VideoThe world wants international accounting standards, which promise to reduce accounting costs, improve comparability, and promote more efficient markets. And over the past 10 years, standard setters have come close to transforming this ideal into a reality. But members of the International Accounting Standards Committee (IASC) have several major hurdles to get past before they can present a proposal for the world to consider. The first hurdle is the standard setters themselves.
The friction began last November, when IASC members voted to reject their own staff's critical "financial instruments" proposal. Many European members considered the proposal too "American"--not surprising, since the proposals were lifted straight from U.S. accounting rules and proposals. These members also chafed at the detail with which reporting requirements were specified.
Meantime, the U.S. Securities and Exchange Commission (SEC), which holds the key vote to international approval of the IASC's work, has made it clear it will insist on standards that are as comprehensive and rigorous as the rules adopted by the Financial Accounting Standards Board (FASB). In view of the SEC's virtual veto power over any IASC proposal, by last January events were building toward a showdown. The standards, after all, will shape global capital markets as they enter the 21st century.
Diplomacy may yet prevail. "In February, board members reviewed a working document outlining a new approach, and an exposure draft will be ready to be approved at the April meeting," says Paul Pacter, international accounting fellow at the IASC who is charged with drafting the new document.
The resulting exposure draft would follow the principles of U.S. GAAP in most respects, absent the burdensome details and explanations typical of U.S. rules. For instance, the new version calls for recording the fair market value of all financial assets, excluding assets held to maturity and those impossible to value. As for liabilities--the bigissue--only derivative financial liabilities would be marked to market; all others would remain at historical amounts. The rule would also allow hedge accounting, adjusting both the hedge and the hedging instrument to fair value. The draft contains only slight differences from the U.S. rules: write-downs of financial instruments could be reversed in income if values go back up; IAS companies could recognize the unrealized changes in asset and liability values in earnings or in equity (as opposed to only equity in the United States); and the IASC proposal would allow nonderivatives to be used as hedging instruments.
THE LARGER HURDLE
Assuming the refashioned standard passes muster with the IASC's 16 voting members, a larger hurdle remains. Can the IASC persuade the SEC--a member of the International Organization of Securities Commissions (IOSCO)--to permit companies to sell bonds and list stocks across borders following the new rules? Moreover, will the SEC allow the international standards to be used in the United States without cumbersome reconciliations to U.S. rules? It's hard to tell. Pending final approval of new rules by the IASC, the SEC is reluctant to tip its hand.
"Acceptance of the IASC's standards by the commission is not a foregone conclusion," SEC commissioner Isaac Hunt Jr. warned in a speech last December at a conference of the American Institute of Certified Public Accountants. "The commission's decision as to whether or not to accept the IASC's standards should be made only after the core standards are completed, based on what is in those standards."
Leaders of the IASC, however, sound confident that their board will reach a solution in April. "I hope, and believe, that we will be successful in completing the work this year, and in presenting the core standards project to IOSCO," says Patricia McConnell, a senior managing director of Bear, Stearns & Co. and vice chairwoman of the IASC.
THIRTY-SEVEN DOWN, THREE TO GO
Even if it takes until 1999 to craft a set of standards to suit the SEC and international tastes, it is difficult to be critical of the IASC. A global organization of accounting and industry volunteers established in 1973, the group has worked at a feverish pace since 1995, when it agreed with IOSCO to develop a set of high-quality, comprehensive international standards for corporations to use in cross-border securities transactions.
Toward that end, the IASC has worked diligently to address 40 core standards outlined by the original agreement. As of February, all but 9 of the standards had been established, and 6 of those are pending approval as exposure drafts. The other 3--hedging, off-balance sheet items, and investments--are addressed in the financial instruments project.
Such rapid progress has prompted broader acceptance of IAS standards already. Lawmakers in France and Germany are considering whether to allow their domestic companies to use IASC guidelines as their only accounting rules in consolidated statements. Regulators in Asia are mulling similar decisions, according to Deloitte Touche Tohmatsu. And to facilitate cross-border activities, many global corporations are already keeping two sets of books, using both international standards and their domestic rules.v Yet the SEC does not want to allow international companies to list on U.S. markets using IAS standards rather than GAAP if those standards are weaker. In such a case, the SEC warns, access by these companies could undermine the stability and efficiency of U.S. markets. The agency also fears that if international companies can list using IASC standards, U.S. companies will lobby hard to follow suit, circumventing GAAP in order to look better.
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