Introduction Chapter: State of Accounting Convergence Among Large Public Companies

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Convergence

Since 2002, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working towards the convergence of international financial reporting standards and U.S. reporting standard under the generally-accepted accounting principles. The state of this convergence both at the regulatory level and at the practical level in American accounting departments is of interest to a number of stakeholders, including investors, creditors, regulators and the firms themselves. While the FASB and IASB have not outlined a clear end date for full convergence, the SEC has set 2014 as a date by which American firms should be using IFRS, introducing some urgency to the issue.

While there have been studies on the drivers of the convergence process and on the impacts of convergence on public companies, there have been relatively few studies on the state of convergence in American public companies. It is these companies that will eventually be implementing the changes brought about as a result of the convergence process, so it is important to understand the issue from their perspective.

This study provides a better understanding of the state of accounting convergence among American public companies. Their attitudes towards convergence will be gauged, and they will be polled on their state of readiness for convergence. Their understanding of the process will also be analyzed. The study will provide conclusions on the state of convergence that will be of benefit to regulators and those involved in the convergence and implementation process.

Chapter 1 -- Introduction and Overview

1.1 Introduction

Accounting convergence was first announced in October 2002 by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Since that time, the agencies have been working to reconcile the American GAAP system with international accounting standards, a process known in the business community as accounting convergence. The process had begun earlier with research to compare U.S. And international accounting systems (the IASC-U.S. comparison project, 2nd edition, released in 1999). The rationale for convergence was simple -- that the globalization of capital markets necessitated a consistent system of accounting that could be used worldwide (FASB.org, 2011).

The project has proven to be one of immense complexity. In the early years of convergence, the FASB noted that it expected "many differences between U.S. And international standards will persist well beyond 2005." This has proved to be something of an understatement, as there is still no timetable for the achievement of full convergence. The process of reconciling each standard is lengthy. When an issue has been identified as requiring convergence, the first step is typically "user outreach," a process whereby the opinions of relevant stakeholders are sought. A discussion paper is published, and comments are solicited for a period of several months. When the FASB and IASB deem the public commentary to be satisfactory, they will proceed to incorporate the views they have collected into board meetings and deliberations. As a result, it can take years to implement convergence on a single issue. Public companies can typically be expected to follow the lead of the self-regulatory bodies with respect to convergence.

1.2 Importance of the Topic

The subject of convergence is of important for a number of reasons. For public companies, the state of convergence is very important, since companies will need to conform to the prevailing accounting standards. Public companies must be aware of implementation timelines for different convergence topics, and must understand the issues at play and be prepared to make the necessary adjustments to their accounting and reporting procedures. There may be, as Hail et al. (2009) have proposed, economic consequences related to convergence both in terms of new costs and in terms of gaining access to new capital markets.

For the investing community, convergence is also of importance. Jones (2010) argues that the case of Lehman Brothers highlights the importance of convergence to the investing community. The bank, following U.S. GAAP, was able to strengthen its balance sheet in a manner that would have been inconsistent with international financial report standards (IFRS). The substantial difference in accounting outcomes that can result from having different standards around the world can create situations where investors have difficulty understanding the financial statements upon which they are basing investment decisions. Barth, et al. (2011) noted in a recent study that although IFRS use has brought the reporting outcomes of foreign firms closer to those that they would have achieved under U.S. GAAP, "significant differences remain."

Other stakeholders also have an interest in the state of accounting convergence. The American Bar Association has issues memos to its members about the effect of accounting convergence on the field of business law (2010). Governments, regulatory agencies, lenders and other common stakeholders of financial statements also have a stake in the accounting convergence process.

1.3 State of the Field

In practice, the accounting convergence process is ongoing, with no defined end point. In 2007, Price Waterhouse Coopers issued an outline of the process' timeline. The process was defined in four phases. Phase III (2009 and beyond), the idea was that the FASB was intended by this point to become a redundant entity. By Phase IV, the resources of the FASB are to be subsumed into the existing IASB infrastructure. The Phase III outcomes, scheduled for two years ago, are not yet in place and there is no timeline for the completion of Phase III at this point. Some progress has been made, however, and a number of convergence standards have been implemented. In 2007, the SEC altered the reporting requirements for foreign firms traded on U.S. exchanges, allowing them to prepare statements in accordance with IFRS without reconciliation with U.S. GAAP (AICPA, 2010).

There have been several studies that seek to analyze the impacts that accounting convergence will have on a number of stakeholders, including both foreign and American firms. Qu and Zhang (2010) developed a method for measuring the convergence of national and international accounting standards, although they applied their system to China, not the U.S. In order to better understand the convergence process Hall, Leuz and Wysocki (2009) outlined the economic and policy factors that have impacted the process.

There have, however, been few studies that have sought to directly measure the state of convergence among large U.S. public companies. The SEC has issued a roadmap that will lead to the mandatory use of IFRS among U.S. issuers by 2014 (Bratton, 2011). There is resistance to this plan; there remain a number of key convergence issues that remain to be addressed. The existence of the roadmap, however, highlights the importance of U.S. firms proceeding along the convergence path prior to a point in the near future when the SEC mandates that they do so.

1-4. Field Research Problems

In addition to the relative paucity of research that can be used as secondary sources for this project, there are some practical challenges to field research on this subject matter. At present, U.S. firms are obligated to adhere to the GAAP in the production of their financial statements. Where GAAP and IFRS have converged, domestic companies will have already done so. Voluntary convergence on issues that do not as yet have a scheduled implementation date is more difficult to ascertain. In annual reports or 10-Ks, firms are obligated to make note of changes in accounting policy and the impact of those changes on the financial statements. The result of this is that researchers will need to pore through the notes contained in the 10-Ks in order to determine the state of convergence. This is a time-consuming affair. Most research to this point has focused on determining outcomes associated with convergence rather than the state of convergence itself.

If the study is to be conducted using interviews with public company accounting departments, then finding the right contacts and conducting the interviews would represent the most significant challenge associated with the field research.

1-5 Dissertation Outline

This dissertation will focus on determining the state of accounting convergence among large public U.S. companies. What constitutes convergence will need to be determined, based on some of the points where convergence between IFRS and GAAP has already occurred. Any points where convergence is optional will be critical to this project, as they represent areas where convergence is expected to be less than 100%. The dissertation will be conducted using interview data, whereby representatives from accounting departments of large public companies will be polled for their opinion of their company's state of convergence.

The outputs will be a set of quantitative data that can be subjected to statistical analysis, and a set of descriptive qualitative data that can be used to help illustrate some of the quantitative findings. The views of these departments are important to this study, because the more resistant public companies are to the idea of convergence, the more likely the process is to be extended beyond the SEC's 2014 deadline and become more in line with the unlimited timeframe as set out by the FASB and IASB framework. The hypothesis of the… [END OF PREVIEW]

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