CCC 1044-8136/99/1004073-05© 1999 John Wiley & Sons, Inc.

Frank C. Minter

The Next Step in Global AccountingStandards

Frank C. Minter, CPA, is anexecutive in residence at SamfordUniversity in Birmingham,Alabama. He formerly was vicepresident and controller of AT&TCompany and chief financial officerof two of its units. After retirement heserved on the Accounting faculty atSamford. Mr. Minter currently serveson the Financial AccountingStandards Advisory Council(FASAC) and is the president-elect ofthe Institute of ManagementAccountants (IMA). He previouslyserved on the Financial ExecutiveInstitute’s (FEI) Committee onCorporate Reporting and theEmerging Issues Task Force (EITF).

One organization will develop and interpret global accounting standards in thefuture. But what will that organization look like? © 1999 John Wiley & Sons, Inc.

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In the Spring 1999 issue of this Journal, Mitchell Danaher of General Electricand Professor Herbert Hunt of the University of Vermont described how fast

approaching global accounting standards will affect U.S. firms. They exploredin detail the development of a group of so-called “core” international accountingstandards by the International Accounting Standards Committee (IASC) thatare anticipated to be the set of standards that will permit cross-border securitiesexchange listings based solely on international accounting principles. Since Mr.Danaher is one of the U.S. representatives to the IASC, he has been very mucha party to the development of this set of standards and their article provides anexcellent framework for the work that has gone on in this important area.

Coincident with the development of this latest group of internationalstandards, the IASC also established another group of individuals to address thenext question which could be framed as “Where do we go from here?” There aretwo separate answers to that question: The first (which is not the thrust of thisarticle and is not being addressed by this new group), deals with what action willnow be taken by the Securities and Exchange Commission (SEC) that could leadto the ability of foreign registrants to list securities on U.S. exchanges without therequirement to reconcile their financial results to U.S. generally accepted accountingprinciples, if those registrants are in compliance with IASC-issued accountingstandards. The second question, that will be explored here, is “What will theorganization look like that will develop and interpret global accounting standardsin the future?”

EXAMINING THE IASCBriefly, IASC was formed in 1973 by an agreement made by the professional

accountancy bodies of ten countries, of which the United States was one. Itsmembers currently are the professional accountancy bodies that are membersof the International Federation of Accountants (IFAC) and number 143 membersin 103 countries. The United States is represented both by the American

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IFAC has delegated to theIASC Board the authorityto publish internationalaccounting standards.

Institute of CPAs (AICPA) and the Institute of Management Accountants(IMA). The IASC has delegated the responsibility for IASC activities that wouldinclude promulgation of International Accounting Standards to the IASCBoard. The Board is composed of 13 country members and up to four additionalmembers appointed by the Board itself.

IFAC has delegated to the IASC Board the authority to publish internationalaccounting standards. To publish an exposure draft of a proposed standardrequires a two-thirds favorable vote and to publish a final standard requires athree-fourths favorable vote. Each member country has only one vote althoughit may have two representatives. If the representatives do not agree, that countrywill abstain.

To address the question that is being asked in this article, the IASC Boardauthorized its chairman to appoint a Strategy Working Party (SWP) to evaluatethe current structure and to propose a structure for the future. Fourteenmembers comprise this group of which seven are from specific countries andseveral are members of country standard setters. For example, Tony Cope, aFinancial Accounting Standards Board (FASB) member, is a member of theworking party. Sir David Tweedy, Chairman of the UK Accounting StandardsBoard is also a member. In December 1998 the SWP issued a Discussion Paper(DP) “Shaping IASC for the Future” and has invited all parties affected byaccounting standards to participate in the debate of this future direction.Comments on the DP were due to the SWP by April 30, 1999.

