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The evolution of the relationship between the US financial accounting standards board and the international accounting standard setters: 1973-2008.

Abstract: Utilizing archival materials as well as personal interviews and correspondence with personnel of the Financial Accounting Standards Board (FASB) and International Accounting Standards Committee /Board (IASC/B), including former Board chairmen and staff members, this paper examines the development of the working relationships between the FASB and the IASC/B from their earliest interactions in 1973 through the transformation of the IASC into the IASB and the Convergence Program rooted in the 2002 Norwalk Agreement up to 2008.

INTRODUCTION

In 1973, two nongovernmental organizations (NGOs) important to the future development of accounting standard setting were established: the International Accounting Standards Committee (IASC) and the US Financial Accounting Standards Board (FASB). Teegen, Doh and Vachani [2004, pp. 463-465] define NGOs as "private, not-for-profit organizations that aim to serve particular societal interests by focusing advocacy and/or operational efforts on societal, political and economic goals, including equity, education, health, environmental protection and human rights." The emergence of NGOs as institutions filling voids where governments and firms have been unwilling or unable to meet consumer and citizen needs underlines their importance and justifies an examination of their role in globalization. Both the IASC (and its successor, the International Accounting Standards Board, or IASB) and the US FASB have proven to be vital promoters of the globalization of international financial accounting standards.

This paper traces the evolution of the relationship between these organizations through analysis of correspondence preserved in the IASC files located in the archives of the IASC Foundation, (1) as well as analysis of published documents of the FASB and the IASB. It is fleshed out with information from correspondence and interviews with individuals who participated in the developments. The paper proceeds through the following sections: The First Twelve Years; Deepening Contacts: The Next Ten Years; The FASB Seeks to Involve the IASC; The IASC/ IOSCO Core Standards Program; the G4+l; Restructuring the IASC; The Strategy Working Party; The FASB/IASB Convergence Program; Summary and Prospect; and Epilog.

THE FIRST TWELVE YEARS

The IASC was founded by the accountancy bodies of nine countries: Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland (UK), and the United States (US) as a private sector NGO. A part-time body of standard setters who met three or four times a year in various cities around the globe, it had a small, full-time secretariat at its London location. (2)

The FASB was founded in 1973. Its creation was based upon the recommendations of the 1972 Wheat Committee of the American Institute of Certified Public Accountants (AICPA) to replace its predecessor, the eighteen-member Accounting Principles Board (APB), which was controlled by the profession. The FASB was established to ensure that its seven full-time standard setters acted in the interests of financial statement users. The Board was composed of former auditors, preparers, and users of financial information [Miller, Redding and Bahnson, 1994, pp. 36-38]; traditionally, one member came from academe.

The FASB's authority derives from the Securities and Exchange Commission (SEC), which, since its founding in 1934, has looked to private-sector NGOs to provide directions for financial reporting practices and now recognizes their standards as "authoritative" and "generally accepted" for purposes of US federal securities laws. (3) With respect to non-public companies, the FASB's authority comes from the AICPA and its requirements governing the responsibilities of auditors who are AICPA members. (4) Thus, the FASB operates within a regulatory environment that may limit its independence, whereas the IASC and, until recently, its successor, the IASB, did not. However, the need for the IASC to get its standards accepted by national bodies may have circumscribed its independence, or at least the independence of some of the organizations or representatives on its board. The same issue arises with the IASB. (5) This is quite evident, for example, in the EU decision to endorse IAS 39 with reservations, i.e., "carve-outs."

In the first few years of the IASC's basic standards phase there was limited contact between it and the FASB. What contact they had was rather formal. Consider the following example. On September 14, 1973, IASC Secretary Paul Rosenfield wrote FASB Chairman Marshall Armstrong:
      ... I am writing this letter to you in my private capacity
   (italics added) and not as Secretary of the IASC to
   ask how liaison between the two bodies should be established.
   Should the IASC be in direct formal contact
   with the FASB, or should formal contact be through the
   AICPA or other American bodies?


Armstrong's September 18, 1973, letter of response to Rosenfield stated:
   In my judgment, inasmuch as the AICPA is the member
   organization of the IASC, liaison with the FASB should
   be through the AICPA, rather than directly with us,
   although I hope that you will feel free to call on me personally
   if you feel I might be of assistance. (6)


Thus, Armstrong left the door open to direct communication. In the future, direct contact between the IASC and the FASB became routine.

