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Oct 1992

International accounting standards: are they coming to America? (interview with International Accounting Standards Committee Chairman Arthur R. Wyatt) (Cover Story)

by Craig, James

    Abstract- There is an increasing awareness among US accountants of the importance of an international perspective to accounting standards. International Accounting Standards Committee (IASC) Chmn Arthur Wyatt affirms this and asserts that the IASC has made various efforts towards this harmonization of accounting. The IASC is working to bring IASC standards to US accounting p ractice by encouraging a broader interpretation of accounting standards and principles. A comparability project that seeks to gain the insights of various countries on what improvements should be made in accounting standards is currently underway.

International accounting standards are beginning to become visible in U.S. accounting circles. The FASB and the SEC are talking about them. Exposure drafts are circulating for comment at the FASB, in state society committees, and at other interested organizations. Words and phrases such as harmonization, creating a level playing field, and down with LIFO and poolings-of-interest are being heard from sea to shining sea. What does this all mean to the accounting profession in the U.S.? Editors Douglas Carmichael and James Craig spoke with Arthur Wyatt, Chairman of the International Accounting Standards Committee (IASC) and former member of FASB to find out.

CPAJ: A recent issue of the FASB update had a lengthy commentary by Chairman Dennis Beresford about international financial reporting and accounting standard setting. It is clear that international accounting standards are very much on FASB's mind. But before we explore why that is so, please give us some background about the International Accounting Standards Committee (IASC) of which you are presently the Chairman.

Arthur Wyatt: The IASC was formed in 1973, coincidentally, the same year that FASB came into being. It was formed by and as the result of concerns of accounting professionals in the U.S., Canada, and the U.K. who felt more had to be done to further uniformity in international financial reporting. Presently, IASC has representatives from about 105 professional bodies from 78 different countries. A professional body in this context is an organization representing a group of accounting professionals. For example, the two U.S. bodies represented are the AICPA and the Institute of Management Accountants (IMA, formerly the NAA). IASC meets three times a year: March, June, and October or November. The board of IASC is composed of 14 voting members from 13 countries and a representative from the International Association of Financial Analysts. The constitution provides for three additional seats that are countries. The International Financial Executives Institute was invited to join but did not accept because it feels it has no way to get agreement on international accounting issues and thereby represent its constituency. Similarly we have tried to get an international bankers association into the ranks, but to no avail.

Countries are appointed to provide representation on the board for three year terms. The countries designate the individuals who will serve. In 1988 I was appointed as the U.S. representative to the board for a five year term. I gave up that role when appointed chairman, because the chairman has no vote. He acts more like a cheerleader or tour director. Ronald Murray of Coopers & Lybrand now serves on behalf of the AICPA. All the positions are non-paying by the IASC. However, there is a secretariat and small paid staff to undertake technical research and take care of administrative matters.

CPAJ: What is the IASC's primary mission?

Wyatt: The purpose of the IASC is to reduce the diversity of practice in financial reporting among the countries or, stated more positively, to achieve some level of harmonization of principles. Since 1973, it has issued 31 standards. Each of the participating countries agrees to use its best efforts to move toward the acceptance of international standards in its country. The AICPA is a signatory to this agreement.

Each of the 31 standards is characterized by acceptable alternatives. Standards are usually different among countries because the laws and customs are different. For example, in Germany the tax law governs the accounting principles to be applied and what is to be recorded in the accounts. As a result in Germany there are no temporary, or for that matter permanent, differences between tax and accounting income. In the U.S., our financial reporting scheme is very much directed toward investors and creditors. That has led to a system of open and complete disclosure and fairly detailed standards. In many countries such as Germany and Japan, most of the capital is provided by a handful of banks. These banks can get the information they need directly from the company. As a result, there is no pressure in Germany and Japan for open and full disclosure. Their standard setting is therefore less oriented to investors' needs. A vote of 11 out of 14 members is needed to pass an IASC standard. In order to get that many to agree, in its initial stages, IASC often had to accept the two most popular practices in a particular area in order to get 11 votes. Of course, this approval excluded popularity items three to whatever. The process was to eliminate weaker practices but did little to promote or lead to harmonization because it accepted alternatives.

