Chapter 3

Future Directions in Financial Accounting Standards: The Potential Role of International Accounting Standards

Tom Jones

3.1 Introduction

3.2 Necessary Transition Period

3.3 Case for Adopting One Set of Principles-Based Standards

3.4 Historical Perspective

3.5 Formation and Structure of the IASB

3.6 Structure and Process of the IASB

3.7 Standards in Force

3.8 Impediments to Implementation

3.9 Myths and Misconceptions about International Standards

3.10 Sources and Suggested References

3.1 Introduction

The objective of the International Accounting Standards Board (IASB) is a single set of high-quality financial reporting standards used globally. Why is this a desirable objective?

First, there are cost benefits. The international standards dramatically reduce costs to preparers and also to auditors and to some extent to analysts. This applies primarily to multinational companies that in the past have had to deal with many different accounting conventions and disclosure requirements in their foreign operations. They have had to meet local accounting standards in their subsidiaries overseas and then convert those results into U.S. generally accepted accounting principles (GAAP) for Securities and Exchange Commission (SEC) and shareholder reporting.

At least they now deal mainly with only two sets of accounting conventions—U.S. GAAP and international GAAP—but even this involves two sets of books for every affected operating unit, and this remains expensive. IBM is a prime example of a company with more operations outside the United States complying with international standards than in the United States complying with U.S. GAAP. One global enterprise, Ford Motor Company, has moved to international standards worldwide—for every unit, including its management reporting for domestic U.S. operations. The broader goal of this particular company is to build on a unified global accounting system as a key part and driver of globalizing its entire operations.

It is also the case that U.S.-based multinationals are the only companies in the world that are required to keep two sets of books; since foreign registrants are now permitted to file in the United States without reconciliation to U.S. GAAP, this implies some acceptance by the SEC that international GAAP has significant legitimacy.

Cost benefits are not limited to large multinationals. Many of the smaller listed companies believe that the move to international standards will be very expensive and will yield few benefits. Nothing could be further from the truth, and this erroneous view is fostered by scaremongering by opponents of U.S. adoption of international standards and by a lack of teaching and information on the subject.

3.2 Necessary Transition Period

The transition to international GAAP in the United States will likely not take place without a lengthy preparation time, probably about five years. Most companies renew operating systems fairly frequently, and obviously changes in the next few years should take into account potential international accounting information requirements. This will dramatically reduce the cost of the transition if considered at the time of systems updates.

In addition, the Financial Accounting Standards Board (FASB) and the IASB are working very hard right now to convert to identical standards in each area where they are currently active. A prime example is revenue recognition, which was an area of significant difference between FASB and IASB, mostly attributable to the multitude of detail rules in current U.S. GAAP. A new standard currently being contemplated would make principles-based revenue recognition identical in both jurisdictions. Obviously, the larger and more important the area of full convergence, the lower will be the cost of adoption.

Also, the cost of conversion, as modest as many believe it will be, is a one-time item.

3.3 Case for Adopting One Set of Principles-Based Standards

A logical way for the United States to adopt international standards would be to eliminate the unnecessary length and large body of rules-based requirements, written in accountant “techno-speak” language that is incomprehensible to all but a few. If the United States adopts this approach, there will be quite dramatic savings in the future in terms of the lower amount of investment and effort complying with the current complex requirements. While cost savings are important, the savings in the human resource area are probably equally important. In the past, preparers had to ensure that accounting staff were educated in many different accounting theories; often the first language of these staff members was not English. Imagine the cost and waste of resources this caused, often in countries with limited resources that would be better used for purposes other than competing accounting theories.

No less significant are the improvements in comparability. Opponents of international standards argue that comparability will suffer, but a few moments reflection will convince you that with emerging economies growing rapidly and markets globalizing—and with U.S. markets now occupying only about 30 percent¹ of the total global equity markets, comparability globally will obviously be improved.