However, in the early years, the IASC, created by professional accountancy bodies rather than standard-setting bodies, insisted that contacts with national standard setters should be channeled through the related IASC national member body. This was still the case when Hans Burggraaff served as the fourth IASC Chairman, 1980-1982. When he visited FASB Chairman Don Kirk in May 1981, Burggraaff got prior permission from the AICPA President. (7) When David Cairns joined the IASC as its Secretary-General in 1985, it was explained to him that any contact between the IASC and national standard-setting bodies had to be made through the member accountancy bodies in that country. He drew the ire of the Institutes in both Canada and the UK for talking directly to people in their respective standard-setting bodies. As he has noted, "The AICPA was perhaps more relaxed about this (perhaps because they did not expect the IASC and the FASB to reach a joint conclusion in private)." (8) In those early years, it was generally thought within IASC that the accounting profession should set accounting standards and enforce their acceptance and application, and that it was capable of doing both. (9)

While direct contacts between the FASB and the IASC were rare at this time, the FASB was very much aware of the IASC's standard-setting work and the SEC's reaction to it. Camfferman and Zeff [2007, pp. 157-160] recount a controversy among the Financial Executives Institute (FEI), the SEC, and the FASB over a proposal in IASC's December 1974 Exposure Draft 3 (E3), Consolidated Financial Statements, that all subsidiaries, not excepting banking, insurance, and finance subsidiaries of industrial parents, be consolidated. GAAP of the time excepted the inclusion of such subsidiaries. On June 10, 1975, John C. Burton, SEC Chief Accountant, wrote the AICPA that E3 was "not inconsistent" with GAAP and that the SEC would propose amendments to Regulation S-X "which will conform its consolidation rules" to those in E3 if the FASB issued no statement to the contrary. After seeing Burton's letter, FASB Chairman Armstrong wrote SEC Chairman Ray Garrett, Jr., that "the proposed action could seriously undermine" the FASB by weakening its recognized authority and causing a loss of financial support. Garrett responded to Armstrong [Camfferman and Zeff, 2007, pp. 159-160]:
   It seems clear that all efforts at an international level
   cannot be expected to adopt an American solution. It
   seems even clearer that proposed solutions at such a
   level may be considered for possible adoption [in the
   US] without upsetting the authority of the Board when
   the Board has not yet decided to deal with the issue.


In the same letter, Garrett commented:
   The Commission [is] witnessing an influx of foreign
   registrants ... [T]he adoption of international standards
   will achieve improved comparability in an environment
   which is currently riddled with exceptions. We therefore
   have viewed with favor the development of the
   IASC and our [Burton] letter was designed to express
   our support for their international objectives.


The two-year-old FASB took an egocentric posture, while the SEC had a broader view in supporting the work of the IASC, even at this early date.

Reciprocal FASB/IASC meetings began to occur regularly in 1975. Camfferman and Zeff [2007, pp. 161-162] recount two FASB/IASC meetings in 1976 and 1977. On March 23, 1976, an IASC steering committee chairman, Alex Mackenzie, met two staff members in the FASB's office. Mackenzie reported that Marshall Armstrong had said, "As regards the problem of reconciling domestic and international standards his approach was 'conference and not confrontation.'" The second meeting occurred in November 1977. On December 7, Armstrong wrote William P. Hauworth, II, Chairman of the AICPA's international technical subcommittee, that the meeting with the IASC representatives was helpful and that the FASB would consider the underlying reasoning of IASs 1-6 whenever the FASB undertook projects in which such positions would be "relevant."

On February 14, 1980, IASC Secretary Allan Cook met the FASB staff in Stamford, Connecticut. Following that meeting, Moshe S. Levitin, FASB Technical Associate, sent Cook a draft memorandum of the meeting for his review. In the section dealing with the relationship of the FASB with the IASC, the draft indicated:
   Mr. Cook stated that because of recent criticism that
   IASC standards reflect the views of a small group, the
   IASC wants more input from bodies such as the FASB
   and the European Economic Community [EEC]. He
   indicated that the IASC Board will shortly consider formal
   FASB involvement. Mr. Walters [FASB Board Member]
   stated his belief that the FASB might be receptive
   to the idea of increased involvement in IASC activities.
   Perhaps a nonvoting permanent observer at IASC meetings
   should be considered. Messrs. Cook and Nash [of
   the IASC] indicated that the matter will be discussed
   further among the IASC members and with the AICPA
   representatives. (10)


This quote reveals that the IASC staff coupled increased FASB participation in IASC activities with extension of the same privileges to the EEC; they would continue this strategy until both accepted observer membership on the IASC Board. It is also interesting that it was an FASB Member who first suggested the FASB become a permanent observer of the IASC Board. The FASB would repeatedly make the request in the years ahead.

Levitin's draft memorandum next dealt with accounting for grants received from governments; it explained that the FASB staff had recommended waiting until the IASC issued its standard and then incorporate it into an FASB document which "would indicate tangible support for international harmonization of accounting standards."

On foreign currency translation, (11) Levitin noted that Cook had stated the IASC's desire to participate in and to assist with the current effort to harmonize FTC accounting standards in the US, Canada, and the UK. Subsequently, Cook received an invitation to join the FASB's Task Force on Foreign Currency. (12) With the authorization of Chairman John Hepworth, Cook accepted the invitation. (13)

