By Dennis R. Beresford
A Research Resource to the World
Formed in the early 1990s, a largely informal group of representatives from accounting organizations in five industrial nations has gradually become more important to both its constituent organizations and international accounting standards setters.
G4+1's fundamental informality has led to a certain mystique around it and its relationship with FASB. Now, one of G4+1's founding members explains the group's background, composition, objectives, operating activities, and completed and current projects. He also gives his own perspective on the implications of G4+1's activities, particularly how they could affect the future of financial reporting, both internationally and domestically.
FASB Issues Two Special Reports from the G4+1. So ran the headline in FASB's September 30, 1999, Status Report. The news item announced special reports on Reporting Interests in Joint Ventures and Similar Arrangements and Reporting Financial Performance: A Proposed Approach. However, even habitual FASB watchers may not understand the significance of a special report, and even fewer know much about the G4+1.
In June 1988, during my first term as FASB chair, I made a short presentation to the International Accounting Standards Committee (IASC). In my remarks, I proposed a conference of accounting standards setters from around the world, including representatives of the IASC. The time seemed ideal for discussing how to work cooperatively on new issues and eliminate some of the accounting differences between countries.
The feeling was that the conceptual framework underlying the accounting standards in the various countries should be the main topic of discussion. There was interest in sharing our respective objectives of financial reporting, accounting terminology, and other basic notions before moving to specific topics.
The first conference was held in Brussels in June 1991 under joint sponsorship of the IASC and the European Federation of Accountants. The following year, FASB hosted a similar meeting of about 40 standards setters.
Since then, meetings have been held nearly every year. However, those of us at FASB realized that, while such large meetings were useful for improving communications, we were unlikely to make much progress on resolving accounting differences. More important than group size was the fact that many countries didn't have the same objectives for their financial reporting system. In the United States, the objective is to provide unbiased information to enable investors, creditors, and others to make economic decisions. In many countries, social or political objectives are more important than this "user focus."
We eventually agreed that the most beneficial course was to meet periodically in a smaller group that had much in common in terms of accounting philosophy. The initial group comprised representatives of the Australian Accounting Standards Board, Canadian Accounting Standards Board, United Kingdom Accounting Standards Board, FASB, and IASC. The first meetings focused on conceptual recognition and measurement issues identified in the early discussions held in Brussels. We invited IASC representatives to participate to avoid even the appearance of trying to undermine the committee's work.
Subsequently, we concluded that our meetings were worthwhile and agreed to continue somewhat more formally. Every group needs a name, and we decided to call ours the G4+1. G4 stands for the four original countries, and +1 reflects the IASC's participation. For the last several years, representatives from the New Zealand Financial Reporting Standards Board have participated with their associates from Australia, so G4+1 could now be more accurately labeled G5+1.
The first meetings of what evolved into the G4+1 centered on the importance that should be given to future events in preparing current accounting information. The group members prepared a study to facilitate discussion of the issue at a conference of standards setters in late 1993 in London. This broad, conceptual issue related to several specific projects that were on the agendas of FASB and other standards setters. Problems at that time were how future events should be considered in accounting for tax loss carryforwards and for the cost of future site restoration.
As a result of that meeting, the first special report was issued in August 1994, Future Events: A Conceptual Study of Their Significance for Recognition and Measurement. The foreword to that report explained its purpose as follows:
The purpose of this study is to help standards setters develop a common conceptual foundation on which they can base accounting standards for their respective countries concerning issues that involve the consideration of future events. The working group believes that developing such a foundation will enhance the prospect of future international harmonization from the earliest stages of the development of accounting standards.
The report included the views of the individual group members on a series of topics. The group was in unanimous agreement on some issues, and majority and minority views abounded on others. Even with a diversity of opinion, the effort was judged to be reasonably successful, and the group decided to continue to discuss current issues and try to develop recommendations.
That first report was not a standards-setting document, either by FASB or the other bodies. Rather, it was our way of developing ideas to engage interested constituents in the issues. The foreword to the report concluded with "we welcome reactions to the individual cases or the study as a whole." We received few written comments from FASB constituents, which did not surprise us because the report was not an official FASB document and it did not appear to specifically relate to then current agenda projects.
