The Future of Financial Accounting: Universal Standards

By Schwartz, Donald | Journal of Accountancy, May 1996 | Go to article overview

The Future of Financial Accounting: Universal Standards


Schwartz, Donald, Journal of Accountancy


Widespread adoption of international accounting standards has come considerably closer to reality. In 1995, the technical committee of the International Organization of Securities Commissions (IOSCO)--of which the Securities and Exchange Commission is a member-agreed to formally endorse a core set of international accounting standards for cross-border listings on the exchanges of all member nations by June 1999, after the International Accounting Standards Committee (IASC) successfully completes 15 new standards (see sidebar, page 21). Once the resulting set of standards is endorsed, IOSCO member regulators are expected to replace the use of local generally accepted accounting principles with IASC-based financial statements.

Because acceptance of IASC-based financial statements by the SEC and other IOSCO members would provide issuers with access to New York, London, Tokyo, Hong Kong and other world capital markets, the adoption of international accounting standards by a wave of multinational companies is sure to follow IOSCO endorsement. Putting it in perspective, nearly 400 of the world's top 500 companies do not have listings on the New York Stock Exchange.

Also of note, the IASC board of directors was strengthened in 1995 by new members of several national standard-setting bodies, such as the chairman of the United Kingdom's Accounting Standards Board, the former chairman of the Canadian Accounting Standards Board, the president of India's Institute of Chartered Accountants and a member of the Australian Accounting Standards Board.

The dilemma

Can the SEC allow foreign registrants to apply international accounting standards, yet require domestic registrants to adhere to U.S. generally accepted accounting principles? It would be appropriate to identify which international accounting standards would cause material reporting differences if adopted by domestic corporations in place of U.S. GAAP. In a limited survey of eight foreign corporations, Columbia University's Trevor Harris found the differences may not be that significant. When existing international accounting standards were applied to these companies, there were surprisingly few additional requirements needed to conform with U.S. GAAP. The margin of difference will become even smaller as the IASC completes its work on new standards and improves some of its existing ones.

Because U.S. GAAP allows flexibility in areas such as inventory costing and depreciation methods, there often are major inconsistencies and lack of comparability even among companies within U.S. borders. These inconsistencies are acceptable as long as companies disclose the alternative accounting principles. The same approach can be used to accommodate any remaining IAS principles that, if adopted by domestic companies, would cause material reporting differences.

The SEC has taken a number of steps to ease the burden on foreign registrants by accepting provisions from several international accounting standards. …

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