What's the FASB doing about international accounting standards?

• Author: Beresford, Dennis R.
• Position: Financial Accounting Standards Board

What's the FASB doing about international accounting standards?

What does the FASB think about financial reporting standards that span the globe? The Board's chairman says their development is "clearly impossible" for the near term, but that doesn't mean you shouldn't be preparing. With the globalization of financial markets, international accounting standards have been propelled into the spotlight. But the global market is a myth, according to Jack Ruffle, vice chairman of J. P. Morgan & Co. and president of the Financial Accounting Foundation. "What we have," he said in a speech last year at the University of Chicago's Graduate School of Business, "is the global linkage of local markets, both electronically and via financial instruments like swaps, which can tailor financial flows and currency denominations to just about any specifications."

Economist Milton Friedman reinforces the point. He agrees that markets for goods and services have become more fragmented, and therefore less global, over the past century. Friedman's analysis, as he wrote in The Wall Street Journal last year, indicates that international trade as a percentage of national income has declined steadily in the United States, except during the two world wars and the inflation-scarred decade of the 1970s. And he expects the decline to continue because protectionist policies are more restrictive than they were in the nineteenth and early twentieth centuries.

Globalization is prominent in financial markets because of the high mobility of capital and the speed of telecommunications. But domestic financial markets, the terminals of the global network, are buffered from the full impact of foreign market forces by national monetary policies. Domestic markets for goods and services are even more buffered from foreign market forces by national trade policies and the immobility of resources.

Demand for international accounting standards is coming from participants in the global financial network. They have common interests, and it is readily conceivable that, despite their different national backgrounds, they could agree on accounting standards. It is not so readily conceivable, however, that such standards would be acceptable in the more fragmented and insulated national markets.

Accounting standards were developed in response to the needs of domestic markets. They are still evolving in response to those needs and, if Milton Friedman is right, national markets will continue to be insulated from one another despite the efficiency of the global financial network.

International or domestic priority?

The dilemma for those who regulate securities markets and those who set accounting standards is how to adopt standards that facilitate cross-border capital movements without lessening the quantity and quality of information available to investors and without putting domestic companies at a competitive disadvantage with foreign companies.

To illustrate the dilemma, let's consider some of the differences between the Generally Accepted Accounting Principles (GAAP) in the United States and the standards set by the International Accounting Standards Committee (IASC). * U.S. GAAP covers more topics--The IASC has issued 29 standards. But, in more than 50 years of formal standard-setting, the Committee on Accounting Procedure, the Accounting Principles Board, and the FASB have issued many more standards--and these standards have been supplemented by issuances of the Securities and Exchange Commission, the AICPA's Accounting Standards Executive Committee, and the FASB's Emerging Issues Task Force. * GAAP in the U.S. covers topics in greater depth--IASC standards are typically statements of broad principle. U.S. standards are more specific about principle, more detailed about measurement methods, and more extensive about disclosure requirements that augment recognition and measurement requirements. * GAAP in the U.S. has incorporated a large body of common practice not covered by formal pronouncements of standard-setting bodies--There is no similar body of common international practice. To get full comparability between U.S. GAAP and IASC requirements, all these differences would have to be eliminated. To get worldwide comparability, a high multiple of those differences would have to be brought into sync, overcoming in the process many economic, political, and cultural hurdles. Not the least...