At that point, G4+1 had no explicit plan to issue further special reports. The group's purpose was simply to discuss matters of mutual interest and to share staff research and other useful materials. As our discussions became more focused on certain topics, however, we agreed to share the results with other interested parties.
The second special report was on hedge accounting, which was already a hot topic at FASB. Standards setters in other countries were very interested in the topic because of the absence of guidance on accounting for or disclosure of derivatives and other hedge accounting issues.
The report indicated that members of the working group agreed that derivative financial instruments should be recognized and measured at fair value. By itself, that statement signaled a major change in what was being considered by FASB and others. However, rather than reaching a conclusion about hedge accounting, the report listed several alternatives and encouraged readers to share their reactions with their respective standards setters. FASB and other group members viewed the report as an educational document.
A Greater Sense of Purpose
The role of the G4+1 was beginning to evolve through those first two reports. The first report addressed a broad, conceptual issue related to several accounting problems but was not designed to lead to specific standards. Comments were welcomed, but few were received. The second report was related to a current FASB project and included a clear indication of the group's thinking on a major part of it. We encouraged comments and received many, even at that early phase of FASB's deliberations.
Representatives from other countries authored the next reports. The subjects, provisions (accounting for contingent losses, in U.S. terminology) and lease accounting, were already clearly covered by U.S. accounting standards. The provisions issue was a problem at the time in the United Kingdom, and lease accounting was considered a problem in Australia. FASB published both reports as part of its cooperation with the G4+1 group, but neither issue was on the board's active agenda, although they may be revisited in the future.
The June 1997 special report on business combinations was the first to explicitly refer to G4+1. The January 1998 special report on reporting financial performance was the first to include a G4+1 memorandum of understanding on objectives. Those objectives have been refined in later documents, and the most recent reports (September 1999 on joint ventures and December 1999 on nonreciprocal transfers) include the memorandum in the form shown in Exhibit 1.
Two important messages come through in the stated objectives:
* The standards setters are pledging a long-term commitment to work toward truly international accounting principles.
* There is strength in numbers, and each body gains support to make improvements in its own country by taking positions consistent with those elsewhere.
Composition and Operating Procedures
Each G4+1 organization decides who will represent it at the meetings. Most participating organizations send the same delegates to each meeting, but some rotate the attendees depending on the scheduled topics.
The chairs and vice chairs of FASB and the U.K. Accounting Standards Board and the chairs of the other bodies typically represent their constituent bodies. One or more senior staff members accompany each board member. The first meetings were organized and run by the group representing the country in which the meeting was held. In recent years, to improve administration, a G4+1 chair was elected, currently James Leisenring, the FASB vice chair.
The G4+1 operating procedures are relatively informal. The group endeavors to reach a consensus on the topics it considers, but sometimes majority and minority views on individual issues are necessary. Each country's delegation determines its own procedures for casting its vote. If the delegates from a given country disagree among themselves, as sometimes happens, they must resolve their differences before taking a single position.
A key point here is that positions taken by the individuals during G4+1 meetings are neither officially authorized by nor binding upon the bodies they represent. For example, while the FASB representatives usually discuss pending G4+1 matters with their colleagues, they are not official FASB positions. As stated in the preface to the recent special report on joint venture accounting:
Although members of the working group represented the standards-setting bodies with which they were affiliated, the views that they expressed during the course of the discussions were their own and had not been officially deliberated by the bodies themselves.
Because of increasing interest in the group's activities, G4+1 decided to open its meetings to the public beginning this year, "to the extent such arrangements are possible and appropriate meeting facilities are available in the host country." This open-door policy should help demystify the G4+1. However, the group is not a standards-setting body, and G4+1 documents seeking public comment are not a direct part of any of the countries' standards-setting activities unless specifically made so by the appropriate body. Therefore, other changes in operating procedures to improve due process are unlikely.
Nonetheless, the special reports and other G4+1 discussions can be seen as a sort of "coming attractions" for constituent agendas. (See Exhibit 2 for a complete list of special reports issued to date.) G4+1 papers on some occasions have represented an early step in FASB's research. For example, the reports on hedging and business combinations clearly related to projects that the board already was considering, and the reports encouraged feedback from constituents.
