While full adoption of IFRS for domestic issuers appears unlikely in the medium term, it is possible that the [U.S. Securities and Exchange Commission] would consider a similar route to Japan and allow an option for at least some entities to use IFRS.”

Both the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working on converged accounting standards for years, and the the SEC had proposed a “road map” for the adoption of IFRS in the U.S. that would have had U.S. companies using international rules as soon as this year.

But implementation of the Dodd-Frank Wall Street Reform Act — as well as a lack of enthusiasm from U.S. filers — had made accounting convergence a dream deferred for both regulators and accounting standard-setters.

Now public U.S. companies should assume that full U.S. adoption of IFRS “seems unlikely to happen anytime soon” as both the FASB and IASB “began moving away from efforts to converge their two sets of accounting standards” this year.

Two major convergence projects are just “pipedreams” at this point, the Fitch report argues. The project to align accounting for financial instruments has collapsed with major differences in both the U.S. and international standards, and efforts around insurance contracts all but evaporated after FASB abandoned the joint project.

For now, all that is left for issuers is to work on  implementing the converged revenue recognition standard.

“Many companies will use the [revenue recognition] transition to the new rule as an opportunity to scrutinize their terms of business,” the Fitch report said. “Previous terms and conditions linked to revenue recognition under the old rules may no longer be required, and it may be possible to restructure agreements in a more intuitive way.”