Question

It is true that the FASB is the authoritative source for establishing accounting and financial reporting standards for investor-owned and not-for-profit health care organizations; however, can you think of some differences that exist in the reporting standards?

Answer 1

Financial Accounting Standards Board (FASB) is the independent, private-sector, not-for-profit organization based in Norwalk, Connecticut, that establishes financial accounting and reporting standards for public and private companies and not-for-profit organizations that follow Generally Accepted Accounting Principles (GAAP).

• The Conceptual Framework is part of the authoritative guidance under IFRS whereas it is not under U.S. GAAP

In most instances this does not create a practical divergence; however it may have a significant impact in certain complex situations.

• Definitions of certain terms are different

The SEC defines asset (and liability) as a concept of probability of future economic benefit (or economic sacrifice for the liability) under FASB, whereas in IFRS such probability is considered at the recognition level only. On the other hand, IFRS requires that the measurement be reliable before recognition, whereas there is no such reference in FASB.

“Probable” is another such word with meaning variations. Under IFRS, “probable” means “more likely than not,” i.e., over 50 percent chance of occurrence. Yet FASB defines probable as “likely to occur”, which is usually understood as a higher threshold of occurrence than under IFRS.

• Divergences in the scope of the standards have a more practical impact

An obvious and very visible one is the single volume of literature with FASB being approximately 10 times “heavier” than the IFRS. This difference is not just an anecdotal difference, but a reflection of how FASB has developed a corpus of industry-specific standards and detailed guidance for certain situations over the years.

Though the traditionalists differentiate the two with the simple “rule-based FASB vs. principle-based IFRS,” this somewhat inaccurate supposition has some truth in it. Since IFRS is international in essence, it is very difficult to develop narrowed standards that meet the needs of each constituent at the same time. For example, the standard on rate-regulated activities developed in the U.S. addresses constraints of the U.S. legal environment for these activities. In the rest of the world, legal environments for these activities vary from one country to another and the IASB has found it difficult to develop a comprehensive standard that would reflect all these variances thus far.

1. Differences in the Standards and Their Application

One well-known commented difference is the valuation of inventory: LIFO method is authorized under FASB, but forbidden under IFRS. Another well-known example can be found in accounting for fixed assets. Historical cost (less depreciation) is the only valuation method authorized under FASB, whereas the IFRS authorizes a fair value approach.

Several differences exist on the impairment testing of long-term assets as well, but the one with the largest impact in terms of documentation and processes is the possibility of reversal of impairment charge under IFRS (except for goodwill).

Differences from already converged standards are less frequent but more surprising. The standards on business combinations are converged though a difference exists in the recording of non-controlling interest. Under IFRS, non-controlling interest is recorded either at historical cost (e.g. no goodwill allocated) or at fair value, whereas under FASB, preparers have to measure non-controlling interests at acquisition date fair value. Even in the standards under revision, the two Boards may be willing to recognize and accept differences, as it is illustrated in the current discussions around the offsetting of certain derivatives instruments. Readers should note that the two Boards have acknowledged that there is no convergence currently on the accounting itself. However, the required disclosures on this matter should provide information allowing the user to reconcile the difference noted in accounting.

Another source of difference is in the implementation of standards. While the FASB usually forbids early adoption date of new standards, the IASB allows it.

1. Differences in Changes in Standards Over Time

One aspect apparently overlooked of the convergence project in a dual system US FASB/IFRS is the management of changes over time.

Changes in standards result from projects the FASB handles as well as the SEC’s decisions (for public companies only) issued in the Staff Accounting Bulletins (SAB) and from decisions of the Emerging Issues Task Force (EITF) currently in the U.S. Over the years, the EITF has issued a significant number of guidance and interpretations following questions received from users and preparers. These guidance and interpretations are very specific to narrowed and detailed circumstances and become the rule for the accounting of similar transactions. There is a strong willingness to stay away from too narrowed guidance under the IFRS and the IFRS Interpretation Committee (formerly IFRIC) limits its interpretations to flaws or “loopholes” in standards that could lead to inconsistency in the accounting of similar transactions.

Conclusion

Without a real coordination of the interpretation process, these two approaches will continue to generate differences much quicker than it took to converge the two standards.