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Wake-up call to American business: international accounting standards are on the way.

Many public accountants and members of the investment community believe the world is ready for a single set of international accounting standards. Those who support worldwide accounting standards do so because they believe businesses are moving toward a global economy. The movement, they contend, will transform how business is conducted and, in turn, how transactions are accounted for and reported on a global basis. The linkage of worldwide capital markets is one of the driving forces behind the movement toward a single set of accounting rules.

How much of the above is fact and how much is wishful thinking? Will international accounting standards ever be acceptable in the United States for cross-border securities offerings?

In spite of all the talk about dynamic change, the American business community does not appear to believe that accounting rules ever will be standardized on a global basis. Most have the attitude the United States has the best accounting standards and disclosure requirements in the world; therefore, the United States will never lower its standards to accommodate the rest of the world. As a result, U.S. businesses have not paid much attention to the activities of the International Accounting Standards Committee (IASC), the London based group responsible for developing international accounting standards


This article suggests U.S. businesses should begin to change their perceptions and recognize the rest of the world is considering accepting lASs for cross-border securities offerings. If this happens, U.S. businesses will be at a competitive disadvantage if they do not also adopt the same accounting rules. Accordingly, U.S. companies should become familiar with the IASC's proposals; otherwise, IASs will be finalized without the appropriate consideration of the majority views and opinions of the United States.


The IASC, which comprises the professional accountancy bodies of over 75 countries (including the American Institute of CPAs), has been in existence for almost 20 years. During those two decades it has issued 31 lASs through a due process involving the worldwide accountancy profession, the preparers and users of financial statements and the national standard-setting bodies.

Despite the IASC's history, few American companies have paid much attention to its activities. This is primarily because of the following:

* IASs are not accepted under U.S. generally accepted accounting principles.

* The Securities and Exchange Commission does not accept securities offerings prepared in accordance with IASs.

Since additional resources are necessary to become familiar with proposed IASs and there is no immediate payback for committing those resources, U.S. businesses generally have ignored the IASC proposals. Even U.S. CPAs seem to doubt that non-U.S. accounting rules will ever be accepted by the SEC, the Financial Accounting Standards Board or other standard setters throughout the world. It is worth noting, however, that the London and Hong Kong stock exchanges allow foreign issuers to comply with their listing requirements by presenting financial statements prepared using IASs.

Doubt about the acceptability of IASs in the United States may have been justified in the past because of the limited acceptability of the IASC's rules worldwide. However, increased competition in international capital markets and local markets' efforts to attract additional capital put the IASC in a position to move its accounting standards to the next level of international acceptance.


The acceptability of the IASC's accounting rules eventually will be determined by the International Organization of Securities Commissions (IOSCO) as well as the individual securities commissions making up IOSCO. IOSCO has over 60 securities regulatory agencies around the world as members, including the SEC.

IOSCO sees facilitating cross-border securities offerings and multiple listings without compromising the presentation of financial statement information as one of its major objectives. It recognizes differences among countries in financial accounting and reporting are a primary impediment to the free flow of capital. Securities issuers in a foreign market pay a premium for preparing their financial statements using different accounting standards. IOSCO, as well as other groups and individuals, want to improve access to foreign capital by international-class issuers.

There are two approaches to facilitating cross-border securities offerings.

* Mutual agreements. Mutual agreements between specific countries (sometimes called bilateral agreements) are agreements by two countries' securities or government officials to accept domestically prepared financial statements when raising capital in each other's country. While these agreements make life easier for securities regulators, they do not help investors and creditors, who still must deal with financial statements prepared in accordance with different accounting rules, with the attendant risks and uncertainties.

* Professional initiatives. Many believe a quality body of international accounting standards--having relatively few acceptable alternatives and requiring disclosure of information investors and creditors reasonably need to make investment decisions-should be developed through a collaborative effort of many countries' accounting professions. Once the standards are accepted, the risks and uncertainties associated with financial data prepared under different accounting rules will diminish and cross-border capital can be raised more efficiently. The IASC has been concentrating on this approach in the past four years, with the expectation the first major step eliminating a large number of previously acceptable alternatives--will be accomplished by the end of 1993.

The link between IOSCO and the IASC is quite simple: IOSCO representatives have said IOSCO will consider the acceptability of IASs once the IASC completes its specified work program. That program includes the comparability-improvements project begun in 1989 with the issuance of an exposure draft proposing to eliminate numerous accounting alternatives allowed by existing IASs.

As noted earlier, the U.S. business community has generally not responded to the IASC accounting proposals. When the IASC issued its comparability-improvements exposure draft in 1989, over 160 respondents sent written comments. Of those responses, only 10 were from U.S. corporations. (The AICPA, the Institute of Management Accountants and the Financial Executives Institute sent comments, too.) More recent exposure drafts issued by the IASC generally have had the same response rate from U.S. corporations.

Between now and the end of the year, the IASC is expected to issue 10 standards addressing proposals included in the comparability--improvements project. After that, the IASC will address other accounting topics and consider reviewing its other standards.

While IOSCO has not made a formal commitment to accept IASs for securities offerings, other key players in the international arena, including the national accounting standard-setting bodies (the FASB and its counterparts in the United' Kingdom, Japan, Germany and others) have pledged their support to the IASC. These bodies plan to work with the IASC to address accounting topics of international importance.

The FASB and other standard-setting bodies are not currently IASC members. Inclusion of the FASB and its peers in the international standard-setting process may speed up when and how IOSCO formally determines the acceptability of standardized accounting for securities offerings.

