A former FASB chairman's take on international accounting standard setting.

• Position: Former Financial Accounting Standards Board Chairman Dennis R. Beresford - Includes related articles on positions of SEC and Financial Executives Institution on international accounting standards

It's mid-afternoon on a day in late January 1999. The closing conference with your auditors just began. As CFO, you are delighted with the year's record results, and your controller and manager of financial reporting have assured you the closing has been squeaky clean. Why, then, the grim look on the audit partner's face?

She begins the conversation by confirming that the company properly handled all of the latest FASB and AICPA pronouncements. "But we have a problem with IAS 36 and 38," she says.

CFO: "What the heck are IAS 36 and 38?"

Auditor: "Those are the International Accounting Standards Committee's new rules on employee benefits and financial instruments. IAS 36 won't let you defer certain actuarial losses as you've done under FASB Statement 87. And IAS 38 says the amounts you considered hedges under U.S. accounting rules have to be charged to income now. Unfortunately, by using these rules your adjusted net income will be about 20 percent less than you thought. Since you are making plans to list your company's stock in Tokyo and Paris early this year, you'll need another set of financials showing the lower amount."

CFO: "But we're a U.S. company, and our reports are correct under U.S. rules. I don't care about international accounting standards."

Auditor: "I'm sorry, but the SEC recently announced an international agreement that all cross-border securities filings must follow pronouncements issued by the IASC. The commission already has been allowing some foreign companies to use IASC standards when they sell securities in U.S. markets. Now U.S. companies will have to do the same overseas. In fact, this could become an even bigger issue in the future. There's been talk that there should be just one 'world GAAP.' If that happens, all U.S. companies will have to follow these standards as well."

CFO: "These things don't happen overnight. Why weren't we informed the IASC would be given the power to dictate rules for U.S. companies? And why didn't your firm or our company get involved to influence the IASC's conclusions?" ...

All of the above is purely hypothetical, of course. But it really could happen. That's why financial executives need to get involved now to influence the outcome of recent developments in internationalizing accounting standards.

WHERE IT ALL BEGAN

The IASC was established in 1973, the same year as the FASB. The IASC is affiliated with the International Federation of Accountants, an organization of professional accounting associations around the world. While a large number of countries belong to the IASC, its operating arm is the IASC board, which consists of 16 voting members representing 13 member countries, Swiss multinational companies, the International Association of Financial Executives Institutes (IAFEI) and the International Coordinating Committee of Financial Analysts' Associations. The IASC board is the group that promulgates international accounting standards. Members of the board are part-time representatives who generally are otherwise employed as accounting firm partners, financial executives, analysts and academics. Headquartered in London, the IASC also has a small full-time staff.

Each IASC board position has one vote. However, generally two individuals represent a country or organization. Currently, the two U.S. representatives are G. Michael Crooch of Arthur Andersen LLP, appointed by the AICPA, and John J. Perrell of American Express, appointed by the Institute of Management Accountants. The IAFEI representatives are David Potter of BAT Industries (from the United Kingdom) and Thomas E. Jones of Citicorp (from the United States). The FASB is not a member of the IASC, and the U.S. and other delegations' votes on IASC matters are not coordinated with the FASB. However, an FASB board member does observe the IASC meetings, and the FASB has the opportunity to provide input to the IASC through letters and discussions with staff and consultative group members.

The IASC began as a way of providing minimum accounting guidelines for developing countries and others that did not have their own standard-setting process. It issued standards that basically compiled what was acceptable in the parts of the world that had more developed accounting standards - in the United States, continental Europe, Japan and others. That is why many of the IASC's earlier standards were very basic and allowed for alternatives in several cases.

With the growing globalization of capital markets in the mid-1980s, the IASC began an "improvements project" designed to reduce the number of alternatives and to deal with more of the important overall issues that previously were not covered. That has been a slow, but...