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The growing importance of international accounting standards; Arthur R. Wyatt, chairman of the International Accounting Standards Committee, heralds international harmonization.

PETER D. FLEMING is a senior editor of the Journal.

Mr. Fleming is an employee of the American Institute of CPAs, and his views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.

Arthur R. Wyatt, chairman of the International Accounting Standards Committee, heralds international harmonization.

Prepared in accordance with international accounting standards." While this phrase is not commonly found on the financial statements of U.S. companies, it's likely to become increasingly prevalent in the next decade. So predicts Arthur R. Wyatt, chairman of the International Accounting Standards Committee (IASC), an entity headquartered in London and charged with promulgating international accounting rules and regulations.

Wyatt is a partner of Arthur Andersen & Co. in Chicago. He brings to the IASC 25 years of experience in public accounting, 3 years as a member of the Financial Accounting Standards Board in the mid-1980s and 15 years as professor of accountancy at the University of Illinois, where he earned a Phd. Wyatt has completed half of his term as chairman of the international standard-setting body; the remaining 15 months promise to be busy for him as work is completed on several important projects.

STRUCTURE OF IASC

The IASC is composed of representatives of 106 professional accounting bodies in 79 countries. Governed by a 14-member board comprising representatives from 13 countries plus the International Federation of Financial Analysts, the IASC has responsibility for issuing international accounting standards. Other areas of interest to the profession, including auditing, ethical, educational and public sector standards, are handled by the International Federation of Accountants (IFAC), which has the same membership.

The IASC was begun in 1973 as an outgrowth of an effort by Canada, the United Kingdom and the United States to develop international accounting standards. IFAC was established in 1977 when it was determined the IASC didn't have the expertise to deal with broader professional issues. The two organizations work closely together, although they are operated and funded separately.

SIGNIFICANCE OF INERNATIONAL STANDARDS

Who in the United States should be interested in the activities of the IASC? Wyatt says in the short run there are two audiences he would like to reach: accounting firms servicing multinational companies and the financial executives of those companies. "Longer term," Wyatt says, "our audience is the broader base of practitioners, because it's possible U.S. accounting standards will be altered based on international standards." But he thinks that's not likely to happen in the next decade.

To understand the significance of IASC pronouncements it's necessary to understand how the decision to issue standards is made. According to Wyatt, 75% of the 14 voting members of the board must agree before the IASC can issue a statement. Wyatt says it's often difficult to get the required vote,

particularly since members come from different cultures and legal systems. In the past, to avoid problems, most IASC statements would have two acceptable alternatives. "If you could get agreement on two alternatives," Wyatt says, you could capture the 11 required votes and eliminate some of the less-used practices." Wyatt maintains it's "not much of a standard if you have two alternatives, but it's better than having six."

To date, the 31 standards issued by the IASC include most of the issues already embodied in opinions of the American Institute of CPAs Accounting Principles Board and in FASB statements. To the extent the IASC has addressed issues the United States also has addressed, the U.S. conclusions represent one of the two alternatives. As a result, according to Wyatt, the issuance of international standards has had virtually no impact on U.S. practice. And although most don't do so, almost any U.S. company could say their financial statements were prepared in accordance with international accounting standards.

This is in sharp contrast, Wyatt points out, to other countries, such as those in the Third World, where professional societies have decided to use IASC standards as their own rather than incur the cost of maintaining a standard-setting body. In yet other countries, including many in Europe, some IASC standards have been significant because they eliminated a commonly used alternative. This hasn't happened in the United States-yet.

IASC IMPROVEMENTS PROJECT

In 1988, the IASC began a project to eliminate a significant number of the alternatives in its existing standards. Originally known as the comparability project, it has evolved and been renamed the improvements project. Wyatt says if the project goes as expected, there will be a handful of generally accepted U.S. practices that will no longer be acceptable internationally.

While the improvements and comparability projects are essentially the same, Wyatt says, "not only are we going to eliminate the alternatives proposed in the comparability project but we also are going to redraft our standards and improve them."