IOSCO's acceptance of the IASs, if ultimately permitted by the individual securities commissions, would enable international companies that conform to (or reconcile to) the IASC's rules to engage in multinational securities offerings without complying fully with domestic accounting rules and regulations. Multinational companies would realize significant cost savings if they do not have to restate their financial statements to conform to each country's rules when registering a securities offering. Financial statement users could draw company-to-company and country-to-country comparisons because like transactions would be accounted for and reported in a similar manner no matter where in the world they occur or are reported.


The objectives of the IASs issued by the IASC are to establish broad principles while avoiding detailed rules. If the rest of the world moves toward international accounting standards and the SEC allows foreign companies to follow or reconcile to those standards for U.S. securities registrations, would U.S. companies wish to do the same?

FASB Chairman Dennis Beresford says if the SEC relaxes the reporting requirements for non-U.S. companies, "the only appropriate alternative will be for the SEC to allow domestic companies to prepare financial reports under IASC requirements." However, Beresford points out the U.S. accounting and reporting system is regarded by many as "the most comprehensive and sophisticated system in the world." He says the U.S. accounting model has evolved to what it is today because of local market pressures that insist on qualitative information. According to Beresford, changing to a less comprehensive accounting system would run against those market pressures.

Beresford's comments highlight the need to balance the competitive pressures imposed by the globalization of securities offerings with the need for quality information to allow financial statement users to make informed business decisions. However, if the SEC allows foreign registrants to file securities offerings in accordance with IASs, it will be extremely difficult to require U.S. companies to follow stricter U.S. accounting requirements. American businesses should be aware of this because depending on the SEC's actions, they may be afforded the opportunity to follow international accounting standards for securities offerings and might be at a competitive disadvantage not to do so.

The big question that needs to be answered concerns whether the SEC will allow foreign registrants to file securities offerings in accordance with IASs. Today, no German company is listed on any U.S. stock exchange because of German companies' unwillingness to conform to U.S. accounting standards they believe are too costly and burdensome to follow. SEC Chairman Richard Breeden, while appearing sympathetic to concerns about the competitiveness of U.S. stock exchanges, seems unwilling to relax U.S. requirements to accommodate foreign registrants. However, his main concern appears to be the differences between specific countries' accounting and disclosure requirements and U.S. reporting requirements.

While the SEC wants to proceed cautiously, representatives of U.S. equities markets fear waiting too long will create a dangerous conflict between the nation's commitment to free and open trade and its industries' need to compete. A representative of the New York Stock Exchange chairman recently indicated the United States should not "wait until another key opportunity has passed America by. Delay adds to the risk that our marketplace, one of the most competitive of all U.S. products and services, will be eroded by foreign competition."


Will IASs be accepted for cross-border securities offerings in the future? The answer depends on the securities commissions' willingness to work with the national and international accounting standard setters on a worldwide basis. It is expected the SEC will play a key role in IOSCO's consideration of the standards' acceptability. Once the IASC has completed its comparability-improvements project, as well as other projects, we will gain a better understanding of just how far the SEC and the rest of IOSCO is willing to go to facilitate cross-border securities offerings, multiple listings and the free flow of capital between nations.

U.S. businesses should recognize the acceptance of IASs is closer to reality than ever before. The actual time frame for when this might occur and the extent of its impact are unknown. However, since national standard-setting bodies and securities commissions are actively working with the IASC to improve IASs to enhance their acceptability, the first wave of acceptance could occur sometime within the next five years.

If U.S. companies are faced with the requirement or the option of preparing financial statements in accordance with IASs, will they understand the potential impact? If U.S. companies are required to amortize goodwill over a period that cannot exceed 20 years, as proposed by the IASC, will they have determined the net income impact? What will be the impact of a requirement to capitalize development costs if certain criteria are met?

The U.S. business community should follow, address and comprehend the IASC's work to ensure the views of American businesses are considered by the IASC and the potential impact of new international accounting standards is fully understood. To do this, U.S. preparers, users and auditors should work actively with the IASC, the FASB and the SEC to ensure all facets of adopting IASs are considered.


* MUCH OF THE INTERNATIONAL accounting community believes the world is ready for a common set of accounting rules. The International Accounting Standards Committee (IASC) is responsible for developing international accounting standards (IASs).

* U.S. BUSINESSES HAVE NOT paid much attention to the IASC's work, believing accounting rules will never be standardized on a global basis.

* THE SECURITIES AND Exchange Commission does not permit securities offerings prepared in accordance with IASs, which are not accepted in the United States under generally accepted accounting principles.

* BOTH THE LONDON AND Hong Kong stock exchanges allow foreign issuers to comply with listing requirements by presenting financial statements following IASs. Increased competition in international capital markets may force all countries to permit this.

* THE ULTIMATE ACCEPTABILITY of the IASC's accounting rules will be determined by the International Organization of Securities Commissions (IOSCO) as well as IOSCO's individual members. One of IOSCO's major objectives is to facilitate cross-border securities offerings.

* THE IASC IS WORKING to reduce the number of acceptable alternatives in its IASs to make them more acceptable to IOSCO and its members. The needs of financial statement users must be considered to enable them to draw comparisons from company to company and country to country.

* U.S. BUSINESSES MUST REALIZE the acceptance of IASs is closer to reality than ever before. Failure to become involved in the process may mean the majority views of U.S. companies will not be considered.
COPYRIGHT 1993 American Institute of CPA's
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Article Details
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Author:Yospe, Joseph F.
Publication:Journal of Accountancy
Date:Jul 1, 1993
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