Difficulties converging US GAAP and IFRS through joint projects: The case of business combinations

Abstract

In order to converge US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) agreed in the 2002 Norwalk Agreement to participate in several joint projects with the intention of developing common standards. This exploratory research study investigates the first major joint project, Business Combinations. In 2005 the FASB and IASB issued joint Exposure Drafts (ED) for comment. Despite the Boards' intentions of creating a single high-quality standard, two separate standards with many differences were ultimately issued. The purpose of this article is to better understand the various issues related to using joint EDs as a means toward the goal of convergence. The results suggest systematic differences in comment letter quality, ED question response and agreement rates depending on CL Board audience, stakeholder interest group, and region. The analysis of the 283 comment letters submitted finds that different stakeholders responded to the FASB and IASB, and that respondents to the joint ED differ from those normally responding to FASB or IASB EDs. Compared to single Board EDs, the number of letters to the FASB dropped substantially while those to the IASB increased. Significant differences are found between different stakeholder interest groups and regions in their levels of support for proposed changes as well as in the quality of the comment letters submitted to the FASB and IASB. Letters written to the FASB are significantly shorter than those to the IASB, and those written to both Boards and by international accounting firms are significantly longer. This is especially noticeable for those key issues where the final standards for the Boards differ. Non-US letter writers much more frequently cite national accounting standards in their opposition to proposals. National accounting standard-setters frequently have different levels of support than writers to the FASB, which are over 90% from the US. The results support concerns that convergence efforts may be hampered by the Boards having their own constituent groups and that these diverse groups engage in the “joint” due process in different ways that will need to be addressed.