CPAJ: You said the AICPA as a participating professional body has pledged its best efforts to bring IASC standards to U.S. practice. Has it kept its commitment?

Wyatt: Until recently, the AICPA has not had to give serious consideration to honoring that pledge, because everything the FASB has done has lined up with one of the two alternatives accepted by IASC. In other words, it could be said that a U.S. company following U.S. GAAP meets international standards.

In 1988 it became clear that IASC had to do better in moving towards harmonization. And so we began the project that became known as the comparability project. The first step was to identify all the alternatives in IASC standards and try to eliminate as many as possible. It identified 25 alternatives which it felt should and could be eliminated. An approach was adopted to give each country one vote on the total package. What was expected to happen was that each country would perhaps have two or three items it would oppose in the package, out would be offset by 20 or more practices that it felt should be eliminated. The thinking was that countries would vote in favor of such a package in the interest of moving harmonization forward. The project has since been renamed the "improvements project."

An exposure draft was issued in late 1988. A statement of intent was issued in mid 1990 explaining what IASC planned to do following receipt and analysis of comments on the exposure draft. IASC is presently rewriting the standards to reflect the insights obtained from the comments and exposing them for comment. A final vote is scheduled for 1993 to determine whether eleven members of the Board of IASC will accept the package.

CPAJ: Will there be a separate exposure drafts on each of the 25 alternatives?

Wyatt: The alternatives relate to about nine or ten standards. The effect of deciding on those nine or ten will be to eliminate some 25 alternative. Eight exposure drafts have been issued, with the remainder to be issued before year end.

CPAJ: What motivated IASC to change from its initial approach to narrowing the alternatives to eliminating the alternatives? Won't that slow the harmonization process?

Wyatt: The leading factor was the increase in international trade and the increase of cross-border financing arrangements. A business in Peoria, Illinois can get access to capital in a dozen places in Europe as easily as it can in Chicago. And one of the ingredients in making lending decisions is financial statements. The party lending money in Hamburg, Germany wants to feel comfortable with the financial information being furnished to it. To the extent a reasonable comfort level is not obtained because of uncertainty and differences, the cost of the loan will increase in the form of a higher interest rate of higher origination costs.

An important factor influencing developments is the emergence and influence of the International Organization of Securities Commissions (IOSCO). Although in existence for over 20 years, in the 1980's it expanded from being a North and South American securities organization to a truly international player. Its representatives are the equivalent of our SEC or our stock exchanges. They are the regulators of securities trading in their respective countries. That organization has an interest in reducing the alternatives in order promote the international trading of securities. It has been exerting some pressure on IASC to move to restrict alternatives. Its viewpoint is that if IASC comes up with quality standards, its members will move in their individual countries toward requiring all non-domestic issuers seeking to sell securities to present financial information in accordance with international standards. Then a securities regulator in a particular country would need to know only two systems of accounting--its own and international standards.

CPAJ: What has the U.S. to gain from all this? We have the most extensive disclosure requirements in securities' registrations in the world supervised under the watchful eye and powerful arm of the SEC?

Wyatt: We in the U.S. have the most to gain. Presently, for those foreign companies wishing to sell securities in the U.S., the SEC has the requirement that the issuer prepare financial statements in accordance with U.S. GAAP or reconcile them to U.S. GAAP. No other country has such a requirement. Therefore, other things being equal, it is more costly, in the form of legal and accounting fees, for a foreign issuer to raise capital in the U.S.

CPAJ: Differences in GAAP aside, I would imagine that a financial statement distributed in Japan, for let's say Honda, would be significantly different than a financial statement issued to register securities in the U.S.?

Wyatt: Yes, that would be true. The disclosures in the U.S. statement, regardless of the measurement principles applied, would be significantly greater.

