Enforcing Financial Reporting Standards: The Case of White ...

achieve significant progress on by 2008. In September 2008, the FASB and the IASB updated
their MoU and agreed on milestones to be achieved on a number of projects by 2011. In June
2010, the boards issued a progress report on the convergence project in which they also
published a modified work plan that prioritizes the major projects mentioned in the MoU.
Thus, the boards aim to increase their focus on those projects that they deem most urgent.
As was set out earlier, the treatment of R&D according to IFRS differs from the US-
GAAP requirements. R&D accounting was identified by the boards as one of the short-term
convergence project as they considered the gap in the treatments narrow enough to close in a
short period of time. Thus, R&D accounting was included in the MoU as issued in 2006.
However, after several rounds of discussions, the boards decided not to add the project to the
active agenda. What’s more, R&D accounting was not mentioned anymore as a part of the
modified work plan which meant that the project was not prioritized. Thus, the boards did not
expect to agree on converging R&D accounting in the near future.
The main reason for this development seems to be that the differences in R&D
accounting were only perceived to be small, while they, in fact, addressed a fundamental
difference between IFRS and US-GAAP. While the former system is generally considered
principles-based, the latter is described as rules-based. The main characteristic of a principle-
based regime is that a limited number of standards give guidelines on how to assess
transactions. Therefore, the principles cannot provide an impermeable set of requirements but
rely on managerial judgment. On the other hand, a rules-based system issues guidance on a
case-by-case basis which results in a high number of standards and, thus, relatively tight
regulation.
Prior to issuing SFAS No. 2, R&D accounting in the U.S. was also based on
principles similar to the ones currently in use by IAS 38. Entities were to capitalize their
research and development costs if a certain set of criteria was fulfilled. This procedure was
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