In summary, the combination of these factors should make for more efficient capital markets—and a reduced cost of capital. Academic research² has shown that in a number of countries that have adopted international standards, the cost of capital has indeed been reduced.

It is important to remember that accounting is not rocket science. It does not need to be highly complicated or to be written in incomprehensible language. In fact, I believe that complexity in accounting standards is usually a sign of too many rules and too few principles and is therefore a sign of weakness in the standards. The more complex the standard, the easier it is for inventive accountants to “lawyer the words” and find ways around it. Prime examples of this can be found in consolidation standards, where the IASB has a simple principle: “If you have control, you must consolidate.” The standard illustrates that control is a fact. It may be ownership of more than 50 percent, but it may equally be the exercise of control over the board or over company policies or benefits. These and other factors may be evidence of the requirement for consolidation even without majority ownership or even without any ownership. It is clear that you cannot easily find ways around the standard by tweaking ownership percentages and that judgment of the facts is required to make a decision as to whether consolidation is required or not. I posit that there would have been far fewer subsidiaries omitted from the books of the banks in the 2008 crisis had that been the rule in the United States. In fact, when Deutsche Bank moved from U.S. standards to international standards in 2007, it was required to consolidate approximately 200 vehicles that had not been consolidated under U.S. GAAP, and of course the lessons of Enron's adventures in accounting do not need repeating. I should hasten to add that U.S. standards on consolidation have been significantly strengthened in recent years, and the United States and international standards on this and many other subjects should be identical after completion of the current round of joint deliberations on these standards.

Another example of the evils of complexity is in the area of lease accounting. Many standards, including both international and U.S. standards, have had rather complex rules regarding how lease obligations should be treated. This, of course, means whether they should appear on the balance sheet or not. Needless to say, these rules have resulted in less than an appropriate number of leases ever appearing on balance sheets as liabilities. This is a gross distortion of liabilities and of any ratios based on assets or liabilities. It is the simple result of giving adventurous preparers a challenge to work around and defeat complex rules. A proposed replacement by both the IASB and the FASB will include a simple principle stating that if a lease has been entered into, the discounted cost of lease payments through the entire contract must be reported as a liability. It will be very hard to find imaginative ways to avoid that standard, and accounting credibility and comparability will benefit as a result.

One other change introduced by the IASB based on the experience of a number of national standard setters is to discourage the issuance of industry-specific standards. The IASB prefers to use product-specific standards so that preparers do not shop around for the most advantageous accounting methodologies. An example of this lies in the banking and insurance industries, where it is possible for an identical product to be accounted for differently depending on whether the preparer is classified as an insurer or as a bank. Many commentators in the United States see the absence of industry-specific standards as a weakness. It takes a real effort to change that mind-set and recognize that while product-specific accounting may be required, industry-specific accounting is a trap. Much of the complexity in U.S. rules has been caused by industry specialization, and global experience tells us that not only it is not necessary but that it carries heavy cost burdens, leads to real differences in accounting, can lend itself to opinion shopping, and usually is a way for an industry to look for exceptions from basic rules. A number of years ago special accounting for railroads was abolished, and life continued as usual.

In my view, accounting standards need not be highly complex, and I believe that the last 10 years have given some proof of that. However, the objective of a single set of high-quality accounting standards used in every jurisdiction is a breathtaking thought. It certainly would not have seemed very likely 10 years ago when the IASB was first formed, but when you consider that the result of multiple sets of differing standards is that a transaction may be accounted for differently because it takes place in Birmingham, Alabama, rather than Birmingham, England, the result is absurdity.

It is also a fact that many of the differences between the various competing standard setters in the past were insignificant. In some cases, countries developed their own versions of existing U.S., U.K., or French standards with no meaningful differences between their end product and their “model” except the pride of authorship. Obviously there are issues of principle, which must be addressed head on. For example, the charging of stock option compensation to earnings was a prime example of an issue of principle that had to be addressed in accounting, but many of the differences that accounting technicians and academics argue over and that accumulate to make the differences between competing accounting rules are truly insignificant and create confusion while yielding no benefit whatsoever. This topic of stock compensation was hotly debated in and outside the United States and heavily lobbied by businesses exerting pressure on politicians to influence the process. In both cases, the end accounting result was similar, but a war was fought on two fronts to accomplish that end result. How unnecessary.