Arguably our requirements have driven companies away from our capital markets. For example, there are no German companies listed on the New York Stock Exchange. The concern is that our disclosure and filing requirements have made the U.S. less competitive in the international competition for capital.

CPAJ: How does IASC get companies and their auditors to comply with its pronouncements?

Wyatt: The IASC has no means of enforcing compliance with its standards. It has no clout. It must sit back and wait for market forces of those seeking to raise capital to decide that the use of international standards will result in the most efficient and cost-effective way of tapping into international capital markets. IOSCO will definitely be a driving force. Its members can seek to influence the securities regulation in their respective countries to require the use of international standards by nondomestic issuers in filings in their countries. Then international standards would become increasingly important, first by large multi-national companies seeking the lowest price for new capital.

But more importantly in the long run, the SEC would have to contemplate and ponder its position of permitting foreign issuers to use international GAAP while continuing to require the use of U.S. GAAP for domestic filers. In the eyes of some, this might be considered an unlevel playing field sloped against the U.S. company. If the international standards are good enough, and the participating bodies such as the AICPA use their best efforts to promote the acceptance of international standards, we will see movement of individual country standards towards international standards.

CPAJ: We in the U.S. feel that we have the most sophisticated and highest developed financial reporting system. The impression that many have is that a movement from U.S. GAAP to international standards would be a step back.

Wyatt: Most people in the U.S. would agree with that statement. Most people outside the U.S. would not. They would look to the savings and loan crisis and say they never had anything like that. The perception outside the U.S. is that our ways are not necessarily the best.

CPAJ: Some may debate that our system of financial reporting is not the best. But I am sure that there is no debate that our system requires more. I can see the SEC willing to settle for international measurement principles, but I cannot see the SEC backing down from the level of disclosures now required. Why will companies in Japan and Germany want to submit to the higher levels of disclosure in the U.S.?

Wyatt: The SEC will inevitably give up some of its disclosure requirements. In the past twenty years all we have done is added to disclosures. The SEC may in the interest of moving forward be willing to reduce some disclosure requirements. On the other hand, I see the reporting in other countries moving toward our approach. The U.K., Canada, and Australia are now reasonably close. What will cause Germany and Japan to move in our direction will be developments in their capital markets. If you look at Germany in attempting to bring economic prosperity to what was Eastern Germany and to other eastern European countries, it is easy to conclude that the required capital can not all come from the six or so banks that presently finance the Germany economy. The Germans will have to turn to individual investors. And when they do, the kinds of disclosures we have found to be appropriate may also be appropriate for them. The same will be true for Japan. It will be the capital provider for all the Pacific rim. Consider the capital needs of China--Japan is right there. Can it do it strictly through the large banks? The expanded need for capital will cause countries like Germany and Japan to turn to methods similar to those in the U.S. to promote the financial disclosures necessary to attract individual and institutional investors.

CPAJ: Can you see a company with a $5 million or $10 million public offering in the U.S. ever caring about international accounting principles? Or the family-owned or privately held business?

Wyatt: Statements for these entities will always be first prepared in accordance with U.S. GAAP. But as you noted there is a growing awareness of international standards on the part of the FASB. Businesses and others are clamoring for a level playing field with international businesses. I see U.S. standards moving in that direction. I don't think the FASB can continue on the path of more and more detailed and complex standards. It's self defeating. International standards are broader. I believe the burden for proper reporting must be returned to the chief financial officer of the company and its auditor to come put with the appropriate accounting based on broad principles. There should be an attempt to apply standards the way they were intended to be applied, rather than try to find the loopholes.

CPAJ: Many CPAs have not felt the need to even think about international accounting standards. Do you have any advice for them?

Wyatt: CPAs that are primarily concerned about U.S. markets, i.e., those serving or working in small and medium-sized companies that are not engaged in international market should have a general knowledge of the areas that IASC is deliberating, if only to be a well rounded and informed business person. They need not be overly concerned about the specifics of a particular standard in the short run. They may want to watch what the SEC does in reaction to the Improvements Project. If it allows non-U.S. companies to come to the U.S. markets and use statements prepared in accordance with international standards without being reconciled to U.S. GAAP, that would be the first clue that we may see some changes in U.S. standards down the road.