Despite the February 14, 1980, discussion of possible nonvoting observer member status for the FASB at IASC meetings, in June 1980 the IASC Board agreed to "not invite FASB as observer." It acknowledged the previous good efforts of the FASB staff on behalf of the IASC, but it was not yet ready to admit the FASB to Board member observer status. (14) In the July 1982 issue of World Accounting Report (WAR), Peter Mantle reported that IASC Chairman Hans Burggraaff explained that the IASC had made a conscious decision "to seek a unification of the accounting profession, not of the standard setters (p. 5)."
   [In the first part of my term] there was no urgency to
   liaise with national standard setters, and that was the
   case too as regards FASB. It was only in the second part
   of my term [that] the [IASC] Board began to realize
   that, in order to make our standards stick, we needed
   the support from all parties--preparers, users, standard
   setters, regulators. And that made liasion with national
   standard setters necessary. To make them aware of our
   existence, to foster a positive and friendly attitude, to
   request input and comment on drafts, and to urge them
   to consider whether they could harmonize their standards
   with ours." (15)


Thus, contacts between the two organizations continued. On May 31, 1981, IASC Chairman Burggraaff reported on a conversation he had had with FASB Chairman Don Kirk on May 13, 1981:
   [Regarding Accounting for Income Taxes] I suggested
   to constitute a working party, consisting of representatives
   of US, UK, and Dutch standard setting bodies,
   chaired by a representative of IASC to explore ... whether
   a common solution could be found. The fact that a
   joint approach to the treatment of foreign-currency-translation
   had proved to be productive, had led the
   Board of IASC to believe that a similar approach to the
   annoying problem of deferred taxation might contribute
   to international harmonization.

   Mr. Kirk pointed out that he was very much in favor
   of international harmonization. However, FASB had to
   adhere to its rules of due process, and he was not in a
   position to negociate [sic] international agreements.

   Mr. Kirk will let me know in due course whether FASB
   would be inclined to participate in a working party. (16)


Contacts continued on other levels as well. On May 21, 1981, Secretary Cook wrote Kirk that at a recent meeting the IASC Board agreed, at the discretion of the Chairman, to invite guests to attend Board meetings, and he invited him to the June 1981 meeting. He stated that Burggraaff would be happy to invite Kirk to speak if he chose to do so, even though guests would not normally be expected to participate in the discussions. Cook added, "You may like to know that a similar invitation is being sent to the European commission."

Kirk did attend. (17) On July 2, 1981, he wrote to Burggraaff to thank him for the invitation. Kirk commented, "I was most impressed with the Committee members and with the caliber of the discussion."

Further meetings followed. In January 1982 and November 1983, IASC representatives visited the FASB in Connecticut. The November IASC delegation consisted of Chairman Steve Elliott, Secretary-General Geoffrey Mitchell, and Paul Rosenfield, now Staff Observer for the US. The IASC file note of the meeting is instructive. First, the delegation met with Ralph Walters, FASB Member, and Jim Leisenring, FASB Director of Research and Technical Activities. Elliott indicated that it was IASC's wish that enterprises that traded internationally or whose securities were traded internationally would state that they complied with IASs. (18) Elliott indicated that it was unfortunate that the FASB was not part of the IASC Board. He asked if there was some way in which the two standard-setting organizations could "become closer."

Later that day, Elliott met with Kirk and invited him to attend a meeting of the IASC Board during 1984. Elliott raised the possibility of FASB becoming more closely involved in the work of IASC, perhaps through involvement in IASC's Consultative Group (19) Kirk expressed interest in this suggestion and agreed to discuss the matter further.

Near the end of his term, in December 1983, FASB Member Walters's remarks at a meeting of the FASB and the Arthur Andersen Public Review Board were reflective of the situation at the time. Walters observed that the FASB had no official role or relationship with the IASC. The AICPA represented the US because the IASC comprised national professional bodies. He observed, "The FASB's attitude toward the IASC has been a mixture of unofficial encouragement, moral support, and benign neglect." The FASB staff monitored IASC activities and reviewed and commented upon IASC exposure drafts. But the Board did not normally consider or take a position on IASC standards. Limited contact and liaison had occurred between the two groups, usually initiated by the IASC, whose chairman and secretary had visited the FASB a number of times. IASC had supplied representatives for FASB task forces on projects of strong common interest, such as foreign currency translation and income tax allocation. The FASB chairman had attended an IASC meeting in London in 1981. The vice chairman of the FASB is a member of an IASC steering committee on income tax allocation. "Overall, the FASB is aware of IASC activities and reacts positively to IASC's requests but does not take the initiative in the relationship," noted Walters. He continued:
   The absence of the most influential standard-setting
   body in the free world from the IASC is an anomaly. (20)
   From time to time, leadership of the IASC has considered
   whether the FASB should become a member. The
   FASB has not sought or encouraged consideration of
   membership on the IASC. The Board's Rules of Procedure
   would make it difficult if not impossible for it to
   assume a voting membership on the IASC board.


The position of the FASB toward other international bodies, such as the United Nations and the Organization for Economic Cooperation and Development, was to suggest they support the IASC and stay out of the standard-setting process. Walters observed, "International harmonization has a low priority at the FASB. The subject is not even mentioned in the statement of the FASB's mission.... It is inconceivable to me that the standard-setting body for the US will not become involved in establishing international standards." (21)

There were divisions within the FASB over participation with the IASC. This is reflected in FASB Chairman Donald J. Kirk's response to Walters. Kirk observed that because of legal requirements and American expectations, the FASB must concentrate on its mission to develop standards for entities that issue financial reports in accordance with GAAR With respect to direct participation by the FASB in the IASC, "that is not feasible under the IASC's present charter and the Board's own Rules of Procedure." Were those circumstances to change, it would be awkward for the FASB to participate in setting standards that inevitably would differ in important respects from FASB's own standards.

