Norwalk Agreement Failure

Call it a new realism. Like Hoogervorst, FASB President Russell Golden is leading the many successes of the convergence effort that began with the 2002 Norwalk Agreement (named after FASB Norwalk Headquarters, Conn.). As part of this agreement, FASB and IASB signed a Memorandum of Understanding on the convergence of accounting standards. The accompanying table “Results of Convergence” contains my views, it is true, subjective on the success of convergence and the resulting improvements in IFRS for each of the projects listed in the various agreements concluded between the IASB and the FASB. Finally, I would like to add that convergence may have been the most realistic way to launch the application of IFRS in the United States, but such regulation is not sustainable in the long term. On the contrary, the best approach for each jurisdiction is the adoption of IFRS. As the ifRS Foundation`s directors said recently in the 2011 IFRS Foundation report, with the expiry of the so-called “Norwalk” agreement, signed by the two boards of directors as early as 2002, and a growing impatience on the part of the IASB and its parent company, the IFRS Foundation, for the non-approval of the Securities and Exchange Commission for ifrs to be used by U.S. companies in their transactions. IASB has decided to move to a more multilateral approach to setting standards. Instead of working monthly in joint meetings with the United States to finalize the standards, FASB is now one of the largest national and regional groups that are part of the Accounting Advisory Forum. But errors in meeting common standards on two important issues – leasing and financial instruments – seem to have left the default with a sound assessment of the obstacles they had been trying to overcome for so long.

(The chambers also appear to be following their separate paths for accounting for insurance contracts, although this was not part of the original Memorandum of Understanding.) The recent divergence “requires us to recognize that differences in the cultural, commercial, legal and regulatory environment in different legal systems will inevitably result in some differences in these standards,” Golden wrote. The proposed leasing is perhaps the clearest example of how such differences have led to a collapse in convergence. After half a decade of deliberations, following a basic agreement on the notification of leases of more than 12 months on company balance sheets, the two boards of directors announced their decision, at a joint meeting on 27 August, to approach leasing reports differently. The split led to disagreement as to whether leasing accounting should take a dual or one-off approach. Instead, he sees the end of convergence as the conclusion of a more defined – and very successful – project. “Convergence was a limited project,” he wrote in an email to the CFO. Like any program, this is the convergent standard for revenue recognition and “some challenges,” particularly the inability to agree on how companies should report results with their holdings in financial instruments, Hoogervorst wrote. FaSB and IASB have made slow but steady progress on these other three projects, and a definitive converging standard for revenue recognition has been promised for the first half of this year, after being postponed several times. However, significant obstacles remain in reaching a final agreement on convergent standards for leasing and financial instruments.