Eyes on Financial Accounting & Reporting Standards - IASB and FASB Consider “Convergence” & Separate Actions

Investors Are Calling For More Non-Financial Standards for Corporate Reporting, Less Confusion in What is Now “Voluntary” Disclosure.

Should there be clarity in the rules for corporate sustainability accounting and reporting as many more investors embrace ESG/Sustainable analysis and portfolio management approaches? Many investors around the world think so and have called for less confusion, more comparability, more credible and complete corporate disclosure for ESG matters. Accounting firms are part of the chorus of supporters for global non-financial disclosure standards development.

Where and how might such rules be developed? There are two major financial accounting/reporting organizations whose work investors and stakeholder rely on: The International Accounting Standards Board (IASB) and in the United States of America, the Financial Accounting Standards Board (FASB). Both organizations develop financial reporting standards for publicly traded companies.

There are similarities and significant differences in their work. The US system is “rules-based” while the IASB’s approach has been more “principles-based” The differences have been diminishing to some degree with the US Securities & Exchange Commission more recently embracing some principles-based reporting.

By acts of the US Congress, FASB (a not-for-profit) was created and has governmental authority to impose new accounting rules -- while the IASB rules are more voluntary. The US system has “GAAP” – Generally Accepted Accounting Principles for guidance in disclosure. The adoption of IFRS is up to individual countries around the world (144 have adopted IFRS).

The IASB standards are global; these are the “IFRS” (International Financial Reporting Standards) issued by the IASB.

The FASB standards are used by US-based companies. For years, the two organizations have tried to better align their work to achieve a global financial reporting standard – “convergence”.

The IFRS Foundation is based in the United States and has the mission of developing a single set of “high-quality, understandable, enforceable and globally-accepted accounting standards (the IFRS), which are set by IASB.

In 2022 IASB and FASB will have a joint conference (“Accounting in an Ever-Changing World”) in New York City to “…strengthen connections between the academic and standard-setting communities…” and explore differences and similarities between US GAAP and IFRS Standards.

Consider that the Financial Stability Board (FSB), which launched the TCFD, is on record in support of a single set of high-quality global accounting standards. Convergence. In the USA, the “whole of government” approach to the climate crisis by the Biden-Harris Administration may result in encouragement, perhaps even rules for, corporate ESG disclosure. The IASB is not waiting.

The IFRS Foundation Trustees are conducting analysis to see whether or not to create another board that would issue global standards for sustainability accounting and reporting.

A proposal will come by the time of the UN Climate Change Conference this fall. Should the IFRS foundation play a role? The International Federation of Accountants (IFAC) thinks so. Many questions remain for IASB and FASB to address, of course. This is a complex situation, and we bring you some relevant news in the newsletter this week.

This is just the introduction of G&A's Sustainability Highlights newsletter this week. Click here to view the full issue.