Chapter 3 The Convergence Project – Pick a Number, Second Edition


The Convergence Project

About This Chapter

The United States had been a supporter of international accounting since 1973 and was a very active participant for the period from 2002 to 2012. It directed considerable resources into the development of International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and, at the same time, changed parts of its own regulations so that they complemented the international approach to accounting issues.

Unlike other jurisdictions, including Australia, Canada, and countries in the European Union (EU), the Financial Accounting Standards Board (FASB) chose not to adopt IFRS as originally drafted. Instead, it worked with the IASB in developing standards that both Boards found acceptable. By choosing this convergence approach, U.S. accounting regulations have been heavily influenced by international thinking and alterations have been made to existing U.S. regulations.

Many believed, or at least hoped, that the convergence approach would finally lead to the United States fully adopting IFRS. Despite comments from the FASB and several road maps showing the route it intended to take, the United States has withdrawn from the convergence project and decided to follow its own path.

In this chapter, we explain the route that the United States has selected with regard to international accounting standards (IASs), and the debate on internationalization that has taken place within the country. We complete the chapter by considering two underlying issues that have not been resolved: the definition of high-quality standards and the conflict between a principles-based approach and a rules-based approach in setting accounting standards.

The Early Commitment

The lengthy and arduous progress of the relationship between the United States and international standard setters has been extremely well described by Kirsch.1 The study incorporates not only documentary evidence, but also correspondence with some of the major decision makers. This section draws from that work and also adds material from other relevant sources.

In the first few years following the International Accounting Standards Committee’s (IASC) formation in 1973, there was limited contact between the Committee and the FASB. The IASC was, however, gradually spreading its influence with an increasing number of smaller countries deciding to follow international standards. It was not until 1988, when the IASC had issued nearly 30 separate standards, that the FASB publicly announced its position on international accounting. It stated that the Board would support the development of superior international standards that would then gradually supplant national standards as the superior standards became universally accepted.

There were issues, however, that could prevent, or at least delay, such an occurrence. One of these, which was not discussed at that time, was how international standards could be identified as “superior.” We return to this topic when we consider the development of “high-quality” standards. The issues that could cause immediate problems were:

  1. The differing national objectives of financial reporting.
  2. The wide spectrum of national standard-setting structures from predominantly government-led to predominantly private-sector standards.
  3. Nationalism and the reluctance to relinquish control to an outside body.
  4. The particular economic, political, and social priorities of different nations.

Notwithstanding the challenges, the FASB believed that it could contribute to improving international standards in many ways. It clearly demonstrated its enthusiasm for international standards by declaring that it would take the following steps:

  1. Join the IASC Consultative Group.
  2. Expand and strengthen relationships with national standard-setting bodies.
  3. Greater systematic analysis of international accounting literature relating to major FASB projects.
  4. Encourage more comments on FASB Exposure Drafts from an international perspective.
  5. Hold discussions with IASC leadership on holding an international conference of national standard setters on accounting conceptual frameworks.
  6. Recruit accountants with foreign experience to join the FASB staff.

In 1991, the FASB published an authoritative article2 on its plans for international activities, which was based on two key assumptions. The first assumption was that domestic financial reporting needs would continue to be the FASB’s first priority. The second assumption was that its international activities would be conducted within its charter and mission statement. These assumptions would seem to limit considerably the FASB from adopting international standards. In retrospect, one may conclude that there was not an overwhelming desire to move toward convergence, but rather a wish to be involved.

The declaration by the FASB for greater international involvement was met with enthusiasm by the IASC. It was difficult to claim that IFRSs were international when the largest market did not adopt them. In addition, some countries, without their own national Generally Accepted Accounting Principles (GAAP), followed U.S. GAAP. The move by the FASB toward international accounting would encourage these countries to follow the same route.

In 1996, the SEC indicated that it supported the IASC’s objective to develop accounting standards that could be accepted when preparing the necessary financial statements in cross-border offerings. The elements of the IASC’s strategy were a core set of comprehensive, generally accepted accounting pronouncements, which were of high quality and resulted in three elements: comparability, transparency, and full disclosure for users. These standards were expected to be rigorously interpreted and applied.

If the IASC achieved these three elements, it was the SEC’s intention to consider permitting foreign issuers offering securities in the United States to draw up their financial statements by applying international standards. It would be some 10 years before this consideration became a reality.

Both the SEC and FASB had expressed their support for international accounting. In the year 1999, the FASB3 and its oversight body, the Financial Accounting Foundation, issued a report making public their vision for the future of international accounting. They regarded the desired outcome as the worldwide use of a single set of high-quality accounting standards for both domestic and cross-border financial reporting. To achieve that, the FASB would be required to:

  • Take a leadership role in the evolution of international accounting.
  • Commit to the required resources to ensure that international standards were of a high quality.

It was accepted that, if a quality IAS setting structure and process were established, it could lead to structural and procedural changes to the FASB, as well as potential changes in its national role. It would no longer be the rule setter in the United States. It is not clear whether various parties in the United States fully recognized the implications that the control of standard setting would be held by the IASC.

It would appear that the United States regarded itself as first among equals. In pursuing this vision of international regulations, the FASB stated that it should retain its worldwide leadership role in standard setting and believed that “Worldwide acceptance of internationally recognized standards and a global standard-setting process is impossible without U.S. acceptance and participation” (FASB 1999, 1).3

The intentions of the United States were welcomed by the IASC. Although it had made considerable progress, prior to the year 2000, the major national economies, including Australia, Canada, the United Kingdom, and the United States, were still complying with their own national accounting standards. These national standards frequently differed significantly from international standards. If international accounting was to become a reality, either a complete overhaul of all aspects of the IASC was required, or a new and more powerful body needed to be formed. The latter was the course of action chosen.