This will be done by

* Providing additional guidance beyond that in the original standard.

* Looking at disclosure requirements to see if they include all necessary rules or if any can be eliminated.

Wyatt says the changes resulting from the improvements project are targeted for a vote in October 1992. Then, only half a dozen areas will remain where there are still alternatives, and a new project might be undertaken in a few years to see if some of those could be resolved as well. Wyatt says, "In the United States, we've lived with a number of approved methods in areas such as inventory or depreciation; it's likely some alternatives will persist internationally as well."

What will happen if the IASC adopts standards contrary to those existing in the United States? Wyatt says the AICPA and its counterparts in other countries have agreed in writing to use their "best efforts" to have the standard-setting bodies in their countries move toward international standards. It's not clear, however, what best efforts include. Down the road, Wyatt says, the AICPA is facing the challenge of what it can do to encourage the FASB to adopt international standards.

ADVANTAGE OF INTERNATIONAL STANDARDS

According to Wyatt, part of the impetus for reducing the range of acceptable accounting alternatives is the increase in cross-border financing. Around the world, those with capital to lend make their lending decisions based, at least in part, on financial statements. To the extent such statements are developed using concepts or standards different from those in the lender's country, the result is likely to be "confusion, uncertainty or inefficiency. " Poor lending decisions, high fees or increased interest rates also can result.

Heightened awareness of these accounting differences, combined with a growing ability to obtain capital anywhere in the world, has led to "renewed pressure to reduce the range of alternatives and make the process work more efficiently." Wyatt says the changes will be significant for multinational companies first, because they are the ones with cross-border financing needs.

Another group with what Wyatt calls a "built-in desire to reduce the number of acceptable alternatives" because it facilitates meeting their responsibilities is the International Organization of Securities Commissions (IOSCO). The U.S. member is the Securities and Exchange Commission; in other countries, members are either the securities regulators or the stock exchanges. (For more on the role of securities regulators in the harmonization of international accounting standards, see the Worth Repeating department on page 108.)

According to Wyatt, IOSCO has encouraged the IASC in its improvements project. If the IASC can do a quality job" in reducing alternatives, IOSCO would move to have securities regulators in member countries require that financial statements prepared by companies wishing to raise capital in those countries be in accordance with or reconciled to international accounting standards. This would mean, for example, a company wishing to raise capital in Frankfurt would follow international standards regardless of the company's origins.

Such a change would be particularly important in the United States. The SEC currently requires any non-U.S. company desiring to raise capital here to file financial statements in accordance with or reconciled to U. S. generally accepted accounting principles. Wyatt says to his knowledge there is no other country in the world where securities regulators have a similar requirement. This has discouraged non-U.S. companies from raising capital here.

Companies that do decide to raise capital in the United States face two significant expenses: the accounting costs of restating or reconciling financial statements to U.S. GAAP to meet SEC requirements and the legal costs of meeting other SEC filing requirements. These often onerous requirements have diminished the ability of the United States to compete as a capital market, according to Wyatt, and "to the extent these costs arise when explicit interest rates are the same in different countries, a company may elect to go to London, Amsterdam or Zurich, where the same costs don't exist and the company can get the money at the same rate."

These circumstances make it desirable for the SEC to find a way to resolve this dilemma. One alternative is to adopt international accounting standards for U.S. reporting requirements and to get the SEC'S counterparts in other countries to do the same, thereby creating a level playing field. This means, Wyatt says, what the IASC is doing is more important for the United States than for any other single country.

Why? If the IASC successfully completes the improvements project, more multinational companies raising capital abroad will adopt international accounting standards. As people become more comfortable with these standards, Wyatt predicts entities such as the FASB and the AICPA will find it easier to adopt these changes, because there will be less of the usual opposition to change. Wyatt emphasizes, however, that he is speaking of a 10- to 20-year period.

