When the board of the International Accounting Standards Committee met in Beijing in July, the irony of the venue was inescapable. Financial reporting in China is a mare’s nest and any attempt to use Chinese financial accounts for investment or comparison purposes is doomed. Most listed companies present two sets of accounts – one drawn up according to Chinese practice, the other in line with international conventions. There is often little accord between the two and it is not uncommon for the Chinese set to report a significant profit while the international one reveals a thumping loss.
It isn’t only the Chinese who report the same things in different ways and get vastly different outcomes, of course.
For instance, non-American companies wishing to raise capital in the US must report their results under US rules. Daimler-Benz found out how dispiriting that can be when it listed in New York in October 1993. The German commercial code allowed it to report substantial profits, while reconciliation with the tougher US Generally Accepted Accounting Principles (US Gaap) required it to report sizeable losses.
Last year Daimler-Benz decided to switch to producing its consolidated financial statements solely according to US Gaap, which has widespread international acceptance. ‘We would welcome one overall international accounting standard,’ says company spokesman Eckhard Zanger, ‘and we would not have to change our reports very much.’
The greater transparency and easier comparability of accounts produced under US Gaap is certainly welcomed by Daimler’s investors who, among other things, benefit from the greater speed with which the accounts can be issued, compared with the length of time it took to produce accounts under German statutory regulations.
Big Puzzle
There is no doubt that most companies’ shareholders find the different approaches puzzling, compounding their general lack of appreciation of accounting policy niceties. And there are significant investor relations problems in trying to reconcile what is reported to domestic investors with what has to be said overseas. It is detrimental to good IR to reveal more information in, for example, a filing with the US Securities & Exchange Commission than is disclosed to shareholders in a company’s home country.
By and large, investor relations managers say they would welcome one set of globally-accepted accounting rules, the more straightforward the better, with which all international companies would comply.
Today’s varying and frequently divergent national and international accounting standards, and the increasing globalization of business, as more and more companies raise capital on overseas markets, are causing both confusion and sharply increased reporting costs for the larger international companies.
Acceptable Standards
Small wonder then that the International Organization of Securities Commissions (Iosco) is anxious to endorse a full portfolio of international accounting standards (IASs) and to see them adopted and used by all multinational companies. Iosco and the IASC have been working together for more than ten years to formulate and agree a framework of new or amended ‘core’ IASs that would be acceptable to securities regulators around the world.
In 1995 Iosco agreed with the IASC that if a defined set of core standards could be produced by June 1999, and if these were accepted by Iosco, then the individual national securities commissions would try to ensure that companies complying with IASs would have ready access to the stock markets regulated by Iosco members and, in particular, to the New York Stock Exchange. The idea was that consolidated financial statements prepared in accordance with IASs would be recognized by stock exchanges throughout the world.
The IASC has imposed a deadline of mid-1998 for submission of the set of finished standards to Iosco. By April next year, the IASC has to approve six exposure drafts and nine full IASs, as well as carry out the range of consultations integral to the process.
There are a number of problem areas, notably the treatment of deferred tax and of pensions, on which there are substantial differences between existing UK and US standards and between them and IASs. These will call for significant degrees of give-and-take before a resolution is reached. On some issues, such as business combinations and segmental reporting, American and Canadian standard-setters appear reluctant to give up their preferred treatments, although harmonization meetings are under way on these and other matters.
Sir Bryan Carsberg, IASC secretary-general, says that the committee has had to speed up its work. ‘Our board is meeting more often and for longer each time. The problem is urgent, with businesses wasting a lot of money each year preparing different sets of accounts for different markets.’
He says the IASC and its partners really do want to achieve a reduction in the differences between national approaches and he is broadly in favor of only one set of accounting standards worldwide.
This inclination matches that of IASC chairman Michael Sharpe, a partner in Coopers & Lybrand’s Australian practice, who says that national bodies should adopt IASs in full and not tinker with them. Sharpe believes national accounting standards are a nonsense in an increasingly internationalized business climate, but this view finds few supporters, even within the IASC.
Chris Nobes, a British accountancy professor at the University of Reading and an authority on international accounting standards, goes some way with Sharpe. ‘There is no reason why British accounting standards, for example, should be different from anyone else’s. There are no real domestic differences; every country’s the same.’
Sharpe does, however, see a role for national standard-setters, if only because the work of the IASC relies on the experience of each individual country’s account preparers and users. ‘Real people are needed,’ he says. And, despite its international standing, the IASC is seriously short of resources and depends heavily on the goodwill of the various national bodies.
Speed Restrictions
That perhaps suits some, since certain accounting and business leaders have reservations about the speed with which the IASC is pressing ahead. Robert Langford, head of financial reporting at the Institute of Chartered Accountants in England and Wales (ICAEW) says there is considerable concern that major shifts in accounting practice might be forced through as a result of the IASC’s desire to meet the Iosco deadline. ‘IASC cannot be relied on to get it right first time and the timetable doesn’t allow for adequate discussion.’
Certainly, the IASC’s 1998 core package faces any number of technical disputes. In addition to long-standing and deep-rooted divisions on how to treat pensions, tax or mergers, the committee’s discussion paper on accounting for financial assets and liabilities has sounded alarm signals among national standard-setters. The IASC’s approach is that financial assets and liabilities should be measured at fair value, including those held long-term rather than for trading.
‘We find it surprising that a standard on the measurement of financial instruments should be regarded as a core standard at this stage,’ says Robert Hodgkinson, a partner in Arthur Andersen’s professional standards group and chairman of the ICAEW’s Financial Reporting Committee. ‘No national standard-setter has achieved this so far.’ Carsberg counters that the inclusion of a financial assets and liabilities standard is at the direct request of Iosco.