The IASB was established formally in April 2001 with the objectives of:

  • Developing in the public interest a single set of high-quality, understandable, and enforceable global accounting standards;
  • Helping participants in the world’s capital markets and other users make economic decisions by having access to high-quality, transparent, and comparable information;
  • Promoting the use and vigorous application of those standards;
  • Bringing about convergence of national accounting standards and IASs to produce high-quality solutions to accounting issues faced by companies across the globe.

In 2002, the recently appointed chair of the IASB, David Tweedie, made clear his aim of spreading IASs to the United States. He declared that the IASB’s two main objectives were:

  1. Convergence of U.S. and international standards. Possibly, Tweedie realized that it was unrealistic to expect the United States to adopt existing IFRSs in one sweep. The most feasible route was to converge IFRSs and U.S. GAAP. Convergence in this context is defined as jointly agreeing on changes to both sets of standards to produce one set of high-quality, global accounting regulations.
  2. An improvement project. This was seen as the first step to promote convergence on high-quality standards. The Board’s objective was to revise and reissue 12 named IASC standards by the first half of 2003.

The appointment in July 2002 of a new FASB chair, Robert Herz, added a fresh international dimension to the United States’ way of thinking. Herz was a qualified UK Chartered Accountant and had previously served on the IASB. His appointment brought with it a greater commitment to convergence, which complemented the objectives of the restructured IASB under David Tweedie. The rapport led to the signing in 2002 of the Norwalk Agreement, which had the objective of converging U.S. standards and international standards.

The position adopted by the IASB was formed at a time when both internal and external factors strengthened the argument for convergence. The New York Stock Exchange (NYSE) was facing growing competition from markets in other countries, while foreign companies were finding that the U.S. requirements, such as the Sarbanes–Oxley Act, were becoming increasingly onerous. In addition, a succession of financial scandals such as Enron and WorldCom weakened confidence in U.S. financial reporting regulations and the effectiveness of the rules-based approach to regulation.

External pressures were also becoming apparent. First, several countries had either adopted international accounting or were planning to do so, which meant that the United States could potentially lose its vision of becoming a world leader. It would not be leading the international standard setting and could become isolated. Secondly, the IASB was proving a much more effective organization than the IASC and was generating support from many organizations while simultaneously improving its standards. Finally, new capital markets that already recognized international standards were expanding abroad and threatening New York’s claim as the premier capital market.

The Norwalk Agreement

As a consequence of the pressures generated by the above events, it is not surprising that in October 2002, the FASB and the newly formed IASB signed an agreement in Norwalk, Connecticut. This agreement sets out the aims of the two Boards and the actions they intended to take jointly.


  • The existing financial reporting standards of the FASB and the IASB would become fully compatible as soon as practicable.
  • The future work programs of the two bodies would be coordinated to ensure that once compatibility was achieved, compatibility of standards would be maintained.

Priority Actions

  • To undertake a short-term project aimed at removing a variety of individual differences between U.S. GAAP and IFRS.
  • To remove other differences between IFRS and U.S. GAAP that remained on January 1, 2005, through coordination of future work programs. This would require the Boards to invest the time and resources to undertake substantial projects.
  • To continue progress on the joint projects that were currently being undertaken.
  • To encourage their respective interpretative bodies to coordinate their activities.

The problems faced by the two parties in following the convergence route chosen were probably underestimated. With some confidence it was claimed that the differences between U.S. GAAP and internationalization were not insurmountable.4 However, a few years later it was recognized that “for many countries convergence with international accounting standards will be a monumental task.”5 Not surprisingly, although “the goal of their convergence efforts was common standards, they sometimes fell short of that objective” (Kirsch 2012, 47).6

There was also the issue that seems to be overlooked, which is that convergence would involve changes to existing international standards. This meant that all those countries that had already adopted them would have to make amendments to their accounting practices. The users of the financial statements would need to become accustomed to the new requirements and the preparers would need to change their procedures to collect the required data, and, finally, the auditors would need to be thoroughly familiar with the new requirements.

Any changes to accounting standards are extremely disruptive and expensive. A learning process has to take place with accountants, auditors, and the users of financial statements. It also means that it is extremely difficult to compare this year’s financial results with those of previous years. Is the difference in the profit trend due to changes in accounting or the performance of the company? For all parties this represents challenges. The convergence project partnered by the FASB and the IASB offered stability and high-quality standards.

The Challenges

When assessing the extent of adoption by countries, care must be taken in making assumptions on what this action means in a particular country. Some jurisdictions will adopt IASs completely. Some may not adopt them fully but adapt them by passing the standards through their own regulatory procedures. The adopted standards may therefore be modified to some extent to correspond with perceived national needs and existing practices. Finally, some countries will issue standards that they claim are similar to, or based on, IFRS, which implies that there still remain differences. It is therefore difficult to state categorically how many countries are using IASs in their complete and original form. It is even more difficult to know the extent to which individual companies comply with the standards and the enforcement procedures in place in a particular country.

