At a conference on international accounting standards (IAS) in Washington a year ago, the day's speakers were asked when standards developed by the International Accounting Standards Committee (IASC) will be acceptable for foreign securities issuers in the U.S. without reconciliation to U.S. GAAP. Panelists included an FASB member, someone from the SEC chief accountant's office, three Big Six partners (including an IASC board member), someone from industry, and me.
Several were noncommittal or cautious: "years down the road," "many hurdles," and so on. Others were more definite: "at least 10 years" and an even longer "20 years." My turn came. Five years, I blurted out, meaning at least all regulatory approvals in place by July 1, 2002. I summarized my reasoning-benefits to investors, benefits to companies, and benefits to the U.S. capital markets.
Well, it's now a year later and I am sticking with my prediction for 2002.
IASC is on target to meet its part of a bargain with the International Organization of Securities Cornmissions (IOSCO) to complete a core set of accounting standards in 1998-standards that produce reliable, high quality information; standards that are bolstered by a program of interpretations in response to problems or divergences in apply ing them in practice; and standards that can be rigorously enforced.
Why Not Just
National Accounting Standards?
The answer to that question is simple. Investors and lenders have gone global. Financial reports must be written in a common accounting language that is understood globally. That means defining assets and liabilities and measuring profits and losses the same way across political boundaries.
American investors have gone global in a big way. Just since 1991, holdings of non-U.S. equities by U.S. residents increased from S200 billion to well over $1 trillion. Seven years ago, foreign equities accounted for about six percent of individuals' holdings. It's over 10% today.
The trend toward foreign investment is expected to continue. Studies anticipate that as the foreign percentage of the equity portfolio increases from today's 10% to 20, 30, and even 35%, portfolio risk declines while the average annual return increases. Rational investors simply cannot walk away from reduced risk coupled with higher return.
It is not surprising, then, that nearly 1,000 of the 13,000 companies now registered with the SEC are foreign companies. And most of those 1,000 are huge multinationals. Nor is it surprising that international equity issuances in the U.S. grew at a 26% annual rate from 1991 to 1997. In 1997, foreign registrants raised $28 billion in U.S. capi-' tal markets-16 times the 1990 level. Meanwhile, there are several thousand more large foreign companies-ones of New York Stock Exchange size and quality-that have yet to tap into the American capital markets.
This opportunity has not gone unnoticed on Capitol Hill. In legislation passed in 1996, Congress recognized that "a high-quality comprehensive set of generally accepted international accounting standards would greatly facilitate international financing activities and, most significantly, would enhance the ability of foreign corporations to access and list in the United States markets."
What's Happening in Other Countries?
The trend toward cross border investing and financing is not unique to the U.S. The European Union (EU) started out as a way to achieve a single economic trading market. Harmonized accounting has been an EtJ objective since its inception. It's in their directives (laws). Over the years, the EU has debated different ways to achieve that goal. As recently as 1995, it considered setting up its own accounting board. But it concluded that IASC is the best way to move forward. As a matter of policy, the EU has associated itself with the efforts of IASC and IOSCO toward international harmonization of accounting standards. …