One way to assess the likelihood that FASB might act on a topic covered in a G4+1 special report is to observe how it solicits comments. For example, the September 1999 report on joint venture accounting included a letter from the FASB director of research and technical activities asking for comment on several specific issues and establishing a deadline of January 31, 2000. The report on reporting financial performance, also issued in September 1999, included no such letter or comment deadline, and the foreword to the report has only a general invitation to comment. Obviously, FASB views the joint ventures issue as a much higher priority.
The report on reporting financial performance relates to FASB's project on comprehensive income. Although that project was completed with the 1997 issuance of Statement 130, several board members wanted to improve the reporting of comprehensive income. Thus, even though representatives of the U.K. Accounting Standards Board authored the report, FASB may look to the report in the relatively near future to support a new project to modify Statement 130.
The report on joint ventures relates to a subset of FASB's consolidation project. For a number of years, many corporate executives and others have told FASB that accounting for joint ventures is much more important than consolidation policy and procedures, in part because of the significant growth in the use of joint ventures to share business risks. Those who favor new accounting for joint ventures generally support the use of proportionate consolidation, but the recent special report generally supports the equity method of accounting for joint ventures, which is currently the predominant practice. If this early indication holds true, the clamor for FASB attention to accounting for joint ventures may subside.
G4+1 is discussing many topics that may result in future special reports or other group conclusions. They include the following:
* The equity method of accounting
* New basis measurement
* Financial instruments
* Stock-based compensation
* Constructive obligations.
Potential agenda topics for future discussion include the following:
* Intangible assets
* Definition of residual interest
* Environmental liabilities
* Postretirement benefits.
Many of these topics provide the opportunity for standards setters that have recently addressed an issue to share their experiences to the benefit of other G4+1 members.
The Future of International Accounting
Based on my close involvement in internationalization activities over the past decade, I expect that financial reporting in the G4+1 countries will continue to evolve toward a single set of worldwide standards. However, I do not anticipate complete, truly global agreement on accounting standards for at least 10 years.
No doubt many will disagree. Some see too many difficulties in cooperating with other countries to resolve both old and new accounting issues: If we have been unable to agree on more compelling global differences such as language or currency, how will we be able to agree on accounting rules? Others will look to the IASC and say that its present body of standards is more than adequate to provide the general guidance needed for comparable financial reporting. They may think the SEC should act quickly to endorse the IASC standards and even perhaps phase out FASB in the near future.
Present U.S. accounting standards are more complete than those at the IASC or any other country. More importantly, our financial reporting system includes the discipline of independent audits, regulatory oversight by the SEC, and punishment through the legal system for noncompliance. Nowhere in the world can this system be matched, and the barriers to developing an international system or even comparable local systems are formidable.
But internationalization will continue to be a very high priority at FASB and its counterparts. A current example is the project on business combinations, where FASB has made it clear that discontinuing the pooling-of-interests method is based largely on its nonacceptance in most of the world.
So, where will the G4+1 fit into the continuing movement toward international comparability? One possibility is for the G4+1 to evolve into a global standards-setting organization, either replacing or competing with the IASC, but I don't see that happening because--
* G4+1 membership is limited and not representative of a large portion of the world. Although some countries have indicated an interest in joining G4+1, at least for now either they do not have the same objectives for their financial reporting system or they are unable to commit the significant research and staff resources involved.
* G4+1 would have to develop the entire infrastructure that the separate country bodies and the IASC already have. For instance, G4+1 would have to adopt due process procedures, arrange for more direct public input, and reinvent many things already present in FASB and elsewhere.
Instead of becoming a global standards setter, the more likely future for G4+1 is to continue to do much more of what it does now: serve as a sort of international accounting research and development department. The present countries, as well as perhaps a few more that make a significant commitment to standards setting, will continue to cooperate on projects important in their own countries. This sharing of research and taking of positions on issues will lay the foundation for countries to reach the same or at least similar positions. Two or more countries deliberating together are more likely to result in common or at least similar standards.
I believe that G4+1 will continue to be an important force in the movement to internationalize accounting standards. Corporations, public accountants, financial analysts, and others interested in financial accounting standards should pay careful attention to G4+1 reports and comment whenever they can. *
Dennis R. Beresford, CPA, is executive professor of accounting at the J.M. Tull School of Accounting, Terry College of Business, University of Georgia. He served as FASB chair from 1987 to 1997.
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