3.4 Historical Perspective

Accounting systems have been with us for a very long time. History tells us that double-entry bookkeeping was invented in northern Italy or more likely somewhere east of there about 500 years ago and that long before that time, records of crops and the changing seasons were maintained. However, the emphasis on high-quality financial reporting started with the invention of joint stock companies whose investors who did not necessarily have access to the books of account. While this trend started in Europe, the past 50 or 60 years have seen the United States invest more effort, more money, more time, and more thinking into the subject of comprehensive high-quality financial reporting than any other country.

Accounting history in the United States is complicated. There have been many players, including the part-time Accounting Principles Board and its successor, the Financial Accounting Standards Board. The American Institute of Certified Public Accountants (AICPA) has also had a continuing hand in accounting standard setting through its Accounting Standards Executive Committee (AcSEC) and other groups issued industry-specific guidance. In addition, the SEC has at times been active in steering the direction of accounting through its rulings, Staff Accounting Bulletins, and through speeches or staff announcements. Of course, Congress retains the ultimate right to override all these other bodies, although it has only occasionally done so in the past and today is an active participant in FASB standard-setting projects. This early confusion over standards setting was somewhat alleviated with the formation of the FASB in 1973. A good deal of the duplication and confusion has been cleaned up, particularly with the recently completed “codification” project, which pulled together all the relevant and related rules standards and guidance into one place by topical area. This is a major improvement in a somewhat messy situation. If all the accounting literature (standards, interpretations and clarifications issued by the FASB the SEC and predecessor parallel bodies such as the Accounting Principals Board, Railroad Accounting Board, AcSec, etc.) were printed, it would probably reduce the total number of pages from about 25,000 to an estimated 15,000 pages or so.

In the period from 1973 to the late 1980s, the FASB clearly was the world gold standard in accounting, and it could have become the de facto global standard setter. This is especially true because at that time U.S. capital markets made up significantly more than half of the world's capital markets. However, there was little enthusiasm at the board level or amongst the trustees for this extension of the board's mission. I was a member of the Board of Trustees at the time, and I remember the debate and the consideration of the amount of change in staffing, consultation, politics, and workload to expand the mission to a global focus and include other country's views. This was enough to blunt any enthusiasm that existed, and it probably was a wise decision not to take on the task of global standard setting at that time.

Unfortunately, in the late 1980s and the early 1990s, there were many changes, including the acceleration of growth in capital markets outside the United States and a major and sustained increase in the volume and complexity of the FASB's standards, rules, and guidance.

There was also rapid growth in innovative financial products and techniques as a result of the information technology revolution, enabling inventive minds to find work-arounds to almost any standards containing detailed rules. At one time, a source of pride for a large certified public accounting firm was a dedicated group available on almost a 24/7 basis to help structure financial transactions to meet business objectives.

In addition, there was increasing interest around the world in finding accounting that would add credibility and therefore improve a nation's ability to raise capital. There also was increasing concern, even alarm, over the quality of financial reporting and auditing around the world, particularly in the emerging economies.

Finally, there was a huge and commendable effort by FASB chairman Ed Jenkins, and his successor, Bob Herz, to turn back the clock toward a more principles-based set of standards and a less contorted form of language in the standards issued.

In European accounting, there was a somewhat different picture with a wide variation in traditions. The Dutch, for example, were very early practitioners in accounting aimed at joint stock companies (i.e., shareholder-focused companies). In fact, the Dutch accounting body was created before its equivalents in the United States or the United Kingdom.