ISAC FINANCIAL INSTRUMENT PROJECT

The IASC also has undertaken a financial instruments project that will deal with distinctions between debt and equity, criteria for recognition and derecognition, valuation of instruments and necessary disclosures in a single standard. The project results could have a significant impact on U.S. accounting practices. If this is completed on schedule, it will be the first guidance the IASC has issued in advance of a national standard-setting body. Wyatt says it's "not a trend for the future" but merely a case of the IASC recognizing a problem and electing to deal with it. Wyatt believes, "Because of the nature of our standards, it may well be we will be able to issue a comprehensive standard before any individual standard-setting body."

Wyatt says there likely will be only limited instances in the future when the IASC will be the leader, because most of the accounting issues already have been dealt with by national standard-setting bodies. He says it's easier for the IASC to handle issues such as the financial instruments project than deal with other problem areas, because when no previously issued standards exist in an area, the IASC doesn't have to worry about the "excess baggage" associated with existing national standards.

EUROPE 1992

Wyatt isn't certain if the changes due to take place in the European Community (EC) in 1992 will lead to increased significance for international accounting standards. In fact, he doesn't think anything dramatic is going to happen in 1992 itself; much of what is dramatic has already happened or has been agreed to," he says. European countries already have reduced a significant number of barriers, he points out, and he expects obstacles will continue to fall in the years ahead.

According to Wyatt, future progress in reducing barriers between the EC countries "will be the result of a heightened sense of cooperation and awareness that working together is a way to improve their lot." It seems logical to Wyatt that if this attitude prevails, it also will continue to affect accountants. He thinks the IASC already has been the beneficiary of this spirit of cooperation in Europe and predicts it will continue rather than diminish. And, even though the IASC is only a "bit player," Wyatt believes what they are doing, particularly in the improvements project, fits the "Europe 1992" mode. "To the extent we can cooperate, we all can prosper."

KEEPING UP With INTERNATIONAL STANDARDS

Wyatt believes that as changes in international accounting standards become more important in the United States, CPAs will need to understand and keep pace with those changes. Few seminars or other continuing education materials are available now on the subject. While Wyatt says it's probably a little early for training materials, he predicts a marked increase in awareness of international standards and the eventual development of appropriate training materials by the IASC, the AICPA and others.

What are the benefits of keeping up with the changes in international accounting standards? Over a period of years, Wyatt predicts even small firms are likely to have clients that wish to raise capital outside the United States. "If the CPA has a knowledge base that can assist in the mechanics of this process, he or she will be providing an important service."

MAKING STANDARDS WORK

Wyatt had had no real international involvement before being designated the AICPA representative to the IASC at the beginning of 1989, and he says his tenure has been "without question the most fascinating experience of my career."

What will Wyatt take away from the experience? He says the IASC'S success will have demonstrated "people from diverse cultures can reach agreement on accounting matters, and we will have developed an atmosphere in which practicing professionals will recognize each has a responsibility see the standards work the way they intended. "

Not everyone agrees on the need for standards. Wyatt says he's "troubled by the atmosphere that has evolved in the United States over the last 25 years where the game seems to be to beat the standard setters." But he believes the IASC can help, pointing out that it "is not structured to develop detailed rules. If the IASC can come up with a body of standards that really are standards and not detailed rules and does so in a professionally responsible way, we may be able to reverse the trend that has developed in the United States."

Wyatt says the United States particularly believes everything it does or ever has done is right. "Most of the advice I get from my colleagues in the United States is to fight for the conclusions we have reached--our way." But Wyatt's experience has exposed him to other perspectives. "We have to be willing to concede on some issues if we expect others to do the same." He says the dynamics of the process are difficult to envision if you haven't participated, but the bottom line is we must be willing to concede some existing U.S. practices aren't supportable worldwide.

THE TIME IS RIGHT

Wyatt believes "the time is right for what the IASC is trying to do." As the IASC moves forward in its efforts to limit the number of acceptable accounting alternatives, U.S. CPAs must "have a willingness to listen to the rationale" behind the changes. "You may not be persuaded," Wyatt says, "but understanding why may temper your criticism." He believes working together "we can make progress." N
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Author:Fleming, Peter D.
Publication:Journal of Accountancy
Date:Sep 1, 1991
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