Where a country claims to be following international standards, it does not follow that all types and sizes of companies in that country are complying with them. Normally, companies listed on the country’s stock exchange will be expected to apply international standards, although some banks and other financial institutions may be exempt. Smaller, private companies with less complex operations and fewer resources will not be applying full international standards. They may be following a simplified version or the country may have issued its own accounting standards for smaller entities. The IASB issued in 2009 FRS for Small and Medium-Sized Entities.

Another key factor in the internationalization debate is the strength of enforcement practices in a particular country. The IASB only issues standards; it does not conduct any surveillance to ascertain whether the standards are strictly followed. National regulators and auditors have the responsibility of ensuring that regulations are followed, and the effectiveness of their actions may not always be very high.

Finally, corporate financial reporting not only reflects the requirements and enforcement of accounting standards, but it is argued that influences such as legal institutions, capital market forces, product market competition, and governance are also involved in shaping the financial disclosures made by companies.7

A further concern regarding internationalization is that the standard-setting process involves a compromise among a large and very diverse set of constituents from around the world. Countries have differing objectives with respect to financial reporting regulations. Although the United States has the objective that financial reporting satisfies the needs of external investors, companies in other countries may rely heavily on close relationships among a large set of stakeholders for financing, and are less focused on capital markets.

Given the practices in other countries, the IASB had to attempt to modify or develop IFRSs to meet the demands of insider or stakeholder economies. Thus, IFRS may not be able to satisfy the objectives of U.S. financial reporting, which is to meet the needs of investors and others directly involved with financial reporting.

The following section concentrates, therefore, on the attitudes and opinions within the United States. In that country there are many interest groups with differing opinions on involvement in the development of international standards. The views within each of these groups can change as time passes and new events occur. The following sections examine the opinions of five interested groups. They capture the main thrust of their opinions, but also attempt to reflect differences and changes through time.

Opinions on U.S. Internationalization

Regulatory Bodies

The United States has been setting accounting standards for over half a century. This has involved a substantial investment and has resulted in a highly sophisticated system of accounting regulation. Abandoning completely the success that has been achieved does not appear to be an attractive proposition.

A positive argument for U.S. regulators to recognize and adopt international standards is that there is a potentially wider political benefit for the United States. A strong message is made public that U.S. regulators wish to cooperate with other major countries on important global business issues. It reinforces the reputation of the United States as a global force.

Although it may be impossible for the FASB to adopt fully IASs, the Board’s involvement ensures that the United States is in a position to greatly influence the development of standards. Given the size of its international trade and capital markets, it can make a valuable contribution to the improvement of international standards.

At the other end of the spectrum, there are potentially negative consequences if the United States does not adopt fully international standards or play a major role in their formation. As international standards become more widely established, multinational corporations may find that they meet their strategies and policies. It is even possible that U.S standards could become an ineffective competitor relative to an increasingly dominant international body.

There are also more specific reasons for some form of U.S. involvement. One reason put forward is that regulators have seen a significant shift in global market capitalization, with U.S. market share steadily declining.8 There are various influences that operate over time to determine the market share of a particular stock exchange, although the data does suggest some erosion in the popularity of the U.S. market.

The NYSE market cap at the end of 2003 was 41 times that of the Bombay Stock Exchange (BSE) and 31 times that of Shanghai Exchange. In July 2009, the NYSE was 9 times that of BSE and only 3.6 times that of Shanghai.9

According to the September 2009 Standard & Poor report, the U.S. market was less than 41 percent of global capital markets, a substantial decline from January 2004, when it was nearly 53 percent.10

This decline in U.S. market share must be considered in the context of other events, in particular the state of the economy. In the first few months of 2014, 42 Initial Public Offerings (IPOs) were listed on the NYSE or NASDAQ. In the last 12 months, there have been many more IPOs listing on the NYSE and NASDAQ than in any other country. The Global Financial Centre Index shows that in 2014 London had lost the top spot it has had for 7 years and was in second place behind New York.11 However, there are always changes and, in 2017, it was declared that London, New York, Singapore, Hong Kong, and Tokyo were the top five financial centers in that order.

There are still arguments for regulators to remain involved and continue to participate in international standard setting, but there is also an opposing view. It is claimed that the political incentives that fostered convergence efforts between the United States and the IASB were mostly short term, and there are no evident incentives for U.S. firms to adopt international standards.

There is also a well-documented history of American exceptionalism as a means of defending U.S. sovereignty in matters of U.S. foreign policy. This stance is not particular to the United States and most countries wish to retain authority over the regulations applied in their own country.

Although the United States has now abandoned the convergence project, it is possible that it may decide to, once again, attempt full internationalization. If so, there is the question whether the SEC has the legal authority to delegate its regulatory powers regarding financial reporting by U.S. companies to a foreign, private body of standard setters.12

U.S. Corporates

Corporates, when taking a position on the adoption of IFRS, will be attempting to weigh the benefits against the costs of changing their accounting systems. Undoubtedly, there are costs and benefits if all corporates are using the same accounting system. The following factors may persuade some corporates that an IFRS reporting has its benefits13:

  • Some U.S. companies already report using IFRS because it is the subsidiary of an international parent or has an investor company, and these demand IFRS reporting.
  • If the U.S. company has foreign subsidiaries that are required to follow IFRS reporting in their own countries, it is simpler and cheaper for the entire group to follow IFRS.
  • Where there are operations in other countries, those jurisdictions may make IFRS reporting mandatory.
  • Although U.S. companies are required to follow U.S. GAAP reporting, they may choose to disclose statements with IFRS-based reports to allow for an accurate comparison with foreign competitors.

