The future of financial accounting: universal standards.

Widespread adoption of international accounting standards has come considerably closer to reality. In 1995, the technical committee of the International Organization of Securities Commissions (IOSCO)--of which the Securities and Exchange Commission is a member-agreed to formally endorse a core set of international accounting standards for cross-border listings on the exchanges of all member nations by June 1999, after the International Accounting Standards Committee (IASC) successfully completes 15 new standards (see sidebar, page 21). Once the resulting set of standards is endorsed, IOSCO member regulators are expected to replace the use of local generally accepted accounting principles with IASC-based financial statements.

Because acceptance of IASC-based financial statements by the SEC and other IOSCO members would provide issuers with access to New York, London, Tokyo, Hong Kong and other world capital markets, the adoption of international accounting standards by a wave of multinational companies is sure to follow IOSCO endorsement. Putting it in perspective, nearly 400 of the world's top 500 companies do not have listings on the New York Stock Exchange.

Also of note, the IASC board of directors was strengthened in 1995 by new members of several national standard-setting bodies, such as the chairman of the United Kingdom's Accounting Standards Board, the former chairman of the Canadian Accounting Standards Board, the president of India's Institute of Chartered Accountants and a member of the Australian Accounting Standards Board.

The dilemma

Can the SEC allow foreign registrants to apply international accounting standards, yet require domestic registrants to adhere to U.S. generally accepted accounting principles? It would be appropriate to identify which international accounting standards would cause material reporting differences if adopted by domestic corporations in place of U.S. GAAP. In a limited survey of eight foreign corporations, Columbia University's Trevor Harris found the differences may not be that significant. When existing international accounting standards were applied to these companies, there were surprisingly few additional requirements needed to conform with U.S. GAAP. The margin of difference will become even smaller as the IASC completes its work on new standards and improves some of its existing ones.

Because U.S. GAAP allows flexibility in areas such as inventory costing and depreciation methods, there often are major inconsistencies and lack of comparability even among companies within U.S. borders. These inconsistencies are acceptable as long as companies disclose the alternative accounting principles. The same approach can be used to accommodate any remaining IAS principles that, if adopted by domestic companies, would cause material reporting differences.

The SEC has taken a number of steps to ease the burden on foreign registrants by accepting provisions from several international accounting standards. The SEC now allows

* Foreign registrants' cash flow statements presented in accordance with IAS no. 7, Cash Flow Statements.

* Financial statements presented in any currency that the issuer deems best for U.S. markets.

* Statements in accordance with IAS no. 21, The Effects of Changes in Foreign Exchange Rates, rather than requiring the issuer to quantify the effects of departing from Financial Accounting Standards Board Statement no. 52, Foreign Currency Translation, for operations in a hyperinflationary environment.

* Financial statements prepared under the purchase method if the criteria specified in IAS no. 22, Business Combinations, are met for business combinations required by U.S. GAAP (Accounting Principles Board Opinion no. 16, Business Combinations) to apply pooling-of-interests rules.

* The elimination of the requirement that foreign issuers reconcile differences arising from goodwill amortization periods--generally only 5 years under IAS no. 22, but up to 40 years under U.S. GAAP (APB Opinion no. 17, Intangible Assets).

The ultimate goal

There is much more to be done before the world adopts a set of uniform international accounting standards. Doomsayers believe fundamental political and cultural differences will forever prevent that from happening. As an example, they point to Germany and Japan, where most of the capital is provided by a handful of banks. Because the banks can get the information they need directly from the borrower, there is no need for the kind of encyclopedic disclosure required in the United States to protect investors. But even in Germany, where differences from the U.S. investor-oriented culture may be among the greatest, pressure from large companies seeking foreign capital has led the German government to declare its support for the efforts of IASC and IOSCO. Indeed, the German government itself soon will be selling its telecommunications monopoly, Deutsche Telekom, in a huge offering that is bound to exceed the meager appetite of local investors.

It is not unreasonable to expect that the adoption of international accounting standards by major corporations of the world will motivate national standard-setting bodies to reexamine their own domestic standards, and to work with the IASC and with each other to develop new standards and revise or replace existing ones--this cooperation with IASC already is in practice. An evolutionary process of this kind should result in a set of globally accepted accounting principles that forms the truly common language that accounting was meant to be.

--by Donald Schwartz, professor, school of management and technology, National University, San Diego. [TABULAR DATA OMITTED]