The SWP has proposed the following structure for future global accountingstandards:

1. Creation of a Standards Development Committee (SDC) whose primaryresponsibility would be the development of both Exposure Drafts andAccounting Standards. The SDC would be composed of 11 membersappointed by the Trustees. These would consist of a full-time chairman,six to eight individuals nominated by national standard setters and whoare voting members of that national standard setter, and two to fourmembers from other groups such as preparers, users, academics, andaccountants in public practice. It has been proposed that seven memberscome from “more developed countries” and that there be a reasonablegeographic spread of all members. The SDC members would be expectedto meet every one to two months and at least six should be involved in“full-time” standard setting. In order to submit Exposure Drafts andProposed Standards to the Board, a majority of 7 votes out of 11 wouldbe required.

2. Establish a reconstituted IASC Board that would have broaderrepresentation than at present. It would have 20 country seats withfive additional seats for other organizations interested in financialreporting. At least 14 of the country members should be from “moredeveloped countries.” It is recommended that, although countriesmay be represented by two delegates, each country would still haveonly one vote. In what may be the most significant controversy in theproposal, at least from the U.S. perspective, the Board would have thefinal authority to issue standards that have been developed by the

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The Next Step in Global Accounting Standards

SDC. Fifteen positive votes of the Board (60 percent) would berequired to issue a standard. If the Board rejected a proposed standard,it would send it back to the SDC for reconsideration. If nine or moremembers of the SDC resubmitted it to the Board, only a simplemajority of the Board would be required for approval. To preventdelay, the Board would be required to consider all exposure drafts andproposed standards within three months of their submission by theSDC. The Board would also have authority to add projects to theagenda, but not to remove projects.

3. A Board of 12 trustees would be established that would have twoprimary responsibilities; selection and appointment of the members ofthe Board and the SDC, and raising of funds to support the operationof the overall effort. Six of the Trustees would come from constituentgroups such as IFAC and six from the world “at large.”

MAKING DEBATE PUBLICIn what is a significant change from the current practice of the IASC Board,

the SWP has recommended that the technical discussions of the SDC be opento the public. In a joint response from the FASB and the trustees of its parentorganization, the Financial Accounting Foundation (FAF), the IASC wascommended for its efforts in addressing the issues but noted that changes wouldbe necessary in the proposed structure recommendations.

The FASB-FAF letter emphasized two points. First they believe that it isessential that the SDC have the final authority to 1) set its own agenda and 2) toapprove both its own exposure drafts and final standards. They would proposethat the SDC members be full-time and sever ties with former employers. Theywould assign to the IASC Board “a strong advisory role in the standard settingprocess.” The Board would maintain liaison between the SDC and the businessand professional world. It would also work closely with the SDC, but have noauthority to set agenda subjects or to override SDC decisions. Second, theybelieve that funding and resource sources are not well defined. They wouldsuggest that a plan for obtaining resources based on a detailed analysis of costsbe developed. The FASB-FAF also expressed certain other concerns includingthe clarification of the role and selection of trustees, rotation of membership onthe several groups among countries, and the size of the new IASC staff tosupport such an operation.

The FASB-FAF letter states that it believes it would be very difficult to attracthighly competent and respected individuals to the SDC if that group would besubject to having its proposals rejected by the more politically oriented IASCBoard. They also strongly believe that the SDC must have control over its ownagenda subjects. On the other hand, under the FASB-FAF proposals, one couldobserve that the IASC Board would be left with little real authority and wouldhave the same difficulty attracting highly competent and respected individualsif there was no substantive responsibility assigned to it.

This is not going to be an easy problem to resolve because of the politicalprocesses involved. Although this country may be viewed as having the best andmost detailed accounting standards in the world, some parts of the world maybelieve that not all of the accounting expertise in this world resides in Norwalk,Connecticut [FASB headquarters]. Less developed countries or those with

The FASB-FAF letter statesthat it believes it would bevery difficult to attracthighly competent andrespected individuals tothe SDC if that groupwould be subject tohaving its proposalsrejected by the morepolitically orientedIASC Board.

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emerging market economies may feel the need to provide some oversight to thedevelopment process through Board participation although they may not be apart of the actual development activity. For example, one such country mightsuggest that it is not necessary to saddle everyone with the extensive detail insuch standards as the U.S. Standard on Derivatives.