Scandinavia also tended toward the equity-focused basis of accounting, as did the United Kingdom. In other parts of continental Europe, however, accounting tended to be focused on creditors or bondholders, or toward distributable income as a key ingredient.

By the 1990s, Europe's commercial union, the European Union (EU), had become highly successful. However, fundraising and equity markets had not kept pace, and of course political unity was and remains elusive. This is part of the reason for the euro problems—a common currency but a large number of different economic strategies.

Setting aside the currency issues, it was apparent that given its commercial success, the creation of a common equity market for Europe was a high priority. While the currency experiment could continue, it was essential to have uniform accounting standards. This was the Lamfalussy plan,³ named for the chairman of the committee of “wise men” who created it. Europe's dilemma arose because of the different accounting approaches adopted by various countries within the union and the fact that it would be difficult to persuade 27 countries to adopt the accounting standards of any one country. For this reason, the existing International Accounting Standards Committee (IASC; predecessor of the IASB) seemed to offer a better alternative. ⁴

While these discussions were going on in Europe, other countries and other institutions were active. The Japanese had a complex but advanced set of accounting standards, and many countries (e.g., Australia and Canada), were also at the forefront of developments. Other groups were thinking about the issue of accounting standards, prominent among them the United Nations and the Organization for Economic Cooperation and Development.

Another interesting contender in the movement toward rationalizing/standardizing accounting standards was known as the G4 +1. This organization was a completely informal discussion group dealing with accounting issues of the day. It included heavyweight accounting standard setters, such as the United States, the United Kingdom, Canada, Australia, New Zealand, and the IASC. The group produced some very high quality research, but why it was known as the G4 +1 when in fact it was 5+1 is lost in the mysteries of time. One thing is obvious, however: This was a very Anglo-Saxon–oriented group, with the IASC the only representative of other jurisdictions. Nevertheless, it remained purely a discussion group and did not really have aspirations to become a standard-setting body. To his credit, Ed Jenkins proposed that the group abolish itself upon the formation of the new IASB, and this was a welcome endorsement of the newly forming body.

The IASC is also relevant since it was the predecessor body to the IASB. It was initiated in London in 1973—coincidentally the same year as the formation of the FASB in the United States—as a result of the very active role of its chief supporter, Sir Henry Benson. Benson was a British auditor who, with amazing perspicacity, forecast that while the IASC may be new to the scene, it would come to have great significance by the turn of the century. Indeed, exactly 27 years later, in 2001, it became the basis for the formation of the International Accounting Standards Board.

During its 27 years of existence, the IASC gradually advanced its professionalism and credibility but really did not become anything other than a collator of accounting methodologies in use around the world, with many of its standards containing accounting options—sometimes multiple options to appease various constituencies. It also had no ability to require countries to use its standards or to enforce them in any way. No country required use of the IASC standards, although a number of companies voluntarily complied and they did serve as default standards in a number of countries, including Italy. Despite these handicaps, the IASC was a large group of people—70 to 80 people around the table—from a wide geographic spectrum sharing the common goal of improving accounting. Most of the participants were very part time volunteers. Nevertheless, the credibility of the IASC improved over its lifetime. It certainly could not have undertaken the role subsequently played by the IASB, but it did provide a neutral and credible base for the formation of a new board with more teeth.

Turning now from the various aspiring standard setters, there was obviously a considerable amount of political maneuvering happening behind the scenes. There was an urgent need for a single set of standards in Europe, in order for its capital markets to consolidate and grow. There was equally an interest in the United States because of its worldwide purview of investments. The developing countries also needed to improve credibility, particularly those that wished to make inward investment more attractive. Even Japan, despite its wealth and advanced development, was still looking for more inward investment and therefore needed credible accounting to attract that capital.

