IFRSs and FASB Convergence
As you know, the FASB has been working with the IASB to narrow the differences between U.S. GAAP and IFRS, to foster the goal of someday having accounting standards around the world that result in comparable, useful financial information.
The differing concepts in IAS 27 and SIC-12 and uncertainties surrounding the consolidation requirements in both documents have caused divergence in practice and therefore reduced comparability of consolidated financial statements. The recent financial crisis has also highlighted a need for better disclosures about the reporting entity’s involvement with special purpose entities.
In addition, many constituents have asked the IASB to consider whether investment entities should be excluded from the scope of the consolidation standards. In light of those concerns, the IASB has initiated a project to revise the scope, accounting and disclosure requirements for consolidated financial statements.
What two projects have been set up to address this? Do you think this is an appropriate route to take? Why or why not?
A multitude of projects have been developed to provide a smooth convergence of IFRS and GAAP. The concept of control used in IAS 27 requires having the ability to direct or dominate decision making accompanied by the objective of obtaining benefits from the SPE's activities.SIC-12 addresses when a special purpose entity should be consolidated by a reporting enterprise under the consolidation principles in IAS 27. Under SIC-12 an entity must consolidate a special purpose entity (SPE') when, in substance, the entity controls the SPE.
Perceived inconsistencies between the consolidation guidance in IAS 27 and SIC-12 resulted in diverse practices. The development of IFRS 10 and IFRS 12 were established to provide more consistency.
I agree this is the appropriate route to take. IFRS 10 and IFRS 12 build on the control guidance that existed in IAS 27 and SIC 12, but adds additional context, explanation and application guidance that is consistent with the definition of control.
Companies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results.
Is earnings management always intended to produce higher income? Explain and offer examples to back your explanation.