La Langue Internationale: Making Accounting Standards Work Globally

Summer 2006

Keeping up with the rules and regulations that govern our professional existence is a challenging endeavor, but, relatively speaking, it could be worse. Consider the environment in other countries. In France, for example, students participating in a graduate-level accounting program in a business school must learn three sets of standards. Yes, three!

Nonlisted companies follow the accounting rules set forth by the National Accounting Plan promulgated by the government. Listed companies have to use International Financial Reporting Standards (IFRS), as published by the International Accounting Standards Board, beginning with statements for the year ended 2005. This is true of all European Union countries as well. Lastly, since most accountants will encounter U.S. GAAP-based statements somewhere in the global business environment, they must also be conversant in FASB issuances.

Given the significant inroads international standards have made in the past several years, it is important for today’s accounting professionals and accounting students to be knowledgeable about movement toward, and the specifics of, a global set of accounting and financial reporting standards.

One might ask, why should a CPA in Pennsylvania care about these international standards? The answer is simple: Pennsylvania is home to companies from Japan, Germany, Italy, France, Denmark, South Korea, Chile, Great Britain, and Sweden to name just a few.

Most companies in these countries are now required to, or choose to, prepare financial statements using IFRS.

Development of International Standards
Efforts to develop international accounting standards began in 1973 with the formation of the International Accounting Standards Committee (IASC) by an agreement of professional accounting bodies in 10 countries—Australia, Canada, France, Germany, Ireland, Japan, Mexico, the Netherlands, the United Kingdom, and the United States. In 2001, the IASC reorganized and created a 14-member International Accounting Standards Board (IASB). IASB’s organizational structure is similar to the FASB, and the standard-setting process is similar to FASB’s due process. A Foundation, composed of 22 members from around the world, oversees and appoints members from diverse geographic regions so that no one geographical interest dominates the process. The IASB developed objectives to meet these goals:

• Develop, in the public interest, a single set of high-quality, understandable, and enforceable global accounting standards that require high-quality, transparent, and comparable information in financial statements and other financial reports to help participants in the world’s capital markets, and other users, make economic decisions.
• Promote the use and rigorous application of those standards.
• Bring about convergence of national accounting standards, International Accounting Standards, and International Financial Reporting Standards to high-quality solutions.¹

As the process has evolved, so has the corresponding output. The IASC issued 41 International Accounting Standards (IAS) from its inception until 2001. The IASC also created the Standing Interpretations Committee (SIC) that was responsible for issuing guidance on the implementation of the standards.

After 2001, the IASB became responsible for the development and promulgation of international accounting standards. The output of this process is known as International Financial Reporting Standards (IFRS). The SIC was renamed the International Financial Reporting Interpretations Committee (IFRIC), but it has the same set of responsibilities as its predecessor organization.

Acceptance of International Financial Reporting Standards
The majority of stock exchanges now accept financial reports that conform with IFRS. This acceptance began with an important endorsement in 2000 by the International Organization of Securities Commissions, which is composed of securities regulators from more than 100 securities regulatory agencies worldwide. The International Organization of Securities Commissions has endorsed IFRS for cross-border listings and securities offerings.

The most notable exceptions to global IFRS acceptance are Japan and the United States. In January 2005, however, the IASB and the Accounting Standards Board of Japan launched a joint project to reduce differences between IFRS and Japanese accounting standards. In the United States, the SEC continues to actively monitor and review the current convergence project. The SEC still requires publicly traded companies in the United States to reconcile financial statements prepared under IFRS or a foreign GAAP, to U.S. GAAP, but it has indicated that it will drop the reconciliation requirement as soon as possible, and no later than 2009, depending on progress in the convergence program and experience with IFRS application and enforcement. The delay is caused by an uncertainty over whether IFRS will be implemented consistently or how standards compliance will be enforced. Also, if IFRS were accepted for nondomestic companies, U.S. domestic companies might ask to use IFRS, especially if they believe objectives-based accounting standards will give them more flexibility in financial reporting. Therefore, the SEC continues to support the FASB as the source of authoritative accounting guidance in the United States.

With the International Organization of Securities Commissions endorsement of IFRS, the European Union decided to require IFRS in the consolidated financial statements of almost all listed companies by 2005. A standard must be endorsed by the European Union before European companies can apply it, but there is some question whether the European Union will adopt all standards as written, or make modifications when member states object to certain provisions. For example, while the European Union initially endorsed most of the IFRS, it made an exception to standards on financial instruments (IAS 39) in response to objections raised by European banks over the requirement that derivatives be measured at market value.

In a few instances, countries have adopted IFRS and replaced their domestic GAAP. Countries such as Australia and Hong Kong are adopting IFRS as new standards, although sometimes with modifications. Also, IFRS is required for all domestic companies in Austria, Bangladesh, Costa Rica, Guatemala, Macedonia, and Nepal, among others. IFRS will be required for listed companies in New Zealand in 2007.

