Accounting for Differences.

If international accounting standards are here to stay, what do they mean?

True or false: Because you're involved with a U.S. corporation, international accounting standards (IAS), as promulgated by the International Accounting Standards Committee (IASC), have no impact on your current work environment.

True or false: U.S. GAAP is the only acceptable accounting standard used in the global marketplace.

True or false: No corporation in the United States prepares financial statements using IAS standards.

True or false: Companies aren't permitted to use international accounting standards when listing on the London, Zurich, Frankfurt or Hong Kong stock exchanges.

If you answered true to any of these questions, read this article and its sidebar carefully. While it isn't an exhaustive explanation of financial reporting under IAS, it highlights the differences that may affect a financial executive's information needs. Be aware of these differences and their potential impact on the comparability and reliability of financial information published in the global marketplace.

Heads Up

Although some financial executives may feel removed from the international markets, in reality all businesses operate in the global marketplace. Whether your firm is a multinational corporation or you're the CFO of a small business looking to expand internationally, you must be aware of recent changes in the international accounting arena. International accounting standards have made significant inroads, and the growing influence of the IASC is a serious consideration. You need to recognize that international accounting standards represent an alternative approach acceptable in many countries and on many stock exchanges. They're here to stay.

Consider the following events that have occurred within the past four years:

* The European Union (EU) has concluded that IAS are the preferred option for the future development of accounting in EU countries.

* The finance ministers and central bank governors of the G7 countries recently expressed support for IAS as a means to attaining greater transparency and openness in the world financial markets.

* The World Trade Organization has announced its support for the work of the IASC.

* The International Organization of Securities tries and accepted by 39 of the world's stock exchanges. Though some of the companies and countries are small, some large multinationals also use IASC standards. For example, Nestle, Bayer, Renault, Saint Gobain, Porsche, Olivetti, Asea Brown Boveri and Microsoft (yes, even Microsoft) currently report financial information under IASC guidelines. While the SEC doesn't currently accept statements prepared under IAS guidelines for any U.S. stock exchange without a reconciliation to U.S.-based GAAP, it's currently reviewing the core standards completed by the IASC and submitted to IOSCO. However, many major stock exchanges -- including London, Tokyo, Hong Kong, Paris, Frankfurt, Rome, Brussels, Easdaq, Luxembourg and Oslo -- permit IAS prepared statements.

IASC core standards impact all aspects of financial statement reporting. An examination of their titles suggests many of the topics covered under FASB and APB pronouncements are the same as those covered by the IASC pronouncements.

However, it's important to note that while many of the topics are the same, not all of the results are. Such differences can arise because FASB pronouncements often contain more guidance for the user than is provided under IAS, or because several IAS still allow for alternative approaches (though now most of the pronouncements specify a benchmark or preferred treatment vs. that of an allowed but alternative treatment). When differences exist -- and there's some disagreement among both practitioners and scholars as to the significance of those differences -- evaluate the results on a case by case basis.

Rose Marie L. Bukics, CPA, is professor of economics and business at Lafayette College. Marge O'Reilly-Allen, CPA, is assistant professor of accounting at Rider University. Chris Schnittker is controller at Global Sports Inc.

Apples to Apples

Here are some areas to consider when assessing financial results under international accounting standards.

Balance Sheet

The major financial reporting issues governing balance sheet presentation, if prepared under IAS 1(revised in 1997 and effective for statements issued after July 1, 1998), are clasification and valuation of assets.

If a financial excutive is interested in assessing liquidity in a company using IAS, there differences to note in account classification. While IAS statement clearly report non-current vs. non-current may not be as redily apparent. Although typical 12 months, IAS mandate that invetory, accounts receivable, accounts payable and other accruals for operating costs be classified as current whether or not they're expected to impact cash within 12 months.

And while IAS 1 provides guidelines on balance sheet preparation and presentation, it doesn't provide guidance on the valuation of balance sheet accounts. Those standards are found in a variety of IAS pronouncements. Although some of the balance sheet items are valued in a U.S. GAAP, differences may arise in key areas such as plant and equipment, inventory and investments.

As to the other side of the balance sheet, the IASC has issued little guidance on equity components to date. It's important to note, however, that any change in the valuation of plant and equipment, intangibles or long-term investments results in a revaluation reserve that appears in the equity section of the balance sheet.

Income Statement

IAS 1 also governs the overall preparation and presentation of the income statement. While the presentation of income statement items is similar under both international and U.S. standards, the results may not be comparable because of different accounting treatments in determining the reported amounts. Key areas where difference might occur are discontinued operations, restructuring charges, extraordinary items, research and development, accounting changes (in principal, estimate or errors) and employee benefits. Such differences may occur either because IAS may allow alternative treatments for such events, or because the IAS lacks specific guidance on mesurement criteria, therefore allowing compaines some latitude in determining results.

Statement of Cash Flows

For financial statements prepared under IAS, the cash flow statement is governed by IAS 7, ISSUED IN 1997 AND REVISED IN 1992. The standard for presenting cash flow information corresponds closely to the U.S. standard (SFAS 95), with a few minor classification exceptions. Under IAS 7, companies may present interest expense as a financing activity rather than as an operating activity as classified under SFAS 95. Also, under IAS 7, companies may choose to report interest and dividend income from investments as investing activities or operating activities, rather than as operating activities required under SFAS 95.

Some of these balance sheet classification issues may generate comparability problems in the cash flow statement, too for example, cash or bank overdrafts, typically reclassified to the liability side of the balance sheet for reporting under U.S. GAAP, can be shown as offsets to cash as cash equivalents under IAS 7, provided they result from the company's normal cash management strategies. This contradiction results in a different presentation of changes in cash and financing activity on the statement of cash flows.

It's also important to the note that U.S. GAAP and the IAS differ in their approach to complex transactions that could have multiple classifications in the cash flow statements While U.S. GAAP requires that the most significant part of the most significant part of the transaction determine how it's classified on the cash flow statement, IAS allow such transaction to be reported in various sections of the cash flow statement. This may make analyzing the cash flow effects of a particular transaction an elusive game of hide-and-seek.