IFRS convergence or divergence? Updating the MoU projects.

• Author: Filomia-Aktas, Lisa
• Position: FINANCIAL REPORTING - International Financial Reporting Standards

Starting in 2002 with the Norwalk agreement, the Financial Accounting Standards Board and International Accounting Standards Board committed to harmonizing accounting standards. A Memorandum of Understanding (MoU) was issued in 2006, updated in 2008 and reaffirmed in 2009 and four projects were prioritized in 2010.

The timetable has been extended beyond the initially planned completion date of June 2011. The following provides a status update of the three prioritized MoU projects--Financial Instruments, Leasing and Revenue Recognition--and also includes the boards' joint project on Insurance Contracts.

Significant attention has been focused on whether and how the United States will move to International Financial Reporting Standards, and the MoU projects may be a key component of (he evaluation. But no matter what the U.S. Securities and Exchange Commission decides regarding International Financial Reporting Standards, U.S. generally accepted accounting principles will likely experience significant change.

After the first prioritized projects, further action will be taken on the lower-priority projects: Consolidation, Financial Instruments with Characteristics of Equity, Financial Statement Presentation, Emissions Trading and Reporting Discontinued Operations.

* Financial Instruments

Offsetting--After much debate, FASB does not plan to change the current rules relating to derivatives. The application to repurchase transactions is still being deliberated. The proposal to require an unconditional legal right of offset and intent to settle net or simultaneously would have significantly increased the size of balance sheets for banks and other institutions that engage in significant derivative transactions.

However, IASB is expected to issue a final standard in the third quarter of 2011, which is in line with the proposal. The two boards will work on converging disclosure requirements to assist users comparing financial statements prepared under IFRS and U.S. GAAP.

Classification and Measurement--FASB is moving toward a model that provides three categories for classification similar to those that now exist, moving away from the initial proposal of requiring fair value in most cases.

Essentially, all equity securities, other than those that provide the holder significant influence, and all derivatives and trading instruments would be classified as Fair Value-Net Income (FV-NI); debt securities held for investment purposes would be classified as...