The Relationship between IASB and FASB
The FASB has worked actively with the international standard setting bodies, both the IASB and its predecessor IASC. Corporate accounting failures in the United States earlier this decade increased political pressure on the FASB to develop accounting standards that are more "conceptual" rather than "rules-based." The IASB approach is often called "objectives-" or "principles-" based. While the United States fervently defends its domestic accounting standards, the FASB is committed to working with the IASB on a convergence project that will help develop quality standards worldwide.

For example, in September 2002 the FASB and IASB issued a memorandum called "The Norwalk Agreement" in which both boards pledged to make existing financial reporting standards as compatible as possible.² In the short-term, the FASB and IASB are working on a project to remove differences between U.S. GAAP and IFRS. The boards have agreed that when there are differences between U.S. GAAP and IFRS, there will be a presumption that the entity that examined the issue most recently will have the higher-quality standard.

The IASB has taken the lead on a number of issues, and the FASB has made a number of changes in U.S. GAAP to converge U.S. reporting to IFRS. For example, the FASB recently changed accounting for nonmonetary exchanges (SFAS 153) and reporting the effect of accounting changes (SFAS 154) to align U.S. GAAP with IFRS. The IASB decision to require companies to expense stock options provided the FASB with an opportunity to revise SFAS 123, Share-Based Payment, in 2004, and finally require expensing of stock options. On June 30, 2005, the IASB and FASB published exposure drafts of their first joint proposal to converge international standards on business combinations. The exposure draft is quite lengthy, and, interestingly, bears more resemblance to a "rules-based" standard than to a "principles-based" standard.

As new accounting issues arise, the two boards address the issues concurrently. Some issues include fundamentals, such as financial performance reporting and revenue recognition. The boards also have a joint project to develop a conceptual framework to be used by both boards.

International in Pennsylvania
The global standards do have an impact on Pennsylvania CPAs in industry, public accounting, and educational institutions. For starters, recognize that the development and acceptance of international accounting standards is a tangible, concrete example of what it means to operate within the global business environment. Accepting that international accounting standards are here to stay is important, and the likelihood of encountering IFRS-based statements will continue to grow. There are more than 1,400 foreign companies providing more than 250,000 jobs in Pennsylvania, according to the Pennsylvania Department of Commerce and Economic Development. At the risk of citing the often over-used phrase "global business environment," we need to realize that many elements of that environment do, in fact, drive business everywhere, even in small business operations in local communities across Pennsylvania.

To fully comprehend the concepts behind the development of international standards, we must understand the global cultural environment in which they were created. The cultural perspective is evident on several fronts. One of the most important relates to the overall philosophical and historical perspective of the optimum mode of financing businesses. Companies in the United States commonly use equity financing and individuals invest in an equity-driven market, but this has not always been the global norm. For example, companies operating in Japan or the European Union are frequently financed via debt. Thus, financial reporting has traditionally been prepared with the interests of creditors over that of the perspective of shareholders. The creation of the international standards, and the resulting shift from protection of creditors to the primary consideration of shareholder needs for disclosure, has been an evolutionary process.

For accounting professionals in the United States, understanding the global business environment and its demands for financial information consistent with cultural goals and objectives is important to businesses seeking to increase markets beyond U.S. borders. These companies offer an opportunity to CPAs who are well-versed in the specific needs of a global business operation and the resulting financial reporting requirements.

Educational institutions also must recognize that there is a need for accounting professionals who are well-versed in international standards. Thus, the curriculum should be expanded, either by offering a specific course on IRFS and IAS, or by building exposure and mastery of these subjects into the existing accounting courses. Giving Pennsylvania students the ability to distinguish themselves in the job market in this manner is not an opportunity to be overlooked.

Conclusion
International standards are here to stay. Recognition that such standards are growing in prominence and universal acceptance is imperative. Given that global business reaches to the very heart of Pennsylvania’s cities and towns, we CPAs need to be at the forefront and actively recognize and embrace these ideas to work with our clients and business partners.

¹ IASC Foundation Constitution, http://www.iasb.org/about/constitution.asp

² Financial Accounting Standards Board, Convergence with the International Accounting Standards Board, http://www.fasb.org/intl/convergence_iasb.shtml

Rose Marie L. Bukics, CPA, is the Thomas Roy and Lura Forrest Jones Professor of Economics and Business at Lafayette College in Easton, and a member of the Pennsylvania CPA Journal Editorial Board. She can be reached at bukicsr@lafayette.edu.

Mary Jeanne Welsh, CPA, PhD, is chair of the accounting department at La Salle University, and a member of the Pennsylvania CPA Journal Editorial Board. She can be reached at welsh@lasalle.edu.