These were the formative years of both the FASB and the IASC. FASB had plenty to deal with domestically as its standards were criticized as too detailed and costly for small and mid-sized entities. (22) The IASC was busy establishing its international bona tides, introducing its initial standards, and measuring their impact. (23)

DEEPENING CONTACTS: THE NEXT TEN YEARS

In 1986, the Financial Accounting Foundation announced the appointment of Dennis R. Beresford as FASB Chairman. Among the experiences Beresford brought to the Board was service as US IASC representative, 1982-84. With Beresford's assumption of the Chairmanship, the FASB began to take a greater interest in international accounting matters.

Criticism of the IASC's many permissible alternative accounting treatments by members of the profession and national standard setters led to the launching of its Comparability/Improvements projects. At its March 1987 meeting, the IASC Board appointed a Steering Committee, chaired by Ralph Walters, now representing the AICPA on the IASC Board, to use the IASC Framework "to test the validity of alternative treatments and decide whether they are acceptable." This became the IASC's Comparability Project, and led to E 32, Comparability of Financial Statements [Kirsch, 2006, pp. 182-184].

On July 3, 1987, Walters spoke to Secretary-General David Cairns about a recent conversation he had had with FASB Chairman Beresford and Jim Leisenring about proposals for involving the FASB more in the work of the IASC. Among the proposals was one that "the FASB could appoint an observer to the IASC Board."

Before the World Congress of Accountants in Tokyo, October 11-15, 1987, the majority of the IASC Board did not take very seriously the possibility of inviting the FASB and the European Commission to serve as IASC observers. The non-US, non-UK members were quite conscious of the asymmetry of means and reputation between the FASB and the IASC at that time. For many IASC Board members, it would have been interpreted as giving too much influence to the US point of view. But those who favored the invitation were helped by the following: (1) the AICPA sent representatives to the IASC Board who held personal opinions that did not always coincide with GAAP; and (2) the European delegates, who had a blocking minority, kept referring to the [European Community's Accounting] Directives, (24) but held different national interpretations of them. "The situation was becoming embarrassing, as the exercise was not to invent, but to choose (or to offer options) between proven methods." (25)

At the Tokyo World Congress, outgoing IASC Chairman John L. Kirkpatrick and incoming Chairman Georges Barthes de Ruyter (Georges Barthes) (26) agreed that they would offer two observer seats to the FASB and the European Commission. "This was part of a very significant shift in policy lead by Georges Barthes. As soon as he became chairman, he emphasised the need for direct links between the IASC and important players: the FASB and the European Commission. He went to the FASB within two weeks of taking office." (27) Georges Barthes has observed:
   ... we knew it would be easy with the FASB and very
   difficult with the Commission. But, politically, it had to
   be simultaneous. If not, the general feeling would have
   been that the IASC would become the international
   subsidiary of the FASB. Think of the difference of technical
   means between the two organisations! And it was
   already obvious that Europe would be a better "market
   opportunity," at first, than the US. So the move was delayed
   by the incapacity of the Commission to decide ... (28)


On October 26, 1987, Georges Barthes and David Cairns visited the FASB "in order to find ways of establishing a permanent link between the FASB and IASC." Cairns minutes indicated: Georges Barthes observed that he would like to involve both the FASB and the EC more directly and permanently in the work of IASC. Beresford supported the idea of involvement in the Consultative Group and suggested that it might be more cost effective for such a FASB person to stay on as an observer to the Board meetings. Involvement in IASC Steering Committees was also discussed. Ways of increasing IASC involvement in the work of the FASB were considered including IASC taking part in FASB task forces and making nominations to the Financial Accounting Standards Advisory Committee (FASAC). (29)

On March 11, 1988, Cairns visited the FASB for discussions regarding invitations to the Consultative Group, national standard-setter meetings, and IASC's Comparability Project. Cairns's notes indicate that he "confirmed that the Board would not decide until June 1988 whether to extend a formal invitation to the FASB [and the European Commission] to join the Consultative Group"; that the meeting participants thought that it was particularly appropriate that a national standard-setters meeting consider "the experience of standard-setting bodies with conceptual frameworks"; and that a general discussion took place on various technical aspects of IASC's Comparability Project, including pooling (uniting) of interests, investments, and joint ventures.