It was clear that for most countries, the transition to international standards would be difficult. There was a somewhat grudging acceptance that a beefed-up IASC was the most likely organization to make progress. The IASC also recognized that it would need to relinquish its position in favor of a stronger full-time board, which would have the required impact. There was strong support for the concept of an enhanced IASC from Bob Denham, a visionary chairman of the Financial Accounting Foundation (FAF) and from David Ruder, a former SEC chairman and a member of the FASB's board of trustees. Ed Jenkins, chairman of the FASB, was also a strong supporter.

In September 1996, a strategy working party was created to determine how best to move forward. There was broad involvement, as demonstrated by this list of the members of the working party.

As progress toward a transition was mapped out by the working party, a key meeting of the IASC took place in Venice in November 1999, when after lengthy negotiations between the IASC and the SEC conducted through Mike Crooch, a committee member, and Lynn Turner, chief accountant at the SEC (on behalf of then chairman of the SEC Arthur Levitt), the board unanimously voted itself out of existence in favor of a proposed strengthened IASB.

While the strategy working party was deliberating, the International Organization of Securities Regulators (IOSCO) was a highly involved and interested observer. IOSCO's members worked together to produce an extensive list of issues and subjects that it desired to see resolved before it gave its full support to a new board. This list contained hundreds of recommendations, many of them in potential conflict with each other, but it did get to the heart of many of the issues facing the IASC standards and gave guidance for the IASB's first five years of work programs.

Behind these scenes of major change lay the fact that Arthur Levitt, an influential and very active chairman of the SEC, had concluded that the world would not in fact accept an American-dominated FASB as its standard setter. Yet he had become alarmed as significant companies (particularly in the late 1990s in some Asian emerging markets) suddenly faced financial problems and in some cases bankruptcy shortly after receiving clean audit reports from one or other of the major multinational audit firms.

Investigating this phenomenon, Levitt understood that accounting based on local conventions was being audited by major audit firms using local auditing requirements, leading to very unsatisfactory reporting. This caused him to put his full weight behind the effort to create the IASB, presumably based on the experience of his chief accountant who attended IASC meetings as an observer.

3.5 Formation and Structure of the IASB

It is unknown whether Levitt really believed that the IASB would come to dominate standard-setting globally or whether he simply believed that it would be healthy for the IASB and the FASB to compete in a friendly way to achieve better standards. In any event, it was Levitt's support that led the way. At his urging, the agreement of the structure for the new IASB was completed. Also at his urging, the IASC as one of its last acts appointed a nominating committee of very senior statesman, as the next list demonstrates.

The sole objective of this group was the appointment of the first group of trustees who would oversee the IASB. The nominating committee very quickly persuaded Paul Volcker to become the first chairman of the trustees, and together they arranged the appointment of the initial slate of trustees. Volcker completed two terms as chairman, bringing welcome stature to the new organization and defending the independence of the group with force and style. He was clearly a major asset to the IASB. The quality and prestige of the first group of trustees is well illustrated by the next list.

As part of its negotiations, the strategy working party concluded that the board should consist of 14 members at least 12 of whom were to be full time. This number later increased to 16 with up to 3 part-time members. This was a significantly larger group than the United States had wanted but significantly smaller than the alternative two chambered proposals or a much larger part-time body desired by Europe.

The characteristics desired in the new standards were:

• Prepared by a predominantly technical board
• Producing standards based on principles rather than rules
• With few interpretations because if the standards were indeed principles based there should be very little need for interpretation (this turned out to be true)
• Written in an understandable and translatable way (implementation guidance and examples of application are of course useful but are considered to be quite separate from the standards themselves)

The board was technically qualified but also was geographically widespread as indicated by this list of the initial board members in 2001.

The choice of David Tweedie as chairman was unanimous and was almost a foregone conclusion. He was clearly the most visible and the most reputable candidate. It is mainly due to his independence, tenacity, technical ability, and political skills that the board achieved such success in its first 10 years.

