With reference to free access to the U.S. capital market, Arthur Wyatt, immediate past chairman of the International Accounting Standards Committee (IASC), and Joseph Yospe, senior manager-international accounting with AT&T Capital Corporation, suggest in the July 1993 issue of the journal of Accountancy that the SEC consider accepting registration documents that contain financial information prepared in accordance with International Accounting Standards (IASs). Wyatt and Yospe advance the following arguments:

* A good part of the international business community believes the world is ready for a common set of accounting standards.

* The International Organization of Securities Commissions (IOSCO), of which the SEC is a member, has indicated it will consider the acceptability of IASs now that the IASC has completed its comparability project aimed at reducing the number of accounting alternatives contained in existing LASs.

* The London and Hong Kong stock exchanges accept financial information prepared in accordance with IASs.

The thrust of these arguments is that the force of competition in the world's capital markets will advance the case for a common set of standards. These arguments may not be persuasive in view of recent efforts by Daimler-Benz to enter the U.S. securities market and the SEC's proposals to simplify the registration process for foreign issuers.

The Case of Daimler-Benz

Daimler-Benz, a German multinational well known for its world-class Mercedes automobiles, typically funds its long-term capital needs by borrowing from banks. This approach is made easier by the special relationships that often exist between German companies and major German banks. For example, approximately 30% of Daimler-Benz shares are owned by Deutsche Bank.

The costs of unification between East and West Germany placed a great demand on the resources of German banks. This demand, along with the inflationary pressures brought about by unification, pushed up interest rates, forcing Daimler-Benz to look elsewhere for capital. Daimler-Benz management decided to seek entry to the U.S. securities market, the largest in the world.

Equity and debt securities of foreign issuers can be registered with the SEC using Forms F-1 through F-4. Foreign registrants are required to submit annual reports to the SEC on Form 20-F. Common to the F forms is the requirement that financial statements and schedules be presented in accordance with accounting principles generally accepted in the U.S. Alternatively, they can be presented in accordance with accounting standards of the foreign issuer's country as long as they contain reconciliations to U.S. standards.

In preparing financial information for inclusion in registration documents to be filed with the SEC, Daimler-Benz was faced with the presentation alternatives mentioned above. The second alternative was chosen, and protracted negotiations were held with the SEC as to the nature and extent of the reconciliations. As with most administrative undertakings, the time taken by these negotiations and the effort made to prepare reconciliations acceptable to the SEC must have been costly to Daimler-Benz.

What is the implication of the Wyatt-Yospe suggestion to the Daimler- Benz situation? If the SEC had accepted the Daimler-Benz financial information based on IASs, there is an assumption that the reconciliation burden would have been alleviated because either a) German accounting standards are not materially different from IASs, or b) the cost of preparing reconciliations from German standards to IASs would have been significantly less than that incurred for reconciliations from German to U.S. standards.

The Commercial Code, the General Tax Law, and the Income Tax Law form the statutory basis for German accounting standards. German financial accounting closely parallels German tax accounting with the result that German financial statements are prepared on a conservative basis with a tendency to understate assets and income. This gives rise to hidden reserves and smoothing of peaks and valleys of fluctuating results. In contrast, financial statements prepared in accordance with IASs are intended to make information available to a wide range of users so that a variety of economic decisions can be made. Thus, the framework for accounting and reporting on a global basis is distinctly different from that of Germany.

Given the differences in German and IASC financial information objectives and standard setting processes, the inevitable differences in accounting are likely to be significant. For example, the general rule in Germany is that depreciation for financial purposes must agree with that for tax purposes. In contrast, IAS No. 4 provides that depreciation should be based on a systematic recovery of the cost of an asset over its economic useful life. Since tax policy governs depreciation, the resulting expense is likely to be different from that computed under standards similar to IAS No. 4.

As another example, under IAS No. 28, an associated company (defined as one where significant influence is exercised by the investor) should be accounted for by the equity method of accounting. The term "significant influence" has essentially the same meaning as under U.S. accounting standards. However, the concept of "significant influence" does not apply in Germany with the result that associated companies are accounted for on the cost basis. The differences in accounting under IASC and German standards for dividends and proportionate shares of income/loss of associated companies can be significant.

A third example concerns the accounting for the effects of changing prices. IAS No. 15 provides that while there is no international consensus in this area, supplemental information about the effect of changing prices on depredation, monetary items, borrowings, and equity interests should be disclosed. Given the strength of the German antipathy to inflation, it is highly likely that the disclosure requirements of IAS No. 15 would be unacceptable in Germany.

These examples serve to demonstrate that there would indeed be material differences between IASs and German standards. Given these differences, it may be argued that the cost of reconciliations from German standards to IASs would not be all that different from the cost of reconciliations from German to U.S. standards.

It would appear unlikely that IASs would replace present German standards since to do so would have a dramatic effect on the German fiscal system. It is questionable whether German statutory authorities would risk the upheaval of the present balance between the Commercial Code and tax law in order to advance the cause of international accounting harmony.