As always, there are cost–benefit calculations to be taken into account. The costs of transferring from U.S. regulations to IFRS can be high and can include the following:

  • Existing accounting staff will require training and additional staff with experience will have to be recruited;
  • Information systems will require substantial changes;
  • Multiple charts of accounts and consolidation methods will need to be coordinated;
  • Standardization of policies and procedures needs to be implemented for consistency in standards in different jurisdictions;
  • Company’s strategies may need to be reviewed as new financial information becomes available;
  • Management information systems need to be reviewed;
  • Managers will need to be trained to understand the information available and its implications on planning, control, and decision-making responsibilities.

There are always problems in making cost comparisons based on other countries’ experiences, but the transition to IFRS by Canada gives some insights. For larger-sized companies, defined as organizations with revenues of CDN$1 billion or more, the average total cost of transitioning was CDN$4,041,177. The lowest spent by a large company was CDN$80,000, by a financial services company with revenues of more than CDN$1.28 billion. The highest cost in the category was CDN$25.5 million, spent by a financial services company with revenues of CDN$30 billion. Costs as a percentage of revenues were 0.006 percent for the lowest spender and 0.08 percent for the highest spender in the category.14

Foreign Listers

Foreign companies that wish to list in the United States now have three options regarding their mandatory SEC filings. They can provide reports under IASs as issued by the IASB, use U.S. GAAP, or file reports in their own domestic GAAP with reconciliation to U.S. GAAP. Clearly, if a foreign company is required by the regulations in its own country to comply with IFRS, the first option appears the most sensible.

One study investigated the decisions made by foreign companies confronting these options.15 It found an increase of 20 percent (30 firms) in the group of IFRS-reporting firms over the two-year sample period, whereas the fraction of foreign filers that use U.S. GAAP or domestic accounting standards decreased by 4 percent (12 firms) and 7 percent (18 firms), respectively. In addition, the total number of foreign filers from countries requiring the use of IASs increased from 137 firms in 2009 to 173 firms in 2010 (26 percent). Within this group, there was an increase of international reporting by 35 firms.

Given the growth of international reporting in the world and the elimination of the reconciliation requirements in the United States, it may have been assumed that there would be more cross-listed companies filing IFRS reports with the SEC. There are two reasons that this may not have happened.

First, foreign cross-listed firms from countries that have not adopted international standards may have been listed in the United States for some years. Their original choice of accounting standards would have been U.S. GAAP or domestic GAAP with reconciliation to U.S. GAAP. There would be costs associated with the change to international standards. Furthermore, the users of their financial statements are most likely more familiar with U.S. GAAP.

Another reason for not using IFRS for filing may be that the companies consider that U.S. GAAP is of higher quality, and that the rules-based approach in the United States provides clearer guidance and direction on what to report and how. The AAA FRPC16 argues that although both IFRS and U.S. GAAP represent a high-quality set of accounting standards, it is less certain whether IFRS provides equivalent financial reporting quality relative to U.S. GAAP. In a survey of U.S. accounting professors, only 13 percent of the respondents considered IFRS to be of better quality than U.S. GAAP.17

Finally, U.S. GAAP has been a dominant system for many years. Foreign companies and foreign investors know the regulations and have confidence in them. The possible incentives to change to IFRS may not be sufficient for that change to take place.


The key benefit claimed for international accounting is the comparability of financial information. Individuals, groups, and corporates conduct their investments in an ever-increasingly integrated world of capital markets. In such a world, there is a need for comparability and transparency of financial reporting worldwide to allow for easy comparison of the financial results of a manufacturing company in, for example, France with those in the United States, Australia, and anywhere else in the world.

Of course, U.S. investors also operate in jurisdictions where international standards are the required standards for financial reporting. A study examined whether mandatory IAS adoption at the national level lowers U.S. investors’ tendency to overweigh domestic stocks in their common stock portfolios.18 The results showed that a common set of global accounting standards is helpful for portfolio holdings of U.S. investors. Interestingly, they also observed that the enforcement of standards in a country is a crucial determinant when making investments outside the United States.

It would seem that from the investors’ viewpoint, a global set of accounting standards is preferable. However, this does depend on the quality of those standards and the levels of compliance and enforcement in a particular country.

Accounting Profession

There can be financial benefits in changing regulations for those who provide services, but it can be a two-edged sword. Where a company has to move from U.S. GAAP to international regulations, accounting advice, at a cost, will be required. However, if accountants are offering their services to companies with international connections, they receive fees from constructing financial statements that comply with the requirements of different accounting regimes.

Where IFRS are being adopted, corporate bodies and accountants may experience the following:

  • Companies will require a considerable input of accounting knowledge and experience to make the switch to IFRS.
  • Considerable training will be required for accountants working within a company.
  • Communications with other companies using IFRS will be improved.
  • Business transactions should become easier.
  • Auditing of multinational companies will be simpler.

One issue that is infrequently discussed is accounting education. Numerous studies have shown that, understandably, most accounting professors in the United States teach U.S. GAAP. Most of the textbooks, case studies, and other materials are based on U.S. GAAP. Although the requirements of IFRS are slowly appearing in some universities, any significant move to full adoption of international standards in the United States would require a huge change in U.S. accounting education.

Internationalization of accounting regulations has made progress, but the United States was not involved until 2002. A major study19 was conducted for the Council of Institutional Investors in the United States. The Council opposed replacing U.S. accounting standards and standard setters with their international counterparts unless seven specific criteria were achieved.