In the June 27, 1988, issue of Status Report, Beresford set forth his view of the role the FASB might take in achieving accounting standards responsive to the needs of a global marketplace. (30) Regarding the term harmonization, Beresford observed that it should not be seen as "a search for commonality at the price of settling on the lowest common denominator ... [T]he FASB would support an objective that seeks to create superior international standards that would then gradually supplant national standards as the superior standards became universally accepted." Beresford identified a number of obstacles that needed to be overcome for international accounting standards to be widely accepted: (1) the differing national objectives of financial reporting; (2) the wide spectrum of national standard-setting structures from predominantly government-set to predominantly private-sector standards; (3) nationalism; and (4) the particular economic, political, and social priorities of various nations. After acknowledging the criticisms of the FASB's attitude toward IASs (variously described by others as "benign neglect," "uninterested," "uncooperative," and "less than enthusiastic"), Beresford identified a number of actions that should help the FASB become more directly involved in improving international accounting standards. The FASB's near-term international initiative included: (1) willingness to join the IASC Consultative Group; (2) expansion and strengthening relationships with national standard-setting bodies; (3) more systematic analysis of international accounting literature in connection with major FASB projects; (4) solicitation of more commentary on FASB exposure drafts from an international perspective; (5) discussion with IASC leadership on holding an international conference of national standard setters on accounting conceptual frameworks; and (6) seeking accountants with foreign experience to join the FASB staff. Beresford commented, "Injecting an international perspective into [the FASB's due] process can help make the FASB a constructive player in the quest for superior international standards that are universally accepted." He concluded, "International standards are not likely to be our highest priority for the foreseeable future but they will be a factor in our regular process. Their priority will rise as constituent needs increase...." (31)

On August 1, 1988, IASC Chairman Georges Barthes extended an invitation to Beresford to join the IASC Consultative Group. Sagely, he observed:
   The Board is well aware that improvements in International
   Accounting Standards cannot be separated from
   developments in national requirements. Closer working
   relationships between IASC and national standard-setting
   bodies will help increase the likelihood that different
   national standard-setting bodies reach the same
   solution to the same issues. Such a position is, without
   doubt, the best basis for International Accounting Standards.
   (32)


George Barthes noted the Board had decided to review its policy on the attendance of observers (notably, members from the Consultative Group) at Board meetings. Thus, he could not confirm whether the FASB representative would be able to attend part of the Board meetings on a regular basis.

Ten days later, Beresford responded to Georges Barthes's letter, "I believe we should defer a decision on accepting the invitation until you have concluded your discussions regarding attendance of observers at Board meetings." Noting that the FASB had to carefully consider costs and would have difficulty justifying sending someone to a one-day meeting overseas, he observed that "a major objective of our participation is to hear the discussion of the projects by the Board members themselves." (33)

Ultimately, on September 12, 1988, Georges Barthes wrote Beresford to extend the invitation for the FASB to attend Board meetings as well as Consultative Group meetings. In addition, he noted that a similar invitation had been extended to the European Commission. On September 27, Beresford accepted the IASC's invitation. FASB Board member James Leisenring was the initial appointee as FASB observer. World Accounting Report (October 1988) greeted FASB's acceptance of IASC Consultative Group Membership as "a major development indicating a move away from its previous insular perspective."

THE FASB SEEKS TO INVOLVE THE IASC

Rather quickly after accepting the IASC's invitation, the FASB sought to involve the IASC in its own projects. Thus, less than a month later, on October 21, 1988, Beresford wrote Georges Barthes asking him to nominate someone who could lend an international perspective to the FASB'S task force looking into recognition and measurement phases of its project on Financial Instruments and Off-Balance Sheet Financing.

The FASB continued to press the IASC to hold a conference of national standard-setters on Conceptual Frameworks. (34) In conjunction with the 1990 United Nations meeting, (35) the FASB agreed to a formal IASC visit at which the IASC would report on what its Board intended for its Exposure Draft on Comparability (E32).

At the July 25, 1989, Financial Accounting Standards Advisory Committee meeting, E32 featured prominently in the discussions. In his notes on the meeting, David Cairns reported that among the issues were the question of implementation and the need for compromises that would not result in the weakening of national standards. Noting that IASs were well above the lowest common denominator, Cairns emphasized the important role national standard-setting bodies could play in IASC and the need for change in IASC itself. Further, he stressed that the comparability project was part of a wider improvements project that IASC was carrying out. (36)

In early 1991, the FASB's Financial Accounting Foundation (FAF) asked the FASB Board to prepare a strategic plan for FASB international activities. On March 5, David Mosso, former two-term Board member and current FASB senior staff person, faxed Arthur Wyatt, IASC Chairman, a copy of the draft strategic plan for his review. In his thoughtful comments welcoming FASB's development of a strategic plan for international involvement, Wyatt, an American and former FASB member, 1985-87, observed:
   ... I believe that the ultimate resolution of the standard-setting
   dilemma internationally will not lie in the hands
   of the standard setters, but will lie in the hands of the
   regulators....

   ... I believe that [the FASB] has gone too far in [the]
   direction [of the detailed rules approach] and that the
   most significant responsibility for fair financial presentations
   must rest with preparers and auditors. If such a
   development were to take place, accounting standards
   would have to be more flexible than they are in the
   United States and thus be somewhat more like those
   we find in many other countries. Greater flexibility, of
   course, poses real problems for regulators, but in my
   view the direction in which we have been moving in
   the United States is doomed to failure. There simply
   isn't any way for the FASB, or any other private sector
   standard-setting body, to bear the responsibility that is
   properly borne by those who prepare financial statements
   and those who audit them. (37)


Wyatt concluded that the IASC appeared to be a structure that had promise for achieving improvements over a shorter time span than other alternatives one could develop.