3.6 Structure and Process of the IASB

The structure and governance of the new organization was heavily influenced by and is in fact based on the structure of the FAF and the FASB in the United States. Trustees set the due process rules, hire and fire the board members, and fulfill the fundraising role. The board members are completely independent in terms of technical accounting decisions, which must, of course, comply with the due process as outlined by the trustees and must be totally independent of any other body or any previous employer. (The part-time board members are exempt from this requirement.)

The board operates through regular board meetings, normally one week each month. The trustees appoint working groups of outside experts for every major project and also appoint a standards advisory committee (SAC), which meets quarterly. Roundtables are organized in the case of particularly difficult technical standards and an interpretations committee (the International Financial Reporting Interpretations Committee (IFRIC)) meets approximately six times a year.

Sunshine rules apply. Every meeting, whether board, trustees, working groups, or roundtables, must be publicly advertised and must be open to public observation. No more than five board members may discuss a technical issue in private.

One significant difference between this initial structure and the US accounting standard setting structure, is that there is no oversight body monitoring actions of the trustee's. In the United States, this is a role assumed by the SEC. This shortcoming was eliminated during a change in the constitution after about five years when a monitoring board was appointed consisting of five securities regulators (including the chairman of the SEC) together with an observer from the Basel banking committee. This oversight is quite similar to the equivalent SEC oversight within the United States.

The appointment of the board in April 2001 resulted in about four years of very hard work, responding to criticisms and suggestions by IOSCO and also by the European Commission, and in general to make the standards suitable for European and other countries to adopt in 2005. The European commission did in fact adopt the standards in 2005 giving the IASB a credible start. It was notable that a number of other countries also adopted in 2005, including Australia, which had a very well-established and reputable position as a leader in accounting standards setting. This broad project to prepare the standards for use in 2005 was collectively known as the improvements project, and although it did not answer every issue—it is silent on insurance accounting, for example—it nevertheless resulted in a set of standards that have stood the test of time well in situations that had greater impact in the United States. There were the expected bouts of criticism, particularly in Europe, about the effort required to achieve the transition, but a couple of years later there was general agreement, at least by preparers, that IASB had improved accounting in Europe.

Each country or jurisdiction that uses international standards must of course have its own process for implementing those standards. Some have chosen to adopt all standards and interpretations automatically as issued unless they make an exception; Australia is one example. Others including Europe have chosen an active endorsement process of one kind or another. In Europe, the entire collection of existing standards in 2005 was adopted together with all subsequent standards and interpretations with one minor exception—a “carve-out” of about 11 paragraphs of one standard in the initial package of standards adopted in 2005. This carve-out is very unfortunate; it has given rise to a view that the standards are not being implemented in a disciplined way in every country. In fact, there are differences in the rigor with which countries enforce the standards but, in general, over the first 10 years, the movement has been very much toward full adoption with no exceptions and no argument. The carve-outs in Europe, which could not be eliminated because of the objections of a very small number of European companies—29 out of 8000—will likely disappear with the implementation of the new standards on financial instruments being developed jointly between the FASB and the IASB.

It is important to note that adoption can be achieved in a number of ways, some more expensive and wasteful than others. With about 120 countries having adopted the standards or being in the process of doing so, there is much experience to draw from. The examples of Denmark and Germany are good ones to illustrate good and bad ways to implement. Denmark has made very efficient use of international standards by abolishing its local GAAP for listed companies and abolishing separate accounting rules for tax or statistical purposes wherever possible. Germany took the opposite path and has imposed international standards on top of all existing local requirements and has applied them only to holding companies as opposed to subsidiaries. This is about as inefficient a way to achieve adoption as it is possible to imagine right now.

In other cases, adoption has been too enthusiastic, and international standards have been applied even to small, unlisted businesses. This is clearly a mistake and has been remedied by the introduction of a small and medium enterprise standard within the past few years. The SME standard has achieved enormous success with approximately 60 countries already using it. It covers the entire spectrum of accounting in only 250 pages. It also gives added impetus to further simplify the full standards used by listed companies. The United States is currently considering separate standards for small enterprises. One might hope that the United States takes advantage of the international experience in this area.

