Abacus Flying the standard at last

It has finally happened. After a decade of hard work and negotiation, the International Organisation of Securities Commission's endorsed accounting standards promulgated by the International Accounting Standards Committee.

The endorsement, finalised during the IOSCO annual conference in Sydney last month, applies to cross-border listings; and the resolution passed by the President's Committee of the securities regulators' global association recommends the use of IASC standards for the accounts of companies seeking to list on several exchanges.

Touted as a first step to finding the holy grail of financial reporting - the ability to use one set of accounts in most markets - the endorsement is a recognition of work by the IASC during the past five years to kick its accounting pronouncements into shape to be more acceptable to key financial markets.

Michel Prada, the chairman of France's corporate watchdog, is the former head of the technical committee. He said in the press release heralding the endorsement of the 30 standards IOSCO deemed to be part of an essential core grouping that: "this resolution is the culmination of many years of cooperative efforts between IOSCO and the IASC.

"We are pleased to be able to approve this resolution, as well as offer our thanks to the IASC for the hard work of its members and staff. Accounting standards, including those issued by the IASC, must continue to evolve to address existing and emerging issues."

The resolution itself points out some jurisdictions may deem the core standards as insufficient and they may require one or more of the three supplemental treatments. IOSCO recognises that not all regulators are prepared to accept accounts prepared in line with the existing tranche of IOSCO 2000 standards and it makes provision for jurisdictions to require reconciliation with domestic rules, provision of extra disclosures and the adoption of a particular interpretation of a rule where the IASC standard offers optional treatments.

IOSCO appears to be tolerating the concept of departures from IASC standards in rare circumstances. The IOSCO resolution says such departures could take the form of waivers granted by a regulator.

"[As] part of national or regional specific requirements, waivers may be envisaged of particular aspects of an IASC standard, without requiring that the effect of the accounting method used be reconciled to the effect of applying the IASC method," the IOSCO resolution states.

The working party report's detailed comments on waivers warn sets of accounts that, for whatever reason, have not had to comply with all the provisions of IASC 2000 standards may fall foul of regulators in other jurisdictions.

"The jurisdictions that will consider waiving compliance with one or more requirements of IASC 2000 standards recognise that financial statements utilising these waivers would not necessarily be accepted outside of jurisdictions offering the same waiver, because the financial statements could not be represented as complying with IASC standards according to IAS 1, Presentation of Financial Statements."

The IASC has a body of 39 standards. However, the 30 standards, identified throughout the final assessment report as the "IASC 2000 standards", that have been classified as core standards are the only ones to which this endorsement applies. Most of those have some outstanding criticisms members of the working group list in the final assessment report.

Seven of the 30 core accounting rules are regarded as not having any substantive issues. The other 23 have a range of comments made about them and whether the concerns can be fixed by providing greater disclosures, mandating particular interpretations or reconciling with a domestic accounting rule.

Some other concerns are also recommended as potential projects for the international standard setter.

For instance, the new financial instruments standard, known as IAS 39, has one of the longer lists of substantive concerns. There are 29 different issues raised by the technical committee's working party regarding the standard, which was condemned by the previous Australian Accounting Standards Board as being unsuitable for adoption in Australia.

The old chestnut of having a true and fair override gets a mention. The IASC standard on the presentation of financial statements, known as IAS 1, includes a true and fair override, a concept that has been out of the Australian literature since the Corporations Law was changed a decade ago to make it legally binding for companies to comply with Australian accounting standards.

Some companies and corporate advisers would dearly love to have the override back, particularly where there are contentious areas of interpretation that might see them clash with the regulator over accounting methodology. However, the report notes that some countries believe an override should not be permitted in accounting rules and that any departures from an accounting standard should be outlined in the audit report.

"Working Party members may review, and might not accept, those financial statements that include an override with which they do not concur."

