Convergence with whom? The shift to the 'investor model' of accounting.

• Author: Thrower, Andy
• Position: Financial reporting

Chief financial officers are often too busy and hard-pressed to find time to stay on top of the latest accounting and convergence plans of the Financial Accounting Standards Board and International Accounting Standards Board. And with a deadline for convergence drawing nearer, many CFOs are wary of coming changes in "big-ticket" items--revenue recognition, leases and financial instruments, as well as changes in the structure of financial statements and related disclosures.

Many CFOs are hopeful that the high price of converting to principles-based International Financial Reporting Standards will eventually be offset by the end of a rules-based financial reporting model and elimination of multiple systems of generally acceptable accounting principles in larger international entities. But they might be surprised to learn that to some influential members of the financial community, the word "convergence" means something entirely different.

For many years now, groups of financial analysts, such as the CFA Institute, have worked to transition the financial reporting model away from its traditional view of periodic earnings measurement to a wider view of measuring wealth. That transition has accelerated to the point that the CFO might better understand convergence to mean the process of moving what is left of the traditional accounting model over to an investor model. This process is unlikely to be pain-free.

The traditional accounting model was developed to capture an entity's earnings from its normal operating activities and to recognize the assets used and liabilities incurred in the earning process. The capture was through the process of recognizing and measuring actual transactions.

In contrast, the investor's view of the financial reporting model is one that recognizes all events that affect the value of an entity's net assets under its control and therefore common stockholders' wealth. Thus, the investors' view is a measurement of economic income based on changing fair values, whereas the traditional model is a measurement of accounting income from actual and realizable business transactions.

Under the FASB's mission of issuing one-size-fits-all standards for a general purpose financial reporting model, the two views have tried to coexist. But in the early development of a formal set of financial reporting standards, the accounting view got there first and seized the high ground for itself.

Few recall that when the American Institute of...