A Crucial Step Towards Harmonization Of Accounting Standards

Updated: Dec 23 2002, 05:30am hrs
Recently, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) signed a Convergence Agreement to create a single set of key International Standards. This is a path breaking step towards harmonization of Accounting Standards. So, what are its implications Read on.

Harmonization of Accounting Standards
Accounting bodies across the globe, including the IASB, formerly the International Accounting Standards Committee (IASC), based in UK and International Organization of Securities Commissions (IOSCO), have been relentlessly striving to harmonize the Accounting Standards (AS), also referred to as Generally Accepted Accounting Principles (GAAP), with the International Accounting Standards (IAS) issued by the IASB after making necessary amendments considering the domestic conditions. Harmonization ensures reliable and high quality financial reporting, disclosures and performance comparisons of multinationals, having subsidiaries and/or associates in other countries having their own set of GAAP, and other enterprises against their domestic and international peers. In India, AS are being harmonized with the IAS as India is one of the members of the IASB. To align the Indian GAAP with the IAS, the Institute of Chartered Accountants of India (ICAI) has so far issued 28 AS and 1 Guidance Note (GN), as compared to the existing 34 (41 less 7 already withdrawn) IAS issued by the IASB. In the future, the ICAI is planning to issue new AS and/or GN to harmonize the Indian GAAP with the IAS after giving due considering to the Indian economic and financial considerations. For Indian companies, planning to access international markets for capital, it is necessary for them to restate their financial statement in accordance with the GAAP of that country. Many Indian companies have issued American Depository Receipts (ADR) and American Depository Shares (ADS) in the US stock markets like the New York Stock Exchange (NYSE) or NASDAQ and Global Depository Rights (GDR) in the London Stock Exchange or the Luxembourg Stock Exchange, in which case, the Indian companies will have to restate their financial statements under US GAAP and IAS respectively and also prepare a reconciliation of significant variations between the GAAPs. For those companies, which have issued a combination of ADR/ADS and GDR, they would have to restate their financial statements under US GAAP and IAS. The FASB and IASB ink a Convergence Agreement

A crucial breakthrough was achieved in October 2002, when the FASB of the USA and the IASB signed The Norwalk Agreement i.e. Convergence Agreement to establish a set of key international standards. The two Boards have concurred to undertake a short-term project aimed at removing the various differences between US GAAP and International Financial Reporting Standards (IFRS) which include the IAS. Further, they have also agreed to remove the other differences between the IFRS and US GAAP that will remain at January 1, 2005 through coordination of their future work programs. The two Boards will now also be working on drafting towards an agreed principle based approach including key standards on acquisitions, financial performance and revenue recognition. This is a very important development in area of harmonization of accounting standards and indicates a paradigm shift by the FASB moving away from its strict rules based approach of the US GAAP towards the European principles based approach. Both the Boards have also decided to use their best efforts to issue an Exposure Draft on the Proposed Changes to US GAAP or IFRS that reflect common solutions to some and perhaps all of the differences identified for inclusion in the short term project during the year 2003. So, what does this agrrement hold for the future Companies would be required to follow the spirit of the principle rather than the letter of the rule. Companies would have to comply with a single set of accounting principles in the USA and Europe. In this context, it is pertinent here to note that the European Union (EU) has imbibed harmonization in its laws and as per the European Parliaments recent directive, listed companies are required to report under IAS by 2005. The former SEC Chairman, Harvey Pitt, has also indicated that if the convergence project turns out be successful then, the current requirement for foreign issuers in the USA to reconcile their accounts with US GAAP may be dropped. If this is achieved in the future, it would certainly help Indian companies planning to list or already have their securities listed in the international stock markets.

Although, harmonization of GAAP is a difficult and time consuming task, the above development shows a high level of commitment by the FASB and IASB towards such harmonization and it will also speed-up the process in other countries. After all, harmonization of GAAP is the order of the day.