On March 12, 1991, Cairns met with FASB's Jim Leisenring, David Mosso, and Jeannot Blanchet (the person with international experience that the FASB recruited to deal with international matters) (38) to discuss FASB's draft strategic plan. Among the items discussed were FASB/IASC cooperation on earnings per share (EPS) and business combinations, annual meetings of national standard setters, and the effectiveness of FASB involvement in IASC's Consultative Group. Cairns's notes (39) record that "DHC [Cairns] recognized problem. Added that reconsidering role of Consultative Group--may need to move away from focus on IASC Board's current agenda." Subsequently, Cairns noted, "My acknowledgement of problems with consultative group meetings was a general concern that the IASC was not getting the sort of input it wanted from the consultative group." (40)

In August 1991, the FASB published its plan for international activities in its Status Report. (41) Paragraph 3 gave the two assumptions upon which the plan was based: domestic financial reporting needs would continue to be the FASB's first priority, and its international activities would be conducted within its charter and mission statement. Paragraph 4 reiterated the FASB's position that "[t]he ultimate goal ... would be a body of superior international accounting standards that were accepted in all countries as GAAP for general purpose external financial statements." Paragraph 5 laid out the principal goals of the FASB's international strategy: (1) "[t]o make financial statements more useful for investor and creditor decision making by increasing the international comparability of accounting standards concurrently with improving the quality of accounting standards"; and (2) "[t]o enhance the FASB's standard-setting process, and resulting standards, by gaining new insights and ideas from other national and international standard setters and from financial statement users, preparers, auditors and educators in other countries."

In paragraph 6, the FASB outlined the standard-setting efforts it would take to achieve these goals, including: (a) consideration of foreign national and IASC standards in domestically oriented FASB projects; (b) engagement in joint multinational standards-setting projects on mutually selected topics; (c) considering the adoption of foreign national or IASC standards judged to be superior to their US counterparts; (d) convincing other countries, or the IASC, to adopt specific US standards judged to be superior; (e) attempting to reach agreement on a choice of existing standards to which neither US standards nor other national or IASC standards were demonstrably superior; and (f) continuing to encourage equality of financial statement requirements for foreign and domestic companies in their utilization of US capital markets.

Paragraph 9 laid out the FASB's near-term focus: (1) cooperate with IASC, Canada, and other national standard setters in the consideration of accounting for financial instruments; (2) participate in an international conference on a common framework of accounting concepts; (3) review the differences between US standards and those of the IASC and other major countries; (4) identify a project with promise for reaching quickly broad international agreement, such as determining the EPS denominator; and (5) consider adopting IAS 20, Accounting for Government Grants. (42) World Accounting Report [October 1991, p. 1] greeted the plan by noting that "the FASB is set to become a major player in international harmonization, after 20 years of only occasional flirtations" with non-US standard setters and the IASC.

In the June 30, 1992, issue of FASB Status Report, Beresford recounted the progress the FASB had made in the implementation of its plan and its internationalization efforts. The FASB had amended its mission statement to add an international dimension, nearly a decade after former Board member Walters had commented upon it. It had formed an informal advisory group to advise it on international matters, and, over the previous two years, had systematically given more attention to the accounting and research studies of other countries. It supported the IASC in its efforts to harmonize accounting internationally, had sent detailed comment letters on various IASC Exposure Drafts, and had offered its assistance to the IASC on its agenda projects, such as earnings per share. In terms of its relations with other countries, Beresford reported that the FASB supported the "mutual recognition" thrust of the SEC, especially with respect to Canada and the United Kingdom. In addition, it had invited the representatives of selected countries to attend a meeting at its offices following the October 1992 World Congress of Accountants in Washington, D.C. (43)

Forty participants attended the two-day conference. (44) Among them were: David Cairns, IASC Secretary-General; Eiichi Shiratori, incoming IASC Chairman; Edouard Salustro, President of the Federation des Experts Comptable Europeens (FEE); John Hegarty, FEE Secretary-General; Karel Van Hulle, European Commission; and standard setters from Australia, Germany, Japan, and the United Kingdom. Items discussed included a review of the Brussels Conference on the need for a common conceptual framework, country-by-country reviews, cooperative efforts to improve accounting standards, and future meetings. (45)

On May 4, 1993, FASB Chairman Beresford and Canadian Accounting Standards Board (AcSB) Chairman Paul Palmer sent a joint letter to IASC Chairman Eiichi Shiratori to suggest that the IASC's recent decision to reconsider IAS 14, Business Segments, presented "an excellent opportunity" for the staffs of the IASC, FASB and AcSB "to share information and insights on the issues that will be addressed as these projects unfold." As a consequence of this cooperation, the IASC's revised IAS 14 (1997) was more similar to the FASB's original business segments standard than the revised FAS 131. (46) There would be future cases in which, despite collaboration, the FASB and international standard setters would arrive at different approaches.

