Coming to Terms With International Accounting Accounting Standards.

For years, the prospect of international accounting standards has hovered uncertainly on the horizon. Now, the concept has become a reality -- and, especially in multinational organizations, the impact may stir financial operations.

YOU'VE JUST BEEN ASsigned to conduct a financial audit

In light of the growing acceptance of IASs, scenarios similar to this one are likely to become common. The U.S. Securities and Exchange Commission (SEC), for example, is giving serious consideration to allowing more extensive use of standards promulgated by the International Accounting Standards Committee (IASC). The SEC has unanimously approved and issued for public comment a "concept release" on international accounting standards. In asking for comments from those who have used IASC standards, the SEC has been particularly interested in the experiences of preparers using the standards in presenting financial statements, auditors working where IASC standards were used, and investors using financial statements prepared according to the IASC standards.

These standards are not an abstract notion that can be ignored. All finance professionals, including internal auditors, need to be aware of recent events regarding the IASC standards and their global acceptance.

INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE (IASC)

The goal of the IASC is to harmonize--though some would say standardize--accounting internationally through the development, publication, and advocation of its standards. Founded in 1973 and based in London, the IASC is a private organization with a voluntary membership that consists of 152 professional accountancy bodies representing more than 100 countries. IASC members agree to support and encourage the use of IASC standards in their own countries. U.S. members of the IASC include the Institute of Management Accountants, the American Institute of Certified Public Accountants, and the National Association of State Boards of Accountancy. The Institute of Internal Auditors is an affiliate member of the IASC.

The IASC has issued approximately 40 IASs that address all "core" accounting topics. Although official IASC standards are developed in English, the IASC has worked to make them widely accessible. Official translations are now available in German, French, Russian, Polish, Romanian, Spanish, and Chinese.

INCREASED SUPPORT FOR THE IASC

During the past year, actions taken by the SEC, the European Commission of the European Union (EU), and the International Organization of Securities Commissions (IOSCO) contributed significantly to the acceptance and prestige of the IASC. SEC involvement has been a key factor. Even before issuing its concept release, the SEC had decided to accept, without reconciliation, cash flow statements filed with them--by corporations outside the United States--that were prepared in accordance with IASC standards (IAS 7). The SEC also allows foreign firms to file using parts of IAS 21, The Effects of Changes in Foreign Exchange Rates, IAS 22, Business Combinations, and IAS 29, Financial Reporting in Hyperinflationary Economies.

IOSCO announced that it would be recommending that its members allow multinational firms to use IASC standards--supplemented, where necessary, by reconciliation, disclosure, and interpretation--to address outstanding substantive issues at a country or regional level. Based in Montreal, IOSCO is an influential international organization composed of more than 100 securities commissions and similar government agencies. Although this decision by IOSCO does not force the SEC to allow use of IASC standards in the United States, it provides further support for the acceptance of the standards.

The EU announced that it had adopted a new strategy for future financial reporting in Europe and declared that adoption of IASC standards represented the way to move forward. The EU is expected to propose formally to the European Parliament that all EU companies listed on a regulated stock market prepare consolidated financial statements in accordance with IASC standards by the year 2005. This proposal includes all listed banks and insurance companies.

RESTRUCTURING THE IASC

A new IASC constitution is expected to move the organization even closer to its goals. The new structure and due process are somewhat similar to the structure of the U.S. Financial Accounting Standards Board. A board of trustees with 19 members has been established. The trustees appoint the IASC board members, exercise oversight, and raise the money needed to operate the IASC.

The IASC board is to be geographically diverse. Twelve of the 14 members of the board will be full-time. To achieve a "balance of perspectives and experience," IASC has mandated that at least five members shall have been auditors, at least three shall have a background in the preparation of financial statements, at least three shall have a background as users of financial statements, and at least one shall have an academic background. In addition, seven of the IASC board members are expected to have direct liaison responsibility with one or more national standard setters." A simple majority of voting members is required to approve new IASC accounting standards.

The board of trustees held its first meeting in New York City in June 2000. At the meeting, Sir David Tweedie, chairman of the United Kingdom's Accounting Standards Board, was named chairman of the new IASC board.

COMPLIANCE WITH IASC STANDARDS

Officially, the IASC cannot force anyone to follow its standards. Compliance is totally voluntary. However, increasing support for the IASC holds many implications for businesses. Several countries require, at a minimum, that all corporations working within their jurisdictions must file reports in compliance with IASC standards. Already, firms with subsidiaries in those countries must know and use IASC standards.

In addition, most major stock exchanges outside North America and Japan allow foreign issuers to use IASC standards for their filing requirements. Historically, U.S. firms often have had to convert U.S. Generally Accepted Accounting Principles (GAAP) financial statements to a local country's GAAP if they wanted to be listed on that country's stock exchange. Now, many firms can reduce the costs associated with listing on foreign stock exchanges by producing financials that conform to IASC standards.

If the SEC does allow foreign corporations to use IASC standards to meet U.S. registration requirements, investors will obviously have to understand those standards. Currently, more than 1,200 foreign firms have their stock traded in the U.S. With only a few exceptions, those corporations must file with the SEC financial information that includes reconciliations of key figures to U.S. GAAP. U.S. investors and their accounting and financial advisors currently have ready access to familiar U.S. GAAP financial information, but this scenario will change if the SEC accepts IASC standards.