The international convergence efforts are supported by the G20 (the largest economies in the world) who at their September 2009 meeting called on international accounting bodies to redouble their efforts to achieve convergence. The current status for some those countries are:

Approximately 100 additional countries either have adopted or have a date certain for future adoption. this listing is kept up to date and can also be accessed through www.IASplus.com.

3.7 Standards in Force

Some idea of the coverage of international standards can be seen in this list of standards and interpretations in force in 2010. Interpretations number less than three per year on average, giving credence to the belief that principles-based standards require much less interpretation. Resisting the demands for excessive interpretation requires courage, and the interpretations committee (IFRIC), consisting of 12 volunteer external experts, has done a great job in this respect.

International Financial Reporting Standards International Accounting Standards

Interpretations

These lists are expanding, and the cooperative agreement between the FASB and the IASB will lead to new and revised standards that are common to both in a number of areas. Some examples are a new comprehensive standard for financial instruments, a common standard for revenue recognition, a common standard for lease accounting, and possibly a new insurance standard that will remedy one of the true defects in accounting today. That defect is the fact that insurance accounting (specifically life insurance) is different in many countries, that it is written in a rather arcane language understood only by insurance experts, and that technology is bringing banking and insurance closer so that current differences in accounting treatments are a particular problem. Think, for example, of a small subsidiary regulated by the weakest banking regulator, and therefore using bank accounting, trading heavily in derivatives. This subsidiary is hidden inside a global insurance company, and practically bankrupted its parent.

Other standards already part of the IASB suite are very similar, even though they were written before the formal partnership between the FASB and the IASB. Examples of these are the acquisition and merger accounting standard and the stock compensation standard.

3.8 Impediments to Implementation

One objection raised in the move to international standards was the belief that cultural differences would create problems for a number of countries in adopting the standards. Experience with about 120 countries shows that most of the so-called cultural differences are in fact legal differences. The IASB position on legal differences is very simple: If a country wishes to adopt international standards, it must make whatever changes in the law are required. If it does not wish to change the law, it should not attempt to use international standards. As far as I know, the only area that is continuing to debate the issue of cultural differences is the Middle East, where some countries believe that Arabic banking requires separate and different standards. Personally I doubt this; many foreign corporations operate banks in the Middle East and seem to manage quite well.

Following the wave of adoptions in 2005 to 2007, a number of large countries are now implementing or on track to implement international standards. For this reason, there is some pressure to issue new standards and then after 2011 to have a stable platform for these countries to implement. This is somewhat in conflict with the U.S. trend to take a longer period to produce more complicated common standards.

This leads to a discussion of the U.S. position. Much of the enthusiasm by countries around the world, particularly Japan and China, was based on the assumption that the United States, which had been responsible for setting in motion the IASB, would be on board 10 years later. This has not yet happened, although the United States appears still to be supportive. There is excellent cooperation at the level of the two technical boards, FASB and IASB, but countries around the world are beginning to ask why they should fully adopt international standards if the United States does not. They are also asking themselves why the United States should have four board members and five trustees—more than any other country—when it is one of the very few countries that has not yet committed to a date for adoption.

If the United States does not commit to adoption, other major players may also opt out and we will have lost our best chance of stabilizing the accounting world. If the United States commits to adoption but retains all the detailed rules, interpretations, and guidance that exist today, it will have the worst of all worlds and will have given up the chance to move to a more principles-based approach.

