In a world made smaller by technology, international investment opportunities are greater and more diverse than ever before. But even as markets become internationalized, there remain impediments to the free flow of capital across national borders. As market participants cross national borders to transact in different markets, they often meet with differences in national perspectives about business and finance. One area that has been receiving a lot of attention lately is accounting standards.
Differences in accounting standards pose problems for investors in comparing investment opportunities. Different national accounting rules also can increase the costs to financial statement preparers of raising capital across borders. Many see a single set of international accounting standards as the solution that would remove those types of impediments and increase the efficiency of capital markets worldwide.
The Financial Accounting Standards Board (FASB) recently issued a report that examines similarities and differences between U.S. generally accepted accounting principles (GAAP) and the present body of accounting standards issued by the International Accounting Standards Committee (IASC).(1) Because there are differences between IASC standards and U.S. GAAP, an investor comparing IASC-based financial statements and U.S. GAAP-based financial statements may encounter comparability problems. The FASB report can help investors, analysts, standard setters, regulators, and others to better understand the potential impact of the use of IASC standards in U.S. markets.
The Need for International Standards
Different national accounting rules can hinder cross-border investment opportunities for a number of reasons. First, investment decisions generally hinge on the ability to compare competing opportunities. Differences in acounting rules create noncompatibility, which places a den on either the capital suppliers or the capital seekers to compensate for differences. An investor making an investment decision between similar firms located in Germany and France, for example, will need to make adjustments for differences in the financial information provided under each set of national accounting principles to compare those two opportunities. Further, if it is a U.S. investor whose reference point for decision-making is based on his or her understanding of U.S. GAAP, then each set of financial statements must be compared with U.S. GAAP as well. Essentially, the investor is faced with the burden of understanding three different sets of accounting rules to make an optimal investment decision.
One alternative is for all firms to use the same accounting standards - a set of international accounting standards. Unfortunately, it is unlikely at present that all countries would agree to replace their national accounting rules with a single set of international rules. Nonetheless, there has been a great deal of support for the use of international accounting standards by cross-border filers, that is, those that prepare financial statements for foreign markets and investors outside the home country.
In July 1995, the IASC and the International Organization of Securities Commissions (IOSCO) reached agreement on a plan for the IASC to develop a set of "core" international accounting standards. Core standards are the key areas of accounting identified by IOSCO that must be covered by a set of international standards before they can be considered comprehensive enough for use by cross-border filers. If the IASC remains on schedule to develop the core standards, then, as early as 1998, IOSCO could consider the standards as a basis for financial statements prepared by cross-border filers. If the U.S. Securities and Exchange Commission (SEC), a member of IOSCO, agrees to allow foreign issuers to use IASC standards, it could have a significant impact on U.S. markets. Financial statement users, especially those comparing domestic and foreign firms, will feel the impact most directly. …