One world, one GAAP? Not yet!

Global Finance, Dec 1997/Jan 1998 by Lindorff, Dave

A gigantic stumbling block still remains on the way to international accounting standards: derivatives.

The annual meeting in Paris of the International Accounting Standards Committee in October was supposed to have changed everything. Representatives of the 16 voting members of the IASC would supposedly approve the remaining elements dealing with accounting for financial instruments. From there, the world's multinational corporations, stock exchanges, and national regulatory organizations would rush to adopt a set of global accounting standards for everything from foreign listings and annual reports to tax filings. That, in turn, would unleash a flood of international capital as companies found it easier to list on overseas exchanges and international investors suddenly comprehended the financial workings of overseas companies. But in the end the IASC meeting produced nowhere near the three-quarters majority needed to adopt the standards, so a vote wasn't even taken.

The IASC, a body representing all 126 members of the International Federation of Accountants, has been working on international accounting standards issues since it was established in 1973. The effort to develop a set of "core standards" was begun in 1993 at the behest of the International Association of Securities Commissions, a group of national securities regulators that now hopes to approve core standards in late 1998 or early 1999.

There is broad agreement that an international GAAP is urgently needed, and the IASC board has indeed approved, or is near approving, most of the 40 items on its agenda. But a gigantic stumbling block remains: accounting for financial instruments.

No country currently has comprehensive guidelines to account for financial instruments. But with the US Financial Accounting Standards Board on the verge of completing standards on derivatives and hedging, the United States is furthest along. That led the IASC staff to propose a short-term fix: adopt US financial instrument standards on a three-year interim basis. This, they felt, would give the staff time to work out an approach with IASC's name on it.

Since the United States is the most blatant holdout insisting on its own standards for stock issuance (Canada, Japan, and Germany's primary Borse also require national accounting, though most other exchanges around the globe permit offshore firms to list using either IAS or foreign-country accounting standards), the interim proposal had a certain beauty to it. If standards with a US "ring" helped ease the Securities and Exchange Commission's concerns about the new international standards, foreign companies might hope for an early opening of US equities markets to listings based upon international standards.

But as national pride and concerns about wording began to crop up at the IASC meeting, the interim solution proposal went down in flames. One participant reports that Alistair Wilson, one of two observers at the session for the European Commission, used "inflammatory" language, attacking the US standards as "entirely unsatisfactory" and "incoherent."

In fact, many regulators and corporate finance chiefs worry that a preference for applying fair value to financial assets, based on the American proposal, if adopted on a global basis, could create volatility in accounting. Indeed, FASB's position has been vehemently criticized even within the United States. Although SEC chairman Arthur Levitt Jr called FASB's proposal for handling derivatives a "reasonable approach" that would give investors a better idea of how companies use derivatives, Federal Reserve Board chairman Alan Greenspan warned that it could add considerable volatility to corporate balance sheets and income statements.

The failure to reach agreement on a global set of standards, which were to have been approved in April, sets back the whole IASC timetable. Sir Bryan Carsberg, the board's direct-speaking general secretary from Britain named to the post two years ago, says his staff has been instructed to come back in April with financial instruments standards, which could conceivably be approved at the IASC's next annual meeting in November 1998. Meanwhile, those foreign companies that list on US, Toronto, or Tokyo exchanges must continue their cumbersome practice of either keeping double sets of books or reconciling their accounts using local standards. Such duplication of effort can be enormous. "One major global company's chief financial officer told me it costs his company $5 million extra per year to do the extra accounting work," says Carsberg, who prior to his IASC post directed the United Kingdom's Office of Fair Trading, a position that earned him a knighthood during John Major's administration.

More costly still is the dampening effect multiple accounting standards have on global capital flows, as investors feel uneasy about investing in companies with unfamiliar or opaque accounting methods. While he couldn't put a dollar value on increased capital flows that might be expected from adopting a global accounting standard, Georges Ugeux, the New York Stock Exchange's executive vice president, international and research, says "it would remove a major obstacle to the growth of capital flows and investment around the world and lead to wider and deeper investment in all markets."