International Acct Standards

International Accounting Standards

There is now an international movement towards common accounting standards for all countries, and as a major economic power, United States has an important role to play in the matter. There are various points-of-view regarding the action that should be taken by United States in this regard.

The position regarding this in the current month is that the move towards harmonizing international accounting is concentrated on the standards that have been developed by the International Accounting Standards Board or IASB. The current situation is that 65 of the countries in the world require the listed companies in the country to use only the International Financial Reporting Standards that have been prepared by IASB. However the total number of countries increases to 100 when the other countries which allow the companies in the country to use International Financial Reporting Standards and countries which require that the standards are used by certain companies are included. The entire movement to have a similar accounting standard all over the world received a further boost when the European Union also adopted a resolution that required companies to use the IFRS from the year 2005 was made compulsory. The European Union is a large group and is now about a third of the total number of countries that require the use of IASB standards.

The efforts at harmonization was also a desire of United States for a long time and there was a rapid shift in 2002 when it entered into an agreement with IASB to move its accounting standards to be in line with those of IFRS. This was through the Sarbanes-Oxley Act of 2002 which made it compulsory for the FASB to move towards meeting the high quality standards so that the country maintained its standard setting role and provide the required funding. This has had results, and in a short period of time, the differences between the FASB and IASB have become much smaller. Even at the level of IASB, there is recognition that though it is an international body for developing international standards, it requires help from both United States and the European Union in its mission. The progress of unification received a further boost in April 2005 when the SEC made the statement saying it was ready to accept financial statements from companies in countries covered by the European Union, without reconciliation to U.S. standards, if certain requirements are met. The condition is the natural progress for matching of the FASB and the IASB standards and the European Union achieving a full compliance with IFRS. According to SEC, these conditions are likely to be met by 2009, and it may happen even by the year 2007.

After discussing the international scene and the likelihood of the movement of international accounting standards, let us now come to the situation within United States. Here setting of accounting standards have evolved over the past 30 years or so. Before 1972, the authority in charge was the Accounting Principles Board and then it was replaced by the Financial Accounting Standards Board or FASB. This became the primary private organization responsible for setting out the accounting principles which are in conformity with GAAP or the generally accepted accounting principles. This was followed up with the creation of the Governmental Accounting Standards Board or GASB, in the year 1984 for preparing the standards for state and municipal entities. Another development in the year 1990 was the setting up of Federal Accounting Standards Advisory Board or FASAB for setting the standards for federal government accounting. Just a couple of years ago, there was the setting up of International Accounting Standards Board from the International Accounting Standards Committee, and that has the responsibility of setting up standards that are acceptable in more than one country. The activities of the IASB have been discussed in summary already, and so far as the United States is concerned, apart from FASB there are two other boards with a role in preparing accounting standards within the purview of GAAP - GASB and FASAB.

Among them, in October 1999, the AICPA council has recognized FASAB as the body which is to establish GAAP for the federal entities under Rule 203 of the Code of Professional Conduct of the AICPA. This rule mentions clearly that AICPA members cannot say that the financial data of any organization are in line with the principles of GAAP when they are not in line with any principle that has been specified by a body that has been decided for the purpose by the Council. There are now three such bodies that is set up for establishing GAAP and they are GASB, FASB and FASAB. There is some difference between FASAB and GASB and that is FASAB has the status of an advisory board and its recommendations can be vetoed by any of the organizations that have sponsored it. The work of FASAB is to provide guidance for units under four levels: "concepts, standards, interpretations and technical releases." The concepts given by it explain the objectives and ideas that have been used to develop GAAP principles. They are with the aim of providing guidance when applying the standards that have been set up.

To find out the work that it has done it can be seen that up-to-date, FASAB has brought out four Statements of Federal Financial Accounting Concepts. These address the main objectives behind federal financial reporting, the identification of the organization doing the reporting, discussion of issues that are related to the preparation of management's discussion and an analysis of the financial statements. These are what determine GAAP for federal entities. Till date, FASAB has published 24 Statements of Federal Financial Accounting Standards. They cover major topics, which include "reporting for assets and this means loans, inventory, and software, property, plant and equipment, and stewardship land; reporting for liabilities which means contingent liabilities and social insurance; revenue recognition; cost accounting; and management's discussion and analysis of the financial statements." Though the work has been done by FASAB, it is the GAAP designation that provides credibility to the FASAB standards and makes the agencies follow the standards and makes the GAO audit reports based on these statements more meaningful. Thus it is clear that the different organizations have their own purposes and it can be said clearly that their some differences within the different organizations.

Now let us take a look at the impact of the decisions of these boards. There was an announcement on June 30, 2005 by the two Boards. These are the United States accounting standards setter, the Financial Accounting Standards Board, or FASB and the corresponding international organization, the International Accounting Standards Board, IASB. They have issued what is called an "exposure Draft." This has asked for comment on the new standard that has been proposed from both businesses and accounting organizations. The two accounting standards that will have an impact from these changes are called the "Statement of financial Accounting Standards -- FAS No. 141" in the United States and "International Financial Reporting Standard -- IFRS No. 3" in countries which are out of the purview of the United States.

There are going to be a long period of discussions before these are implemented, but they will certainly change some long standing accounting and financial reporting practices for all business combinations. The benefit of the changes will be a similar treatment of business combinations which fall under Generally Accepted Accounting Principles or GAAP in United States and others under International Financial Reporting Standards or IFRS. The main expected impacts are to have the effect of causing greater fluctuation in short-term earnings for companies, decreasing the predictability of earnings, and require management in some situations to make different complex fair value assessments which will not always be generally accepted. This is one of the areas where we feel that the practices under the two boards will make the accounting practices for both boards similar.

This process for measuring fair value will now require a lot of advance planning and good internal controls. This may mean increase in staff or use of third party valuation experts since the departments responsible for making financial reports will have many difficulties. Even the bottom line and that is the company's earnings before or after changes in business combination could be affected due to changes in the areas of "valuation dates, transaction costs, acquired contingencies, contingent consideration, restructuring costs, in process research and development, and partial business combinations." Through these changes future research costs which are now initially capitalized will be treated as expenses as and when they are spent. This creates an inconsistent accounting model for R&D costs. At the same time, the proposal will increase earnings during the period for business combinations which are now following GAAP and decrease their earnings and gross margins during periods afterwards since the intangible asset will be amortized.