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FASB and IASB Announce Continuing Commitment to Developing Common Accounting Standards and Outline Goals to Be Met by 2008

The US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued a Memorandum of Understanding (MOU) on February 27, 2006 reaffirming their commitment to the convergence of US generally accepted accounting principles (US GAAP) and the International Financial Reporting Standards (IFRS). On the same day, the Securities and Exchange Commission issued a release welcoming the MOU and reaffirming the SEC’s commitment to the goal of eliminating the existing IFRS to US GAAP reconciliation requirement.

Although the MOU does not represent any change in the position of either the FASB or the IASB it does provide a “roadmap” for how the FASB and the IASB plan to move toward achieving convergence of accounting standards. One of the key guidelines contained in the MOU is that “(t)rying to eliminate differences between two standards that are in need of significant improvement is not the best use of the FASB’s and the IASB’s resources – instead a new common standard should be developed that improves the financial information reported to investors.”

Consistent with this guideline, the FASB and the IASB have identified nine areas where short term convergence by 2008 is viewed as possible. As stated in the MOU “(t)he goal by 2008 is to reach a conclusion about whether major differences in the following few focused areas should be eliminated through one or more short-term standard-setting projects and, if so, complete or substantially complete work in those areas.”

In addition to agreeing on this goal, the FASB and IASB have determined which of them should take the lead in examining each of the nine specific issues. The FASB will examine the fair value option (which will include a concurrent examination of investment properties), research and development and subsequent events. The IASB will examine borrowing costs, government grants, joint ventures and segment reporting. Finally, the FASB and the IASB will jointly examine impairment and income tax.

In addition, the FASB and the IASB have identified other areas where US GAAP and IFRS can be improved. Seven items are already on the agendas of both the FASB and the IASB including business combinations, consolidations, fair value measurement, liabilities and equity distinctions, performance reporting, post-retirement benefits (including pensions) and revenue recognition. Four additional topics are being researched but are not yet on the active agendas of the FASB and the IASB, including derecognition, financial instruments, intangible assets and leases.

The FASB and the IASB will meet on April 27th and 28th to further discuss the topics listed in the MOU.

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