There has been at least some suggestion that the FASB be designated as theworld’s standard setter. It is in place and certainly has both a highly competentboard and staff. It already has a trustee structure that could be modified toinclude more country representatives. It has a functioning advisory councilthat could also be made more representative. But these things are probably notgoing to happen, again because of the political realities as viewed by the restof the world.

In looking at both the structure proposed by the SWP as well as the FASB-FAF, both include a three-tiered structure; i.e. trustees, board, and standardsetters. It would appear that there might not be a real role with relatedresponsibility for three bodies. However, the real question remains: Which oneneeds to be eliminated? We could look at our current structure in the UnitedStates that has only two tiers, trustees and standard setters. If the globalorganization only had the same two tiers, it would still need something toachieve broad worldwide representation—so that the views of those notrepresented on the smaller groups would be heard and considered. One suchpossibility would be an advisory council made up of representatives from areasonably large number of countries that could be kept apprised of the work ofthe SDC and could assist in suggesting its work priorities and agenda subjects.This group would be very similar to the Financial Accounting StandardsAdvisory Council (FASAC) which performs many of these same functions inthis country in association with the FASB and FAF.

Another possible modification to the proposals of the SWP would be toassign the responsibility for agenda setting to the IASC Board. This would givesome real responsibility to the Board without taking away from the SDC theauthority to issue final standards without Board approval. This could also beviewed as a mechanism to allow some form of political process to be effective inthe overall structure. It has been stated that if some outside group had controlledthe FASB agenda we would not likely have had stock compensation as a project.Although a great many learned a great deal from that project, perhaps it wouldnot have been a bad decision for it not to have become an agenda item.

WHAT’S THE TIMETABLE?The existing IASC Board timetable for approval of a new structure is for

Board approval in March 2000 with approval by IASC members in May 2000.The SWP will be considering comment letters and will review them with theIASC Board in July 1999. It is anticipated that final proposals will be issued inSeptember 1999.

At this writing, nothing has been forthcoming from the SEC staff but thereis a view that it would be appropriate for the future IASC structure to be in placeso that the SEC could evaluate how it might deal with both interpretations ofexisting standards as well as development of future standards before it beginsrule-making activities, that could lead to acceptance of IASC accounting forfinancial reporting in U.S. markets.

There has been at leastsome suggestion that theFASB be designated as theworld’s standard setter.

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The Next Step in Global Accounting Standards

The AICPA response to the proposals of the SWP contemplates anindependent standard-setting board that would set its own agenda. Its memberswould be appointed by a board of trustees and would sever all previouscommercial and national standard-setting ties to serve full-time. It would besupported by a full-time staff of adequate size to support its functions. It wouldhave a high level of due process. The AICPA agrees with the FASB-FAFrecommendation that there is a fundamental issue that must be changed. Itbelieves that the final authority for approval of international standards shouldreside with the SDC.

In what could be viewed as a difference with FASB-FAF, the AICPA wouldnot be opposed to a structure that involves the IASC Board in the approvalprocess for some transitional period until the SDC has demonstrated thesoundness of its processes. It suggested possible alternatives such as permittingthe IASC Board to delay issuance of an SDC proposal for some period of timeor permitting the SDC to override an IASC veto with some designatedsupermajority. The other U.S. representative, the Institute of ManagementAccountants (IMA), states in its response that it believes a partnership withnational standard setters is essential and that any such partnership must includethe FASB. It believes the FASB-FAF proposed structure is the correct one but,like the AICPA, recognizes that it may not be feasible to implement right away.IMA believes that, over time, the issue of national representation may diminishin importance and suggests that the IASC Board establish a finite time period,perhaps five years, to formally review the structure that was proposed bythe SWP.

RESOLVING TOUGH ISSUESBoth organizations appear to recognize the political realities involved in the

SWP proposals, as well as the fundamental issue of final authority to establishstandards. That recognition has led to the proposal for an interim step with adefinite time period for evaluation of the process. ♦

The AICPA agrees with theFASB-FAFrecommendation thatthere is a fundamentalissue that must bechanged. It believes thatthe final authority forapproval of internationalstandards should residewith the SDC.