In December 1994, Beresford reported that the FASB had undertaken an evaluation of its Strategic Plan for international activities, and had essentially reaffirmed it with some revisions. He noted that in the original plan the FASB had listed as one of its focal points "to encourage the equality of financial statement requirements for foreign and domestic companies in their utilization of US capital markets." In the revised plan, this became a specific objective, rather than a broad area of interest. Beresford acknowledged that the movement toward international comparability should be comprehensive and that "the FASB should, where possible, contribute to the process at all levels." He reported further that the FASB had revised the premise that domestic financial reporting needs would continue to be its first priority and that of other national standard setters. In light of its experience, the FASB concluded that its obligation to its domestic constituents demanded "that it attempt to narrow the range of difference between US and foreign standards," working with other standard setters around the world "to the extent necessary to achieve greater comparability. (47)

THE IASC/IOSCO CORE STANDARDS PROGRAM (48)

As noted above, the IASC had been criticized for years for standards that were said to approach the lowest common denominator. The first attempt to address such criticism, its Comparability/Improvements projects, had met with only limited success.

In the course of IASC's history, one of its most important external relationships was that with the International Organization of Securities Commissions (IOSCO). The relationship had begun in 1986, and a close liaison had developed during the Comparability/Improvements projects (1987-1994). With the passage of time, each organization devoted more and more time and resources to advancing their common cause: the issuance by IASC and endorsement by IOSCO of a core set of IASs that could be employed to prepare the necessary financial reports for cross-border listing of corporate securities. When the completion of the Comparability/Improvements projects in 1993 did not result in IOSCO endorsement, the executive officers and Board of IASC had been collectively very disappointed, and relations between IOSCO and IASC Chairman Shiratori became strained. (49)

There was clear evidence that the FASB was critical of aspects of the IASC's approach to meeting IOSCO's requirements in terms of both technical content and due process [Camfferman and Zeff, 2007, pp. 338-340]. During Cairns's time as Secretary-General, there was tension between the views of the IOSCO representatives on the Improvements Project and the comments of the FASB. His last two years saw evidence of tensions between the position of the FASB and that of the US Board representatives on financial instruments. Cairns recalled occasions "on which the FASB observers openly criticised US [Board] representatives for supporting certain positions." (50)

On July 5, 1995, the newly appointed IASC Secretary General, Sir Bryan Carsberg, informed Shiratori that IOSCO had responded with enthusiasm to the IASC's draft revised work program, and that IOSCO had prepared a draft press release stating that the proposed wording seemed "very helpful." As a result, on July 9 the Board of the IASC and the Technical Committee of IOSCO issued the following joint press release:
   The [IASC] Board has developed a work plan that the
   [IOSCO] Technical Committee agrees will result, upon
   successful completion, in IAS comprising a comprehensive
   core set of standards. Completion of comprehensive
   core standards that are acceptable to the Technical
   Committee will allow the Technical Committee to recommend
   endorsement of IAS for cross border capital
   raising and listing purposes in all global markets. IOSCO
   has already endorsed IAS 7, Cash Flow Statements,
   and has indicated to the IASC that 14 of the existing
   International Accounting Standards do not require additional
   improvement, providing that the other core
   standards are successfully completed.


The press release was greeted with a measure of caution by IASC. The October 30, 1995, minutes of the Executive Committee reported that the wording of the agreement with IOSCO was such that IOSCO would not have to make a firm commitment to endorse IASs even after satisfactory completion of IASC's work program. Nevertheless, the general view was that it would be difficult for IOSCO not to endorse international standards upon successful completion of the IASC work program because of the way IOSCO had raised public expectations. As Martinez-Diaz [2005, p.11] has noted, "it was widely understood that the rejection of [the Core Standards] by the IOSCO--and by its most powerful member, the SEC--would severely limit the future of IASC standards."

While far from perfect, the IASC/IOSCO press release would be referred to by both organizations in the years ahead as proof of their good intentions and as a rationale for the steps they would take. It would prove to be a defining document in their long-running collaboration. (51)

There was division within IOSCO about the course it should take. Should it endorse the IASC's standard-setting process, or should it endorse standards one by one? Should it demand the completion of the whole body of minimum International Accounting Standards? And, should it insist upon the establishment of an IASC interpretation mechanism?

On July 12, 1995, three days following issuance of the IASC/ IOSCO joint press release announcing the Core Standards Program, and shortly before the FASB notified the SEC of its intention to undertake a comparative study of US and IASC Standards, FASB Chairman Beresford sent Carsberg a copy of a draft of a letter to the SEC for his review and comment. In the draft letter, Beresford noted that "[t]he IASC improvements project has narrowed the range of differences from US GAAP, but many differences remain, even in the newly adopted standards." (52) On July 20, Carsberg responded that he hoped the IASC could be involved in the project "by seeing drafts at an early stage and having the opportunity to comment on them," and that he would like to see the findings feed into mutual efforts to eliminate or at least narrow the differences. Once the FASB comparison project was completed, Carsberg wrote Beresford, "our standards are being revised [in connection with the Core Standards Program] and we shall certainly be considering your catalogue of differing requirements in making decisions about our revisions." (53)

In an April 11, 1996, press release, the SEC indicated that it supported the IASC's objective "to develop ... accounting standards that could be used for preparing financial statements used in cross-border offerings." It noted that there were three key elements to the IASC's program and the SEC's acceptance of the results: (1) a core set of comprehensive, generally accepted accounting pronouncements; (2) high quality standards resulting in comparability, transparency, and full disclosure; and (3) rigorously interpreted and applied standards. Once the IASC had completed its Core Standards Project, fulfilling these key elements, it was the Commission's intention "to consider allowing the utilization of the resulting standards by foreign issuers offering securities in the US." Thus, the SEC did not agree automatically to accept the IASC's core body of standards, but expressed its "intention to consider" them [Kitsch 2006, p. 301].