THE FUTURE OF IASC STANDARDS

Opinions are mixed on whether or not the SEC will accept IASC standards in the U.S. Some observers predict that a compromise will emerge, whereby the SEC will accept IASC standards, but require some additional disclosures or reconciliations to U.S. GAAP. A decision is expected within one or two years.

Regardless of the SEC's decision, staying current on developments related to IASC standards is essential, especially in multinational organizations. Internal auditors around the world will need to be fully aware of the potential impact these standards may have on their companies and on their work.

ROBERT K. LARSON, PHD, CPA, CMA, is associate professor of professional accountancy at The Pennsylvania State University at Harrisburg.

LINDA LEE LARSON, CIA, CISA, CPA, DBA, is assistant professor of accounting at Eastern Washington University in Spokane, Washington.

International Accounting Standards

EFFECTIVE JANUARY 2001

IAS 1 Presentation of Financial Statements

IAS 2 Inventories

IAS 4 Depreciation Accounting

IAS 7 Cash Flow Statements

IAS 8 Net Profit or Loss for the Period, Fundamental Errors, and Changes in Accounting Policies

IAS 10 Events After the Balance Sheet Date

IAS 11 Construction Contracts

IAS 12 Income Taxes

IAS 14 Segment Reporting

IAS 15 Information Reflecting the Effects of Changing Prices

IAS 16 Property, Plant, and Equipment

IAS 17 Leases

IAS 18 Revenue

IAS 19 Employee Benefits

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 22 Business Combinations

IAS 23 Borrowing Costs

IAS 24 Related Party Disclosures

IAS 26 Accounting and Reporting by Retirement Benefit Plans

IAS 27 Consolidated Financial Statement and Accounting for Investments in Subsidiaries

IAS 28 Accounting for Investments in Associates

IAS 29 Financial Reporting in Hyperinflationary Economies

IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial

Institutions

IAS 31 Financial Reporting of Interests in joint Ventures

IAS 32 Financial Instruments: Disclosure and Presentation

IAS 33 Earnings Per Share

IAS 34 Interim Financial Reporting

IAS 35 Discontinuing Operations

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities, and Contingent Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments: Recognition and Measurement

IAS 40 Investment Property

         Notable Differences Between U.S. GAAP and IASC Standards
TOPIC                            U.S. GAAP
Goodwill                         Capitalize and amortize over useful
                                 life, with a 40-year maximum.
Research & Development Costs     Must expense all R&D costs as incurred.
                                 Some software development costs
                                 must be capitalized.
Property, Plant, & Equipment     Use of historical cost is required,
 (Tangible Asset Revaluations)   except for impairments. Revaluations
                                 are not permitted.
Long-term Construction Contracts Percentage of Completion Method
                                 preferred; Completed Contract Method
                                 allowed in certain circumstances.
Business Combinations--Pooling   Pooling required if 12 criteria are met.

                                 More common than under IASC
                                 standards.
Borrowing Costs Incurred in the  Requires capitalization.
 Acquisition, Construction, or
 Production of Certain Assets
True and Fair View Override      Does not permit any standard
                                 to be intentionally ignored. Rule 203 of
                                 AICPA's Code of Conduct allows
                                 departures to occur in rare occasions.
Segment Reporting                Disclosures to be made on basis of
                                 operating segments and use of internal
                                 management accounts. May use
                                 accounting policies different from
                                 consolidated GAAP.
Whether to Consolidate:          Consolidate if parent owns a majority
Definition of a Subsidiary       of voting shares.
Effects of Changing Prices       Supplemental disclosures encouraged.
Joint Ventures                   Generally the equity method is used.
                                 Proportionate consolidation method
                                 used in rare circumstances.
TOPIC                            ISAC STANDARDS
Goodwill                         Capitalize and amortize over useful
                                 life, normally not longer than five
                                 years, with a maximum of 20 years.
Research & Development Costs     Expense R&D as incurred, but must
                                 capitalize and amortize development
                                 costs if strict standards met.
Property, Plant, & Equipment     Use of either historical cost or
 (Tangible Asset Revaluations)   revalued amounts allowed. Frequent
                                 valuations of entire classes of
                                 assets necessary when revalued
                                 amounts used.
Long-term Construction Contracts Percentage of Completion Method
                                 required whenever possible;
                                 otherwise the Zero Profit Method
                                 is allowed.
Business Combinations--Pooling   Severely restricted to "true mergers
                                 of equals." Focus on whether an
                                 acquirer can be identified.
Borrowing Costs Incurred in the  Allows them to be either capitalized
 Acquisition, Construction, or   or expensed.
 Production of Certain Assets
True and Fair View Override      Although it should only be done in
                                 rare cases, departure from standards
                                 are permitted to allow a "true and
                                 fair view" of the financial condition
                                 of a firm.
Segment Reporting                Requires reporting of both business
                                 segments and geographic segments,
                                 with the primary segmentation
                                 required to provide more
                                 comprehensive disclosures.
Whether to Consolidate:          Consolidate based on either voting
Definition of a Subsidiary       control or actual dominant influence.
Effects of Changing Prices       Primary financial statements may use
                                 inflation adjusted numbers.
joint Ventures                   Depending on form, either the
                                 equity method or the proportional
                                 consolidation method may be
                                 permitted.