The study explores evidence and views regarding each of the seven criteria. The criteria and the main conclusions are as follows:


Criterion No. 1: In the aggregate, information that results from application of IFRS is, at a minimum, of the same quality as the information resulting from U.S. accounting standards.

Findings. A majority of U.S. and European financial executives surveyed believe the quality of IFRS is high. Most also believe that the IASB and the U.S. FASB have made progress developing joint standards to address improvements needed prior to adoption of IFRS in all major capital markets.


Criterion No. 2: Application and enforcement of IFRS are at least as rigorous and consistent as U.S. accounting standards.

Findings. Research reveals a relationship between a country’s institutional setting, including corporate governance and audit quality, and characteristics of a country’s financial reporting.


Criterion No. 3: The IASB has sufficient resources including a secure and stable source of funding that is not dependent on voluntary contributions of those subject to the standards.

Findings. The IFRS Foundation, the parent entity of the IASB, is focused on moving as soon as possible to a funding source that relies on public sponsorship or other intermediated mechanisms. As of 2011, the United States is the only country where the IFRS Foundation will seek direct corporate contributions. The IFRS Foundation’s 2011 budget, released in April, projects a break-even year and indicates that direct contributions from U.S. companies (8 percent) and international accounting firms (26 percent) represent 34 percent of total projected revenues.


Criterion No. 4: The IASB has a full-time standard-setting Board and staff that are free of bias and possess the technical expertise necessary to fulfill their important roles.

Findings. Recent changes to the IASB’s governing documents have elevated the importance of geographic representation as a criterion for serving on the Board (previously, technical expertise was the primary criterion). The changes also permit up to three part-time members of the Board.


Criterion No. 5: The IASB has demonstrated a clear recognition that investors are the key customers of audited financial reports and, therefore, the primary role of audited financial reports should be to satisfy in a timely manner investors’ information needs. This includes having significant, prominent, and adequately balanced representation from qualified investors on the standard setter’s staff, standard-setting Board, and oversight Board and outside monitoring or advisory groups.

Findings. The IFRS Foundation and the IASB have taken several steps to increase their focus on investors. Those steps include changes to the IASB’s governing documents to designate investors as a major target audience, increasing investor representation in the standard-setting process, and enhancing investor outreach. Notwithstanding the progress that has been made to increase investor representation in the standard-setting process, only 5 of the present 20 seats on the IFRS Foundation, 8 of 47 seats on the IFRS Advisory Council (IFRS Council), and 3 of the 15 seats on the IASB are held by individuals from the investor community.


Criterion No. 6: The [IASB] has a thorough public due process that includes solicitation of investor input on proposals and careful consideration of investor views before issuing proposals or final standards.

Findings. Evidence is mixed about whether recent amendments to the IASB’s governing documents are sufficient to improve due process. Nevertheless, in 2007, an independent think tank recognized the IASB as possessing the best developed external stakeholder engagement capabilities among 30 of the world’s most powerful global organizations.


Criterion No. 7: The IASB has a structure and process that adequately protect the standard setter’s technical decisions and judgments (including the timing of the implementation of standards) from being overridden by government officials or bodies.

Findings. All organizations involved in standard setting face ongoing questions regarding their authority and responsibility. The IASB is no exception. To date, its technical decisions and judgments have been subject to significant pressures from governmental officials and bodies, particularly those representing the EU.


This is a thorough analysis of the situation but it must be remembered that the seven criteria were established by the Council of Institutional Investors in the United States. Other groups in other countries may have different criteria that they would wish to be satisfied.

The U.S. Route to Convergence

The progress toward convergence from 2002 to 2014 was one of memorandums, road maps, objectives, and milestones. Despite all of these carefully worded documents, full convergence was not achieved and U.S. GAAP remains firmly in place, although definitely changed. The timeline of the progress that has taken place is summarized below.

2002—The Commencement of the Journey

The Norwalk Agreement was signed.

2006—Issue of a Road map

Both Boards affirmed their commitment toward making progress toward convergence. Instead of attempting to remove the differences in existing standards, they agreed that it would be more fruitful to develop new and high-quality standards. They also agreed to replace weaker standards with better ones and a number of objectives to be achieved by 2008 were agreed upon.

2007—Foreign Issuers Permitted to List Using IFRS

In the light of the progress achieved by the Boards and other factors, the SEC adopted a final ruling in 2007.20 This indicated the Commission’s confidence that IFRS, as issued by the IASB, were robust enough to provide investors with reliable and relevant financial data. Some outsiders were quietly asking why U.S. companies could not use IFRS if they were acceptable from foreign issuers wishing to list on the NYSE.

2008—Issue of a Road map

An update was issued to the 2006 document, which identified a series of priorities and milestones, emphasizing the goal of joint projects to produce common, principle-based standards. The 2008 IFRS road map indicated that adoption of IFRS in the United States would be conditional upon the achievement of progress toward these milestones:

  • Improvements in accounting standards. The SEC was to continue to monitor the degree of progress made by the FASB and IASB regarding the development of accounting standards.
  • Accountability and funding of the International Accounting Standards Committee Foundation (IASCF). The IASCF was required to show indications of securing stable funding that supported the independent functioning of the IASB.
  • Improvement in the use of interactive data for IFRS reporting. The SEC mandated filings for public companies in the Extensible Business Reporting Language (XBRL) format. The mandate came into effect for the largest 500 U.S. companies for financial disclosures made after June 15, 2009.
  • Education and training. The SEC was to consider the state of preparedness of U.S. issuers, auditors, and users, including the availability of IFRS education and training.