IASC and IOSCO progress on the Core Standards Programme presented interesting challenges to the SEC (the strongest IOSCO member) and the FASB. They were confronted with deciding whether and how the SEC should endorse IASs, as well as contemplating the role of the FASB following that endorsement. On March 27, 1997, FASB Chairman Beresford minuted a recent Financial Accounting Foundation (FAF) meeting with the SEC. Those minutes make it clear that in early 1997 SEC Chairman Levitt was unsure which position the Commission should take in endorsing IASC's core standards, an incremental approach or a total package approach. It is also clear that Levitt was interested in preserving the FASB as a standard setter while supporting the internationalization of accounting standards, that the FAF and the FASB were interested in seeing the IASC improve all its standards, and that there was dissatisfaction with some public statements made by IASC's leaders.

In February 2000, the SEC issued Concept Release: International Accounting Standards (54) to request input on "whether the IASC standards: 1. constitute a comprehensive, generally accepted basis of accounting; 2. are of high quality; and 3. can be rigorously interpreted and applied." The SEC received 93 comment letters ranging from statements indicating that IASs were principles of high quality requiring no reconciliation to GAAP to the opposite extreme that they were of lesser quality requiring full reconciliation. US commentators generally fell into the GAAP rule-based/reconciliation group; non-US commentators more often fell into the principles-based group. (55)

Following analysis of the comment letters received in connection with the concept release, the SEC continued to monitor international accounting standard-setting developments. There was a change in the Commission's leadership following the SEC's receipt and analysis of its February 2000 Concept Release. Arthur Levitt departed and was replaced by Harvey Pitt, who was shortly replaced by Christopher Cox. The SEC's position on IASs was in limbo for quite a while. Finally, in October 2002 the SEC supported the FASB/IASB Norwalk Agreement formalizing their commitment to the convergence of GAAP and international accounting standards (see below).

THE G4+1 (56)

In the early 1990s, a powerful grouping had come into operation: the G4+1. Sir David Tweedie, IASB Chairman, recalled that it "started accidentally" when, in his capacity as Chairman of the UK's Accounting Standards Board, he had a meeting with FASB Chairman Beresford in which the two of them agreed it would be a good idea to set up a joint group. Street [2005, p. 10] described the meeting as occurring at the FASB's Norwalk office in 1992; John Denman, Accounting Standards Director of Canada's Accounting Standards Board (AcSB), joined the discussion and the three agreed to work together--hence, in Tweedie's view, taking the first step in the development of the "Group of 4." Originally, the standard setters of Australia, Canada, the United Kingdom, and the United States (the G4) sent representatives, (57) and IASC members were invited to participate as observers (G4+1). The group met several times each year and progressed from background studies to "position papers" that could have been used to prepare exposure drafts. Turf wars developed as both IASC and some G4 representatives entertained global accounting visions. Some G4 members began to ponder possible alternatives to IASC. Among those considered were G4, an expanded G4, or an expanded FASB [WAR, May 1996, p. 1].

IASC Chairman Michael Sharpe (1995-97) and Secretary-General Carsberg, recognizing the way the wind was blowing, advocated restructuring the IASC so that it would become a quality international accounting standards setter. They succeeded in convincing the IASC to appoint the Strategy Working Party (SWP). Once that was formed, the agenda of G4+1 meetings included a discussion of IASC's restructuring [Street 2005, pp. 65-67].

For its part, the IASC was closely interested in the work of the G4+1 from its beginning in early 1993, following the discussions at the FASB in 1992. (58) On January 30, 1996, Members of the Executive Committee discussed the role of G4+1 and its relationship with IASC. Carsberg saw it "as an important challenge in communication to build up relationships with standard setters in other countries so that the G4 countries would not be seen as excessively influential." (59)

The Executive Committee meeting minutes show a continual interest in the G4+1, including its work on financial instruments, (60) pooling accounting, (61) performance reporting, (62) and share-based payments. (63) The IASC participated in G4+1 discussions, issued G4+1 discussion papers with its own wraparound covers, (64) and re-opened existing standards or initiated new ones. Michael Sharpe has noted that the G4+1 was very helpful to the IASC. There was a risk, however, that unless the IASC got its own act together, G4+1 could develop a life of its own. (65)
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Title Annotation:p. 1-27
Author:Kirsch, Robert J.
Publication:Accounting Historians Journal
Article Type:Report
Geographic Code:1USA
Date:Jun 1, 2012
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