CPAJ: Won't the force that ultimately brings international standard to the U.S. be the operation of the market place? Europe 1992 was talked about as the great event to get U.S. business involved more in international trade. Well, 1992 is here and that great involvement is not readily visible. What will it take?

Wyatt: I agree, it will be the market forces that float the ship bringing international standards to the U.S. and Europe 1992 is having an impact on U.S. business especially in those industries where European trade barriers are at a minimum. But the effects of a united European economy on U.S. commerce will be evolutionary. But it could pass right by those that are not attentive.

CPAJ: Let's assume we have a privately held company in the U.S. seeking to open a branch in Western Europe. Because of currency considerations, the U.S. company seeks to borrow on a short-term basis from a bank in that foreign country: Would international standards come into play there?

Wyatt: If a mid-size U.S. company sought to borrow in Germany, the German bank would be delighted to get a financial statement prepared in accordance with U.S. GAAP. The bank probably would have someone knowledgeable to evaluate the statements as prepared. That would be because of the strength and influence of U. S. businesses in the world economy. A statement prepared by a Australian company might be equally informative, but the bank might not be as comfortable with it.

I think what the foreign banker will seek and prefer is a financial statement prepared in accordance with its own standards, U.S., or international standards.

The message is that there probably is very little reason for the CPA in the U.S. to think there will be some revolution to international standards. On the other hand, it is probable sometime during the career of a CPA in his or her 30's that there will be some rather dramatic changes in standards, including a move toward international standards.

CPAJ: There are many in the U.S. who think that U.S. standards are too detailed, too cook-bookish. Might they not join the international standards band wagon, with its broader approach?

Wyatt: It is interesting to note that, when asked, many CPAs say they prefer broad statements of principle; but when called upon to apply them, they seek very detailed rules. They lack the fortitude to tell a business, "you can't do it that way" based upon inconsistency with the broad intent of a principle. They need the crutch of a detailed rule or prohibition. And the FASB has accommodated them.

But international standards can be a catalyst for such a change back to, in my view, the right way to set accounting standards.

CPAJ: The FASB has, what some would consider, a large and competent staff to help develop and craft accounting standards. That staff is very active in the standard setting process, doing research, writing discussion pieces, drafting principles, and sometimes challenging the Board's thinking? The IASC does not have such a staff. How does it manage?

Wyatt: IASC approaches standard writing in several ways. For example, we have an ED out on financial instruments--a very good draft I might add. That project is being staffed by the Canadian Institute of Chartered Accountants. At the time we started our project the Canadians were also just beginning theirs. CICA was quite willing to have its standard be very much the same as the international standard and so offered its staff resources.

The other approach is to have our staff in London do the work. But because the staff is small, if a Board member asks for more research on a particular project, there is no one to turn the job over to. At the FASB, if a particular Board member wishes to delay a project that is not going in his direction, he can stonewall by asking that more research be done in particular area. That won't work at IASC. If an IASC Board member does not like the drift of a project, he must undertake the additional research himself and bring the results to the Board.

CPAJ: But ultimately you want to come up with the right or, perhaps a better word, "best answer." You were fortunate to have CICA staff the financial instruments project. But what about the inventory project, where it is rumored that the LIFO inventory method may be outlawed?

Wyatt: We found initially in the inventory project, that there were only two countries that permitted LIFO, the U.S. being one of them. And representatives from both these countries agreed that the balance sheet number for inventories that you get under the method is meaningless. It became very easy then for IASC to reject LIFO. Subsequently we found that Germany and Italy had introduced LIFO inventories into their tax code; their accounting standards are very much interrelated with those codes. We no longer are so sure where the LIFO matter will end up, although right now it is out.