Question Marks
The IASC’s proposals have also been severely criticized by European bankers, with both the German and the European banking federations rejecting the proposed approach. Andreas Bezold, head of group finance at Dresdner Bank, says that the IASC’s recommendation ‘has not been given systematic reasoning’ and would ‘replace a fairly appropriate measuring system with one with numerous question marks and plenty of room for manipulation.’
Some experts say the IASC’s standards and pronouncements reveal a tendency towards simplification, which has replaced an equally worrying earlier approach that favored two or more alternative treatments. Langford points to the ICAEW’s conclusions on the financial instruments proposals: ‘Underlying a number of the general issues is, we believe, a preference for an easily policed rule book system, rather than one based on more general principles and appropriate professional judgment.’
Carsberg defends the present IASC approach. ‘We have a strong view that a standard is not much use unless it is definitive but that it should not be too long or detailed.’ He acknowledges that there has been a reduction in the scope for alternative treatments and that most IASs are less detailed than their US equivalents, for example. But he points to the IASC’s recently-formed interpretations committee as a way round any problems.
Among continental European regulators, there is growing concern that they have little or no influence over the reporting and disclosure standards being forced on domestic companies raising capital overseas. Increasingly, there is a tendency to produce supplementary accounts conforming to IASs, alongside financial statements drawn up according to national rules.
This move has been led by German listed companies anxious to gain ready access to overseas markets. For 1994, three companies issued group accounts that met both the domestic commercial code requirements and those of the relevant IASs. Several others produced accounts based on IASs for 1995, and the trend continues. Deutsche Bank, for example, has produced IAS-based group accounts for the first time.
Veba, which is due to list in New York on October 8, has been producing supplementary US Gaap group accounts for three years. ‘We are issuing German statutory accounts and providing reconciliations with US Gaap in additional tables,’ says company spokesman Dr Kay Baden. ‘Once we are listed, we shall produce full US Gaap accounts.’ Veba is aware of the continuing convergence between IASs and US Gaap and may go over to IAS-based accounts in the future, although it considers US Gaap to be more acceptable in overseas markets.
The Bonn administration will allow German companies seeking capital overseas to use IASs or US Gaap for group accounts, as long as these are approximately equivalent to statutory German financial statements. Draft French legislation announced last year would permit a similar approach in France.
Multinational Moves
Outside Europe, in a move typical of a growing number of multinationals, the South African mining and finance group Anglo American Corporation has firmly endorsed IASs. ‘The growth in both international capital markets and international investment opportunities has further emphasized the need for comparability of accounting practices around the world,’ says a spokesman. ‘The IASC has issued accounting standards covering most of the topics that are important in financial statements and our accounts comply with those standards as well as South African Gaap.’ Anglo American says its shareholders welcome the additional disclosures made under IASs.
The Australian Accounting Standards Board has adopted a policy of using existing IASs as the basis for developing Australian standards and ensuring that compliance with domestic standards results in compliance with IASs. Similarly, Hong Kong and Singapore are using IASs as a basis for their own national standards.
Haste or Speed?
The IASC is under growing pressure to produce the agreed standards package. If it takes too long, say the advocates of speed, an increasing number of internationally-oriented companies will go over to US Gaap and will not be keen on changing everything again to comply with IASs.
However, even if the IASC succeeds in producing an agreed set of core standards by April 1998, two crucial questions remain. Will Iosco endorse the full set of standards? Will national regulatory and market operating authorities accept international accounting standards in place of their own domestic standards and practices?
The broad consensus is that enough harmonization and commitment will be achieved and that Iosco will honor its pledge. But will the IASC meet its 1998 deadline? ‘There’s a hell of a work to do,’ says the ICAEW’s Langford, ‘and I think the IASC is trying to go too far too fast.’
A failure to gain Iosco’s support, which has to be unanimous, would leave the US Financial Accounting Standards Board (FASB) in a virtually unassailable position as de facto world leader and pacemaker.
And, among continental European companies, there is already a feeling that international standard-setting is dominated by the so-called G4 bodies – the American, Australian, British and Canadian standards boards – and that too great an American and Canadian influence may block Iosco support for the IASC’s 1998 set of core standards. ‘Europe is very suspicious of the G4 group,’ says Langford, ‘and would like a stronger say in what goes on.’
Such worries are dismissed by Carsberg. ‘If you were a fly on the wall at IASC board meetings, you would see that the Anglo-Saxon countries do not always get their own way and often disagree with one another,’ he says. I am confident that Iosco will accept the full core set of standards. There are strong pressures for international harmonization, with even the US Congress supporting the process. The only question mark is over the length of time it may take, and it will be very disappointing if we don’t get there quickly.’
‘It will be difficult, and it won’t happen quickly,’ says Chris Nobes. ‘But Iosco is driven by politics and everything depends on political advantage, so the technical people may be leaned on.’
National approval will also have to go through each country’s due processes. By and large, the outlook is favorable but for several observers the principal stumbling-block may be the American SEC. The commission’s chief accountant, Michael Sutton, says that the SEC’s goal is to reinforce rather than dilute the US capital market’s strength and stability; its acceptance of IASs should not be taken for granted. But Carsberg notes that the SEC is supportive of IASC’s work and has been fully involved in its deliberations. ‘In fact, the SEC has encouraged us to speed up.’
The SEC’s attitude will be crucial since the whole program may depend in the end on US regulators – notoriously protective of their own national standards and determined to insist on the same level of quality in IASs as in US Gaap.
On balance, pragmatism will probably win the day and the huffing and puffing will subside as the inevitability of endorsing and accepting IASs draws closer. In the world of global finance, principles are one thing; practicalities quite another.