IOSCO endorsement of the IASC core standards comes at a time the IASC is undergoing a significant change management process. A proposal to dramatically alter the way accounting standards are set in the international arena has won the support of the critical US market as well as most other jurisdictions that support a full-time, independent structure as an ideal.

The chairman of the US Financial Accounting Standards Board, Ed Jenkins, said the FASB is supportive of the planned new structure during a break in the most recent G4+1 meeting in New Zealand. He acknowledged the move towards independence as substantially reflecting the philosophy of standard setting present in the US.

Signs of approval of the prospective standard setting regime are partially behind the IOSCO endorsement. It is clear IOSCO has chosen to recognise the work of the IASC by giving it a regulator's elephant stamp for progress made in the past five years. This endorsement is more a statement that the work of the IASC is heading in the right direction rather than fully embracing the answers that are given via the application of the current crop of IASC standards.

It will be some time before the dust settles on the endorsement. Only then can a thorough analysis of what it means to IOSCO's individual members.

US regulator holds the key

How the US Securities and Exchange Commission decides to deal with the IOSCO endorsement will be of particular interest. While there appears to be a willingness to examine the issues contained in the detailed assessment report, any final verdict on how IASC standards might apply to foreign registrants seeking to list on US stock exchanges is dependent on the US regulator's willingness to open the door to those standards.

Current US practice is to require companies to reconcile their financial statements with standards issued by the Financial Accounting Standards Board and, more specifically, other SEC requirements such as the detailed management discussion and analysis companies are required to provide to the US market.

The SEC is currently examining responses to its concept release on IASC standards - a document released in February. It is highly unlikely that the US regulator will move in any substantive way to examine the IOSCO endorsement before it has reviewed the responses to its concept release on IASC standards.

A submission was sent in April by the Group of 100, the pressure group of top finance and accounting executives in Australia, to the SEC. The G100 said the core standards and the IASC concept statement were a good basis for addressing accounting issues.

"We believe that until there are generally accepted international requirements on specialised industry issues such as insurance, extractive industries etc. entities should be permitted to use US GAAP, as specified by the regulator, or home country standards with reconciliation to US GAAP," the G100 submission asserted.

"However, there should be a willingness to change US GAAP if IASC standards or foreign standards are seen as providing more relevant and reliable information to users of financial reports. The current requirements of US GAAP should not be a constraint on achieving the objective of providing relevant, reliable and comparable information to users of financial statements."

Key dates

1989 IOSCO issues a report on encouraging cross-border capital raising. One element of this was the creation of a single accounting language for cross-border listings. IOSCO decides to focus on IASC as the developer of international rules.

1993 IOSCO writes to IASC detailing what it believes constitutes a reasonable body of standards that create a set of principles for companies undertaking cross-border offerings.

1994 IOSCO completes a review of existing IASC standards, identifying a number of issues of concern and areas where existing IASC accounting rules would need to improve before endorsement could take place.

1995 Core Standards Work Program commences.

January 1999 Working Party of the IOSCO technical committee begins analysis of standards.

January 2000 Core standards apart from one, the standard on investment properties, completed.

March 2000 Investment Properties standard completed, but too late for inclusion in the final IASC 2000 review by IOSCO.

May 2000 Endorsement announced during the IOSCO annual conference in Sydney. IOSCO endorsement applies only to IAS standards numbered 1, 2, 4, 7, 8, 10, 11, 12, 14, 16-24, 27-29, 31-39. Approval has also been given to the 17 interpretations relating to those standards issued by the Standing Interpretations Committee. Standards excluded from the core standards project either refer to specific industries such as banking or will be made redundant when one or more of the standards approved by IOSCO become effective.

 

Trustee role for Spencer

Prominent company director and accounting standard setter, Ken Spencer, has been appointed to the new board of trustees of the International Accounting Standards Committee.

Spencer, former chairman of the Australian Accounting Standards Board, joins 18 other high-profile business and accounting identities on the inaugural board, which has as its key duties the selection of the first full-time IASC standard setting board and fundraising for the new structure.

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