One must also sympathize with the complexity of the U.S. adoption decision. The SEC is given legal authority over accounting standards in the United States and has actively participated in the discussions and deliberations of the FASB. Indeed, many of the accounting issues raised to the Emerging Issues Task Force are issues prompted from the SEC's review of filings and questions from U.S. corporations. In the past, the SEC has had a large voice in international accounting and securities laws. Today, U.S. equity markets are no longer as dominant as in the past. Some important questions:

• How can the SEC meet its legal responsibilities to regulate accounting principles in the United States in this new environment?
• What influence will the United States have in the international deliberations going forward?
• Will it be necessary for the SEC to insert interpretive guidance for U.S. companies if the international mechanism for issuing interpretations is reluctant or slow to respond to issues and U.S. perceived needs for guidance? Does that put the United States at risk of being in a situation similar to the one it is currently facing regarding detailed rules and guidance?
• If the past advice of the IASB was to decouple from international standards when there is a conflict with local law, does that imply that the United States needs to change the authority given the SEC in order to adopt international standards as GAAP for financial reporting?

These questions have no easy-to-implement solutions. Answers need to be forthcoming before, not after, a decision to change is made.

The accounting world has come a long way. In the 1980s, the IASC was looking for harmonization. In the 1990s, the IASC was looking for convergence. In the 2000s, the IASB was looking for adoption. It would appear that the SEC has invented a new term, condorsement. I hope this is not an indication of the worst-of-all-worlds solution described earlier.

3.9 Myths and Misconceptions about International Standards

A variety of myths and misperceptions about international standards should be openly debated. Here the author presents his views on the myths and suitable responses.

¹ The Committee on Capital Markets Regulation (CCMR) also reported that the U.S. share of global market capitalization was 31.6 percent compared to an average of 45.7 percent from 1996 to 2006. It is, however, true that the U.S. share of global equity trading was 45.8 percent compared to a historical average of 50.6 percent. (See press release of August 18, 2011, from CCMR at www.capmktsreg.org.) The world federation of exchanges (www.world-exchanges.org/) reports that the United States share of domestic market capitalization declined from 52 percent in 2001 to 31 percent in 2009.

² See: C. Dargenidou, S. McLeay, and I. Raonic, “Expected Earnings Growth and the Cost of Capital: An Analysis of Accounting Regime Change in the European Financial Market,” Cass Business School Research Paper, 2006. C.D. Lee, S.M. Walker, I.R. Christensen, Research Report 105, “Mandating IFRS: Its Impact on the Cost of Equity Capital in Europe,” Certified Accountants Education Trust, London, 2008. G. Lee and Y. Chen, “Asset Liquidity, Cost of Capital and IFRS Adoption,” presented at the 2010 Accounting and Finance Association of Australia and New Zealand Conference, January, 10 2010; http://ssrn.com/abstract=1534316. N. S. Soderstrom and K. J. Sun, “IFRS Adoption and Accounting Quality: A Review,” European Accounting Review 16, no. 4 (2007): 675–702. S. Shi and J.-B. Kim, “Enhanced Disclosures Via IFRS and Stock Price Synchronicity Around the World: Do Analyst Following and Institutional Infrastructure Matter?”, October 2007. Available at SSRN: http://ssrn.com/abstract=1026190

³ The Lamfalussy report, “The Application of the Lamfalussy Process to EU Securities Markets Legislation,” was initially published February 15, 2001. See next footnote for final version and source.

⁴ European Commission Staff, “The Application of the Lamfalussy Process to EU Securities Markets Legislation,” (Final Version) November 15, 2004. See: http://ec.europa.eu/internal_market/securities/docs/lamfalussy/sec-2004-1459_en.pdf

⁵ Standards Interpretation Committee.

Sources and Suggested References

Ball, R. “Mandatory International Financial Reporting Standards (IFRS): Pros and Cons for Investors,” Accounting and Business Research, International Accounting Policy Forum, 2006, pp. 5–27.

Barth, M. E. “Global Financial Reporting: Implications for U.S. Academics.” Accounting Review 83, no. 5 (2008): 1159–1179.

Delotte Global Services Limited.. “IAS Plus,” 2008; www.iasplus.com/restruct/whatis.htm

PricewaterhouseCoopers. “U.S. GAAP and IFRS Convergence,” 2011; www.pwc.com/us/en/issues/ifrs-reporting/ifrs-gaap-convergence.jhtml