The 2008 Roadmap generally received applause. We reproduce below part of a synopsis from the influential Financial Reporting Policy Committee of the Financial Accounting and Reporting Section of the American Accounting Association. The Committee stated:

Based on a review of the literature, the AAA FRPC has concluded that a move to an international set of financial reporting standards is a desirable goal. We have also concluded that continued convergence of U.S. GAAP with IFRS by joint relations between the International Accounting Standards Board, hereafter IASB, and the Financial Accounting Standards Board, hereafter FASB, is preferable to near-term adoption of IFRS as a strategy for convergence. AAA FRC.21

2009—Pressure from Outside Bodies

The financial crisis of 2007/2008 was largely blamed on the inadequacy of accounting regulations to determine the proper treatment of financial instruments. There were requests from many parties, including various government agencies, for the FASB and the IASB to speed up their progress. In response, the IASB and the FASB published a progress report describing an intensification of their work program, including the hosting of monthly joint Board meetings and to provide quarterly updates on their progress on convergence projects.

2010—Draft Strategic Plan Issued—Final Decision Set for 2011

The SEC published its Draft Strategic Plan for fiscal years 2010 through 2015. The document includes drafts of the SEC’s mission, vision, values, strategic goals, major initiatives, and performance metrics. In the plan, the SEC proposed an objective of promoting high-quality financial reporting worldwide through, among other things, support for a single set of high-quality global accounting standards and promotion of the ongoing convergence initiatives between the FASB and the IASB.22

The Plan also stated that the decision for incorporating IASs in the U.S. financial reporting system would be made in 2011. The document did not provide any details of potential transition dates or approaches, but the staff stated that 2015 or 2016 seemed reasonable based on comments received on the 2008 IFRS road map. The SEC also indicated that an early adoption was viable if it decided to make the use of IFRS mandatory.

2012—Joint Progress Report Issued

The IASB and FASB published a joint progress document in which they described the progress made on an accounting standard for financial instruments. This included a joint expected loss impairment (provisioning) approach and a more converged approach to classification and measurement.

It was anticipated that the SEC would make a final decision on the time of full adoption of international accounting in 2012. It did not do so and the opinions of some other major players were that the IASB should cease its relationship with the United States and direct its attention to the rest of the world.

The Institute of Chartered Accountants in England and Wales responded to the failure of the SEC to decide on convergence and proposed that the convergence project should be ended formally, in months and not years. The argument was made that the IASB should concern itself with the 100-plus countries that had adopted international standards and assist those countries, such as China, which were making moves to convergence.23

The Chairman of the IASB, Hans Hoogervorst, is quoted as saying that “Five years ago, it (lack of U.S. adoption) might have led to a disintegration of the whole project. I am not worried about that now. But I am worried that the U.S. finds it so hard to make a decision and that it might lead to a growing divergence between IFRS and U.S. GAAP” (Perrin 2013).24

2013—Publishing of an Update

The IASB and FASB published a high-level update on the status and timeline of the remaining convergence projects. The report includes an update on the impairment phase of the joint project on financial instruments.

2014—FASB Promotes Convergence

The term international convergence of accounting standards may be interpreted in different ways. For some it might mean the discussion between two or more parties leading to complete agreement on one course of action.

The FASB argued in 2014 that the term refers to both the intended goal and the path by which to reach it and explains its strategy on its website:

  • The FASB believes that, over time, the ultimate goal of convergence is the development of a unified set of high-quality IASs that companies worldwide would use for both domestic and cross-border financial reporting.
  • Until that ultimate goal is achieved, the FASB is committed to working with other standard-setting bodies to develop accounting standards that are as converged as possible without forgoing the quality demanded by U.S. investors and other users of financial statements.
  • From 2002 to 2013, the path toward convergence has been the collaborative efforts of the FASB and the IASB to both improve U.S. GAAP and IFRS and eliminate or minimize the differences between them.
  • As the FASB and the IASB complete their work on the last of their joint standard-setting projects initially undertaken under the 2006 Memorandum of Understanding (MoU), the process will evolve to include cooperation and collaboration among a wider range of standard setters around the world.
  • Moving forward, the FASB will continue to work on global accounting issues with the IASB through its membership in the Accounting Standards Advisory Forum, a newly established advisory body comprising 12 standard setters from across the globe.
  • For issues of primary interest to stakeholders in U.S. capital markets, the FASB will set its own agenda. As the FASB initiates its own new projects based on feedback from its stakeholders, it will reach out to all who have an interest in improving financial reporting for companies and investors that participate in U.S. capital markets, including U.S. capital market stakeholders who live and work outside the United States.

Although the above statement emphasizes involvement in international matters, it is evident that there is no intention to converge fully the FASB and the IASB standards. It is also clear that there is no enthusiasm for the FASB withdrawing from its role as the sole standard setter in the United States. Such a stance is not surprising given the role and importance of the SEC and the different conceptual approaches to establishing accounting regulations.

There were criticisms within the United States of the FASB’s continual pursuit of convergence. Miller and Bahnson25 argued that the FASB should reform standards and practices in the United States, thus leading the world by example. They considered that the efforts to converge were a waste of resources and that it was impossible to develop high-quality standards in partnership with the IASB. Unfortunately, the definition of high quality has been elusive and, we would argue, is enmeshed with the principles- and rules-based approach to standard setting. We address these subjects in the next two sections of this chapter.

