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By Ian P.N. Hague
As adoption of IASB standards in the EU approaches, the AcSB is working on a project to ensure continued best practices here
Every once in a while, your computer may need upgrading to keep pace with current technology. But in order to keep it running smoothly, it's necessary to give it a tune-up from time to time — clean up the hard drive, replace any parts that are malfunctioning and so on. Accounting standards are no different.
High quality in financial reporting, based on superior accounting standards, is vital for efficient capital markets. However, this level of quality can only be achieved if regular maintenance is undertaken at the same time as dealing with the bigger issues to ensure financial statements are prepared in accordance with best practices. This is essentially what the Accounting standards Board (AcSB) is doing presently with its Accounting Standards Improvements project.
There has been considerable focus in recent years on the convergence of accounting standards, much of the emphasis being on the activities of the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). With the mandatory adoption of IASB standards by public companies in the European Union and other parts of the world, such as Australia, less than 12 months away, there is increasing demand for FASB and IASB standards to converge towards a "gold standard" that would apply in the world's major capital markets.
In September 2002, the FASB and IASB entered into the Norwalk agreement, which includes an agreement to undertake a convergence project to amend certain of their standards that do not require comprehensive reconsideration, to eliminate differences by adopting the best solution available. In some cases that solution will be the IASB standard, while in other cases it will be the FASB standard. In yet other instances, the best solution may be contained in another standard-setters' standard and both FASB and IASB standards will change.
Canada's accounting standards and the AcSB remain highly regarded in the international community. The AcSB's challenge is to maintain that level of respect in a world where the focus is increasingly on the FASB and IASB, so as to continue being a credible voice representing Canadian interests. Furthermore, the AcSB needs to keep Canadian accounting standards at a sufficiently high quality so that financial statements of Canadian entities are not only useful in the international community but also of value for Canadian users such as shareholders, lenders and tax authorities.
For Canadian standards to remain at this level it is important to keep up with both the large and small improvements made by the FASB and IASB. Sometimes that means Canadian standards must change, but in other cases the Canadian standard is the higher quality and it is others that must change toward it. Recent examples of the latter case include the method of accounting for business combinations, where the elimination of the pooling of interest method created much greater change for the FASB than for Canada. Other instances where Canadian standards are presently viewed by many as being superior to US standards include aspects of accounting for research and development costs and classification of liability and equity based on economic substance. However, in other areas, FASB or IASB standards are more advanced than those in Canada and the AcSB needs to keep up. A good example of this is recognition and measurement of financial instruments, where the FASB has had standards in place for some time, as has the IASB, but the AcSB is only just putting standards in place.
There is plenty to keep the AcSB occupied with seeking convergence on major projects such as financial instruments, revenue recognition, employee stock options and so on, but many less significant, though important, differences also warrant consideration. The IASB/FASB convergence project, established under the Norwalk agreement, is addressing a number of these smaller differences (see chart above). In some cases the agreed upon solution will be closer to existing Canadian standards. For example, the proposed converged treatment for a change in accounting policies, which is presently a Canadian/US GAAP difference, would result in US GAAP changing to become closer to Canadian standards. However, in other cases the agreed FASB/ IASB solution would differ from Canadian standards, such as in the case of accounting for nonmonetary transactions. If Canada were not to keep up with changes where the agreed-upon high quality solution differs, it would run the risk not only of new differences with US GAAP but also of Canadian standards falling below the high-quality benchmark. Keeping up with the changes also allows Canadian views to be taken into account in developing international standards.
The AcSB's Accounting Standards improvements project is addressing these issues in a number of ways. While details of FASB or IASB standards are changing toward those in Canada, the AcSB is undertaking projects to make Canadian standards as identical as possible to those converged high-quality standards. Where the agreed FASB/IASB high-quality solution differs from that existing in Canada, the AcSB plans to change Canadian standards to converge with that solution. Simultaneously, the Canadian Board is taking the opportunity to modernize the presentation and style of certain Canadian standards to express them in clearer and, where appropriate, converged language and to incorporate a more user-friendly presentation. The AcSB plans to complete this project in the next two years.
However, the convergence process does not end there. If converged standards are to be maintained it is important that not only are the standards themselves converged but that the process of interpreting standards does not lead to divergence. Accordingly, regular communication is maintained between bodies such as the Canadian Emerging Issues Committee, FASB Emerging Issues Task Force and IASB International Financial Reporting Interpretations Committee to make sure consistent answers are being developed to issues that arise. As Canadian and FASB/IASB accounting standards converge, the extent of cross-border consultation among companies, auditors, regulators and standard-setters must also increase if we are to achieve and maintain consistent interpretation and application.
The matters discussed so far involve, primarily, keeping up with the FASB and IASB. However, while that is important, Canada cannot afford to sit on the sidelines and treat FASB or IASB standards as the ceiling beyond which it will not go. Certainly, differences from US GAAP are undesirable for many Canadian entities, but in some instances it may be desirable to move ahead and put in place a standard known to be of higher quality than that which exists presently and is consistent with the future direction that IASB and FASB are following — such as the recent Canadian decision to move forward with the expensing of stock-based compensation costs.
It is also important for the AcSB to demonstrate that Canada can play an important role in assisting the international community. The AcSB is doing this now by leading research in key projects as a fundamental consideration of the circumstances in which particular measurement attributes (such as fair value or historic cost) should be used in financial statements and in developing a framework to assist in assessing the need for certain financial statement disclosures.
All of this means substantial change in accounting standards in the near future. The AcSB is doing its best to manage the flow of these changes to constituents. However, at the end of the day the additional time and effort should be beneficial in terms of the longer term gain of maintaining high-quality Canadian accounting standards that support Canadian companies' participation in the worlds' capital markets but also in our own domestic markets. Keeping up with the best involves constant improvement in all aspects. The AcSB is seeking to achieve that goal in a manner most manageable for Canadians.
Ian Hague is Technical editor of Performance measures and a principal with the Accounting Standards Board, responsible for the Accounting Standards Improvements project. | 
