Setting the right standards

It is hard to think of accounting these days as purely a UK matter.

Wherever we look there are international implications. It is certainly impossible to think of putting on a conference on the future of the profession without the international dimension taking centre stage. Hence the presence of senior representatives of the IASC and the FASB at the Coopers & Lybrand conference.

Undoubtedly, International Accounting Standards (IASs) are of increasing importance nowadays. They are used directly in a number of countries ranging from central and eastern Europe to the Middle and Far East and Africa.

Even China is interested.

But a particularly important use of IASs is for secondary listings, such as when a company listed in one country, say Sweden, goes to another country, say the UK, for a secondary listing for its shares – Swedish GAAP is not well understood in London, and so such companies have to report under something better known. IAS is an obvious choice and is acceptable in London.

But the same is not true everywhere. In particular, it is not true in the US. A foreign company wanting a listing in New York must either present information under US GAAP or at least reconcile to US GAAP. Either exercise is onerous. So much of the IASC’s effort currently is directed at satisfying the agreement it has made with IOSCO – the organisation representing the securities regulators round the world, including the SEC in the US.

Under this agreement the IASC is working frenetically towards a deadline of March 1998 in the hope that, at that stage, IOSCO will conclude that IASs are of sufficiently high standard and broad coverage that they are acceptable to all regulators – including the SEC – as a reporting convention for foreign companies.

This agreement will not be easy to achieve, but the indications are that there is a lot of hard work and goodwill going into it. The SEC takes its role of protecting the US investor very seriously by ensuring that companies report very fully and according to a strict code. So it will have to be satisfied that IASs are, if not the same as US GAAP, then at least something of as high a standard which bears some similarity to it.

Quite how close they will have to become is a delicate matter – for other countries will equally want to ensure that IASs do not become merely US GAAP in different covers.

The closely related questions are, firstly, whether national regulators will be able to add to the basic IAS requirements – undoubtedly some will wish to do this. Second, there is the question of who will wish to interpret IASs. The SEC regards itself as having a key role in interpreting US GAAP and so it will expect a similar role in relation to interpreting IASs in the context of their use by foreign registrants.

Quite apart from the SEC, there have been other calls for interpretations of IASs. If interpretations are to be produced, there are a number of ways in which this could be organised. One method would be for each major country in which IASs are used to develop and issue its own interpretations.

The SEC would find this quite natural. One can imagine other national or regional bodies thinking of setting themselves up as local interpreters.

But this would be a recipe for diversity at a time when the accent is on harmonisation. If there is a demand for authoritative interpretations, it is important that they should be produced by the IASC itself. The IASC has accepted this and is now setting up a mechanism for producing interpretations of its own standards through a new Standing Committee on Interpretations (SIC). This is good news, but national and regional organisations must help the IASC in this endeavour and not set themselves up in competition.

It will doubtless be some time before the IASC’s SIC is up and running, and even then it will probably produce interpretations one by one, as happens at the UITF in the UK or in the case of the FASB’s interpretations of its own standards. In the meantime, it is important that IASs are put into practice in a consistent way wherever they are used. So there is also a role for accounting firms to produce their own international interpretations and guidance. These may not have the same authority externally as those produced by the IASC, but they can be produced more quickly and be more comprehensive.

Peter Holgate is accounting technical partner at Coopers & Lybrand.