High-Quality Standards

It is not surprising that members of all interested parties would claim to support high-quality standards. Unfortunately, nobody has been able to define what is meant by the term, although some have explained the characteristics of such standards.

In 1997, the then Chair of the SEC claimed that standards must result in comparability and transparency, and provide for full disclosure. Investors must be able to meaningfully analyze performance across time periods and among companies. Of course, one main aim of IASs is to ensure comparability of companies’ financial results at the international level.

The SEC26 echoes the words of many others when it states that high-quality accounting standards consist of a comprehensive set of neutral principles that require consistent, comparable, relevant, and reliable information. It believes that the information should be useful for investors, lenders, creditors, and others who make capital allocation decisions.

The IASB shares the same sentiments as the others. With so much agreement on the need for high-quality standards it is confusing that convergence did not take place years ago. One reason may be that the phrases used are descriptive and also avoid the tougher issues.

For example, high-quality standards should have relevance and reliability. It can sometimes be difficult to combine these two characteristics. Let us assume that I bought a house for $250,000 some years ago and I am now seeking a bank loan. I tell the manager that my house has a current market value of $350,000. Does the manager take the reliable value of $250,000 or the value relevant to his decision, which may not be reliable? Mostly, in preparing financial statements, accountants use the reliable or historic values. We discussed this in Chapter 1.

Given the difficulties in defining high-quality standards, there are several questions that need to be addressed:

  1. What are high-quality standards? The present description of characteristics such as relevance and reliability does not help.
  2. What is the purpose of high-quality accounting standards? The answer must be high-quality financial statements. This, however, requires not only good standards but a process of interpretation, monitoring, and enforcement to ensure companies comply.
  3. How do we measure high quality?

Some of these questions have been answered by a research study, Barth,27 that compared characteristics of accounting amounts for firms that apply IASs to a matched sample of firms that do not. Measures of accounting quality used earnings management, timely loss recognition, and value relevance metrics.

The results showed that firms applying international standards use less earnings management, more timely loss recognition, and more value relevance of accounting amounts than do those applying domestic GAAP. The conclusion from the study suggests that improvement in accounting quality is associated with applying IAS.

Of course, one study does not provide complete answers. But it does emphasize that the pursuit of high-quality standards requires some measures by which we can assess them. It must also be accepted that standards are not only driven by technical accounting considerations but other powerful influences.

In 2017, the Chair of the SEC (White 2017)28 stressed the need for high-quality standards that are globally accepted. U.S. investors make investment decisions in foreign companies that are using international standards. U.S. companies make acquisitions, enter into joint ventures, and enter into transactions with foreign companies that use international standards. Although the convergence project had come to an end, the SEC should continue its collaboration with the IASB. Unfortunately, it does not seem that the two Boards have a shared definition of “high quality” and we discuss the cause of this divide in the next section.

Principles Based versus Rules Based

If international accounting is to be achieved, there must be agreement on the assumptions and concepts that are to serve as the basis for setting standards. Unfortunately, the IASB has a very different starting position on the subject compared to that of the United States. The IASB uses a principles-based approach to standard setting; the United States uses a rules-based approach.

The difference between a principles-based approach and a rules-based approach is that the former applies detailed requirements to ensure that financial statements are not misleading. With the principles-based approach, the burden is placed on the preparers and auditors of the financial statements to use their professional judgment and experience to ensure that the financial statements are not misleading and comply with the conceptual regulations in the standards.

The rules-based approach holds that by following the rules strictly when preparing financial statements, such statements will give faithful representation. The main characteristic of a rules-based approach is that the regulations set out specific criteria, bright line thresholds, examples, scope restrictions, exceptions, subsequent precedents, and implementation guidance (Nelson 2003).29

In Chapter 4, we discuss accounting for leasing. At this stage we summarize below the main requirements of the U.S. standards and the international accounting guidance on determining what constitutes a lease. Both standards concentrate on what is a capital (finance) lease and this must be shown on the balance sheet.

The original U.S. standard (SFAS 13) defines a capital lease as one under which any one of the following four conditions is met:

  1. The present value at the beginning of the lease term of the payments, not representing executory costs, paid by the lessor equals or exceeds 90 percent of the fair value of the leased asset;
  2. The lease transfers ownership of the asset to the lessee by the end of the lease term;
  3. The lease contains a bargain purchase price;
  4. The lease is equal to 75 percent or more of the estimated economic life of the leased asset.

It does not require much ingenuity by directors and accountants to draw up a contract where the percentages fall on the most advantageous side for the company and the information it wishes to disclose.

The former international standard, Accounting for Leases (IAS 17), states that the classification of a lease depends on the substance of the transaction, rather than the form. The standard describes situations that would normally lead a lease to be classified as a financing (capital) lease, and these include the following:

  • The lease transfers ownership of the asset to the lessee by the end of the lease term;
  • The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised;
  • The lease term is for the major part of the economic life of the asset, even if the title is not transferred;
  • At the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and
  • The leased assets are of a specialized nature such that only the lessee can use them without major modifications being made.

The above examples demonstrate the rules-based approach with its specific, quantitative guidelines, and the principles-based approach with its descriptive guidance. One might conclude that more stringent rules would ensure that companies would properly define a lease as a capital lease rather than an operating lease, which does not have to appear on the balance sheet. This does not, however, always occur. Research30 has shown that firms that follow U.S. GAAP and use a lease standard that contains bright line rules are more likely to classify leases as operating than firms that utilize IFRS and adhere to a principles-based standard.