"Poolings-of-interests" are also proposed to be out of international standards. And purchased goodwill will have to be amortized over no longer than a twenty year period. The goodwill is an interesting issue. In the United Kingdom, Goodwill is charged to reserves--a component of the entity's capital. Some sa this has given U.K. companies an unfair advantage in competing for acquisitions. And if their capital gets too low, they can put non-amortising intangibles, such as brand names, on their balance sheets to increase capital. It was thought that the U.S. representative would never concede on the LIFO issue and the U.K. representative would not give in on goodwill. When the U.S. representative voted to eliminate LIFO, the U.K. representative was at a loss in defending the U.K.'s goodwill approach. But on the matter of staff and research, the issues we are dealing with on the improvements project are well known with much about them existing in existing accounting literature.

CPAJ: How else is IASC different from FASB?

Wyatt: First of all, many of the things we do have their parallel at the FASB: exposure drafts, comment period, revisions, re-exposure if necessary, and final statements. However, our meetings are not open to the public. We meet in different cities and the meeting places sometimes just wouldn't accommodate an open meeting. We do not publish an agenda, but we do publish minutes. We offer a subscription service which includes a news flash after a meeting, a quarterly summary of what we are doing, and of course copies of all the EDs and final statements.

CPAJ: What's your relationship with the International Federation of Accountant (IFAC)?

Wyatt: IFAC issues standards on auditing, ethics, public sector, education,and management issues. Its membership is identical to ours. Its headquarters are here in New York, ours are in London.

CPAJ: How are some of the other member countries of IASC dealing with harmonization and international standards?

Wyatt: The germans will suffer the biggest culture shock in dealing with international standards. Their accounting regime is much different from ours. France and Switzerland are moving toward international standards because they see the benefits. It will be a slow process, but mark my words: In 2000 and beyond, international accounting standards will be playing a very important role in the world market place.

CPAJ: The International Congress of Accountants meets this month in Washington, D.C. What can you tell us about that gathering?

Wyatt: It takes place every five years. We get to act as host every 30 or 40 years. It is partly a social opportunity for those presently or formerly involved in international accounting bodies such as IASC and IFAC to get together and renew acquaintances and part a technical program designed to acquaint people on what's happening on the international scene. When the Congress is held other than in the U.S., we find a great deal of support by the accountants in the host country. More than half of the registrations will come from the host country. At the present time in the U.S., however, there is little interest in attending two and three day meetings. What we are finding is the registration from the U.S. is less than anticipated and the world-wide economic conditions have somewhat inhibited international registrations.

There will be world-class presenters and speakers at the program, and it is a once in a career opportunity for CPAs to attend. It will focus on the broad picture and not the how-to's or details that can be used Monday morning.

I will participate in the opening ceremony as Chairman of IASC and I will also be a speaker on financial reporting. President bush will participate by video. CPAs should attend if they have clients that will be increasingly involved in international commerce. It will be the chance to make some contacts that will pay off later.

There will be accountants from public practice and from industry, the latter group being mostly from large multi-national companies.

There will be exhibits--a trade show--by international companies. This will provide a good opportunity of making contacts. It's not too late to register.

CPAJ: Thank you for joining us. Your energy and enthusiasm and your career-long commitment and dedication to improving the profession and its standards have made their mark. We are honored to have you with us. Do you have a final word or two?

Wyatt: It is my hope that my efforts at IASC will lead to financial reporting that fosters a prosperous world economy. And I would not at all mind if it would result in the U.S. standard setters returning to the use of broad, general statements which the profession would in the spirit of those broad principles in a manner to restore the respect it once had.

Arthur R. Wyatt, PhD, CPA, is Chairman of the International Accounting Standards Committee, immediate past president of he American Accounting Association, former Member of the FASB, and past member and chairman of the AICPA Accounting Standards Executive Committee. He recently retired as a partner from Arthur Andersen & Company, where he served with its Accounting Principles Group. He is a member of the AICPA and a past member of its Board of Directors and a member of the Illinois Society of CPAs. He has been a professor of accounting at Northwestern University.

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