The SEC and Foreign Registrants

While it may be little difference to German companies whether they reconcile their financial information to IASs or to U.S. standards, it is reasonable to assume there are countries whose accounting standards agree with IASs, or where reconcilement of such standards to IASs is neither difficult nor costly. In such cases, Wyatt and Yospe maintain that Increased competition in the international securities markets and the approaching international acceptance of IASs will pressure the SEC into considering IASs as appropriate for U.S. securities filings. An objection is raised by FASB Chairman Dennis Beresford who maintains the U.S. accounting and reporting system is the most sophisticated and comprehensive in the world. He suggests it would be inappropriate to require U.S. registrants to comply with a strict system while allowing foreign registrants to follow one that is less strict.

Former SEC Chairman Richard Breeden had expressed concern with the differences between U.S. and foreign accounting and reporting requirements. Some of those concerns were lessened after the issuance of proposed SEC rule changes for filings of foreign companies. These proposed rules are intended to case and simplify disclosure and reconciliation requirements and are summarized in the accompanying sidebar.

None of these proposed rules would change basic U.S. accounting standards relating to recognition and measurement. These proposed rules appear helpful in reducing the burden for foreign filings. They are administrative in nature and do not address the basic issue of the acceptability of IASs for securities filings. Their intention is to ease the way for foreign issuers without compromising fundamental U.S. accounting and reporting standards. Implicit is the SEC's position that greater access to U.S. capital markets can be made more effectively and efficiently through these proposed rules than through changes in accounting and reporting standards. Furthermore, the SEC believes that while the increase in the number of foreign issuers resulting from the simplification proposals could result in competition for small U.S. companies trying to raise capital, the effect is not expected to be significant.

The Practical Approach

The IASC has served the accounting profession well by establishing a framework within which international accounting and reporting standards can be debated. Furthermore, the globalization of capital markets sharpens the focus on the issue of common international accounting and reporting standards. However great the perceived need for common standards, there is little evidence of increasing support for IASs. The concept of common standards has appeal, but it is unlikely to be accepted in practice. Although the IASC effort is notable, it does not appear to be sufficient for mandated accounting standards.

Is there a realistic alternative to common international standards? The answer may be found in the harmonization process underlying the EU Fourth Directive that prescribes requirements for the preparation, audit, and publication of financial statements of EU-based enterprises. While the Directive establishes accounting standards, there is an overall requirement that financial statements provide a true and fair view of financial position and results of operations. in recognition of this overall requirement and the fact there are differing legal structures, fiscal systems and business practices in the various EU countries, the Directive "harmonizes" accounting information by requiring extensive and detailed discloses. This process provides conceptual support for the reconciliations required by the SEC in registration documents filed by foreign issuers.

The harmonization/reconciliation process takes time and money. A process well conceived in advance and implemented over a reasonable period of time prior to the registration of securities should case this burden. Also reducing this burden is the responsiveness of regulatory authorities to international market conditions as evidenced by the SEC's proposed rules referred to above.

It is possible international accounting standards may be accorded world- wide authoritative support at some future time. However, this will be an evolutionary process and will require significant changes in jurisdictional accounting and reporting standards, fiscal practices, and capital market regulations. At present and for the foreseeable future, an international accounting standards mandate is not a realistic solution. While the cost of the harmonization/reconciliation process is a real cost of doing business, it is the only game in town.

Editor's Note: The recently issued report of the AICPA Special Committee on Financial Reporting also sheds light on the subject of harmonization. The Special Committee concluded that users of financial information-- investors and creditors--had no strong interest in seeing U.S. GAAP alternatives eliminated. They were more interested in additional information, some nonfinancial, that would enable users themselves to evaluate future earnings and cash flows. It is logical to assume that users would not necessarily seek harmonization of international standards, but rather an expansion of the kinds of information available to users such as the Special Committee recommended.

PROPOSED CHANGES FOR REGISTRATION OF FOREIGN SECURITIES

* A statement cash flows prepared in accordance with IASs would be accepted without reconciliation to that prepared in accordance with U.S. standards. The differences in the two presentations are late principally to account classification.

* Currently, selected five-year financial information is required to be reconciled to that prepared in accordance with U.S. standards. The proposed rule would shorten the selected information reporting period to two years in the case of first-time registrants. The reporting period would be extended each year in subsequent filings until the five-year period is reached.

* Separate financial statements and related reconciliations are now required for acquirees and equity investees at prescribed materiality thresholds. The proposed rules would raise these thresholds.

* Fairly comprehensive reconciliations are now required in circumstances where pro rata consolidation for joint ventures is allowed in some foreign countries whereas the equity method of accounting would be followed in the U.S. The proposed rules would simplify these reconciliations.

* Supplemental schedules, e.g., property, plant, and equipment, are now required for foreign issuers even though they are not required in the issuers' countries. The proposed rules would eliminate the requirement for these schedules.

John D. Gould is Distinguished Visiting Professor of Accounting in Western Carolina University's Forsyth College.