The problem with adhering strictly to specified rules is that it excludes professional judgment. This can result in decisions that are consistent with the rules but inconsistent with the principle of providing the most useful financial information to users. If the rules are very specific, such as in the U.S. regulations on leasing, companies may be able to arrange their activities so that they comply and fall within the rules, but the financial statements still remain misleading. This action may be outside legal criticism, but may stretch the limits of what is permissible under the law, and may not be ethically or morally acceptable—or even contribute to good accounting.

Conversely, it can be argued that the principles-based approach gives too much scope to preparers and auditors, which creates opportunities for creative accounting. Without clear guidance on how to account for a transaction, several methods may be considered acceptable. Those different methods can lead to different answers, which is not in the best interests of the users of financial statements.

Additionally, if there are no clear rules, individual companies may choose different accounting treatments for the same transaction and the characteristic of comparability will be lost. It is difficult to compare the financial results of companies if they use different methods to account for transactions and events. A main argument in favor of international accounting is that it permits the comparability of financial statements from multiple jurisdictions.

The principles approach of the IASB may have been influenced by the long-held tenet in the United Kingdom that financial statements should give a true and fair view. The concept of a true and fair view first appeared in the United Kingdom in the Joint Stock Companies Registration and Regulation Act of 184431 and over the years, there has been debate over its meaning.

In 2005, the Financial Reporting Council32 in the United Kingdom confirmed that, following the adoption of IAS 1 and fair presentation in the EU, the concept of true and fair view remained a cornerstone of financial reporting and auditing in the United Kingdom.

In 2012, this position has been reconfirmed by the Financial Reporting Council33 and the consequences of its application explained:

Para 18—The requirement to give a true and fair view may in special circumstances require a departure from accounting standards. However, because accounting standards are formulated with the objective of ensuring that the information resulting from their application faithfully represents the underlying commercial activity, the FRC envisages that only in exceptional circumstances will departure from the requirements of an accounting standard be necessary in order for financial statements to give a true and fair view.

Para 19—If in extremely rare circumstances compliance with the requirements of an accounting standard is inconsistent with the requirement to give a true and fair view, the requirements of the accounting standard should be departed from to the extent necessary to give a true and fair view.

Although IAS 1 used the term financial presentation, the ability to override the requirements of accounting standards was maintained, although some argued that its interpretation was very different from true and fair. Evans (2003)34 critically examined the evidence and concluded that the override in IAS 1 should be viewed in its narrowest possible interpretation, and not as an independent and all-pervasive fundamental concept.

Subsequent articles have pursued this debate and widened it to philosophical discussions.35 Unfortunately, whatever the approach the debate has not achieved a conclusive answer.

Given the above background, it is not surprising that the debate on the principles-based versus rules-based approach is so heated, and one can appreciate the problems that some countries confront in adopting IASs completely. The United States has a very strong rules-based approach. It is almost impossible to envisage that approach being overturned. It is also unlikely that the FASB will depart from its position. It is therefore extremely difficult to envisage the FASB and the IASB reaching a stage where the differences between those two approaches are no longer considered important.


The issues in continuing with national accounting regulations in a world where business activities are becoming increasingly international in nature had become apparent toward the second half of the 20th century. The solution appeared to be IASs where the emphasis would be on high quality and the objective would be the comparability of financial statements, no matter the country in which the company operated.

Unfortunately, although the barriers toward countries adopting international standards have been identified, the success in removing these barriers has been difficult to attain. The IASC had achieved some success in harmonizing accounting practices, and since 2001, the IASB can claim to have significantly advanced the cause of internationalization. However, the United States has not adopted IASs.

There has been considerable joint effort by the FASB and the IASB to achieve converged standards. Starting with the Norwalk Agreement in 2002, the parties have expended considerable resources in attempting to agree to the regulations. There have been several successes which have led to improvements in accounting regulations internationally. However, it would seem that the hurdles have been too great and the involvement of the United States declined from 2012 until there was complete withdrawal in 2014.

In this chapter we have linked two issues that have prevented full convergence: high-quality standards and the rules-based approach versus the principles-based approach to establishing accounting regulations. Although there is complete agreement that the search is for high quality, what is meant by this term remains elusive. It appears, however, that the FASB would appear to favor a standard that has a strong rules-based foundation, whereas the IASB is more inclined to set out the underlying principles. There is no apparent easy way to bridge this gap so full convergence will not be achieved.

It is unthinkable that the United States will turn its back completely on international standards, but the road that it has chosen is one of partial convergence. The stance that the FASB is taking is clearly stated on its website:

The FASB believes that pursuing convergence—making global accounting standards as similar as possible—is fully consistent with that mission. Investors, companies, auditors, and other participants in the U.S. financial reporting system should benefit from the increased comparability that would result from internationally converged accounting standards. More comparable standards would reduce costs to both users and preparers of financial statements and make worldwide capital markets more efficient (FASB).36

This is sound support for continuing a dialogue and, despite the events in 2012, it appears as if the United States intends to continue its international involvement. It is impossible to predict whether full convergence will be achieved. Our opinion is that the combined work to produce high-quality standards will continue, but where agreement on particular issues cannot be agreed, the two Boards will make their own decisions. The result will be that U.S. GAAP is similar to international standards but will have altered the original requirements. However, it will remain as U.S. GAAP controlled by the SEC and the FASB, and will not be fully compatible with international standards as issued by the IASB.