International standards take on new importance

Two years ago, the International Accounting Standards Board was a mere benchwarmer in the standards-setting game. It was a group with a goal that in the eyes of many was little more than altruistic-to develop a single set of global accounting standards. Well times have changed.


Last fall, the Financial Accounting Standards Board in USA announced a convergence effort with the IASB and more recently that effort took on tangible meaning as FASB members unanimously agreed that stock options should be treated as an expense. The board's announcement followed the lead set by the IASB.

CalCPA member Mary Barth, an accounting professor and senior associate dean at the Stanford University School of Business, is a founding member of the IASB. Barth has been a member of the AICPA's Accounting Standards Executive Committee, as well as the Financial Accounting Standards Advisory Council and FASB's Financial Instruments Task Force.

This spring, Barth sat down with fellow CalCPA member Zaf Iqbal, an accounting professor at Cal Poly San Luis Obispo, to discuss the emerging importance of the IASB.

Q: Why, in 2001, did the International Accounting Standards Committee reorganize as the IASB?

A: People were realizing how important global standards were going to be and they wanted an international accounting standards board that was structured so that people could believe in the process and have confidence in the outcome.

Our No. 1 goal is to converge to the same set of standards, which means that there won't be any differences between international standards and U.S. standards or Canadian standards. Everybody wants to make this happen.

Q: How has FASB's attitude toward the IASB shifted?

A: A lot of things have happened. There was a belief that U.S. GAAP was superior. But a new board is in place and the FASB is committed to a partnership.

One thing that people have a misconception about is that there is a competition going on. They think that the FASB and the IASB are competing with each other to be the premier standard setter. That's not what's going on. We are partner standard-setters with the FASB.

The accounting scandals of last fall and the year before pointed out that although the United States has what I believe are the most comprehensive and best set of standards, they aren't perfect. And maybe all of the U.S. rules and guidance are not all a good thing.

The scandals resulted in some people saying, “We aren't perfect and maybe someone else might have a good idea now and again.”

The market demand is out there. Global investors and so many people want this [international standards] to happen.

Q: Do you think a day might come when we won't need national standard-setting parties like the FASB?

A: This whole thing is going to evolve. We're seeing some of that now. The European Union, Australia and New Zealand will be going to international standards in 2005, but there still is a UK accounting standards board and an Australian accounting standards board, a French and a German.

In some sense, we need organizations in these countries to be the eyes and ears on the ground to help make sure we understand the transactions and what's going on in those countries. We're always going to need some local standard-setting body to help us. We can't just sit in London and know what's going on throughout the world.

I don't see them going away, but the role will change. I don't see the United States giving up its standard-setting body.

Q: Can you explain the convergence of standards?

A: We have to ask-whenever we do a joint project-who is going to lead? Is it the FASB or us? We've decided that if the IASB recently has looked at an issue and made a decision, then the FASB needs to look at its standard and see whether the more current thinking of the IASB is what they want to follow, and vice versa.

There are differences and we want to get rid of them. Sometimes it's just a matter of issues that haven't been looked at for a long time, but things have changed and changes need to be made. What's going on is that these two boards are trying really, really hard to agree.

Q: Do you think there will be a day when all countries will agree on one set of standards?

A: I have confidence that there will be a day when the differences among the standards will be so small that we won't notice. I don't think that it's a matter of all the countries adopting the same standards-a bunch of countries will. I don't know if the U.S. ever will, but the day will come when the differences are small. That's the day we're striving for.

Q: How can international standards balance any differences- cultural or regulatory-between countries?

A: The frameworks that standard-setting bodies have around the world are very similar. They aren't identical, but that's one of the things we're going to converge.

If you think about it, the definition of assets, liabilities, revenues and expenses are very broad and very general-and there are some subtleties. But for the most part, they aren't controversial.

Is it an asset or isn't it? Is it a liability? Are you obligated to someone to pay? These are fundamental things.

If the standards are principles-based, which is what we try to do, then we are putting on the books assets and liabilities and we give enough guidance about what those are so that you can apply it to a particular situation.

The focus of the IASB is the investor. Why does an investor in Sri Lanka have different needs that an investor in Hong Kong when they look at a company? The answer is they don't.

Q: Should U.S. educators be changing their approach to teaching GAAP?

A: I would encourage them to teach the principles. Then you can talk about how those principles are implemented in the U.S. and internationally. They are implemented slightly differently. But once students see what the principles are, they can see there are implementation details, but the principles are constant.

Q: Do international accounting standards follow a principles or rules-based philosophy?

A: Some think principles-based standards mean loose. That's not what it means. In every standard there are five, six, seven principles. Then you go through a series of paragraphs that explains what is meant by that. Those paragraphs are very specific-the entity shall do this and shall do that. At the end, if you follow those intermediate paragraphs and follow the standard and have gotten an answer that does not meet that principle, then you have to do something else.

Whereas with a rules-based standard, the assumption is that if you follow all the rules, you will get to the right place. There is no second-guessing.

With rules-based, you follow the rules and you're done. You don't then ask yourself if you meet the principles. What we've done is a combination of clearly setting out the principle with a series of “thou shalts” after it and a requirement to double check at the end that you've met the principle.

A standard setter can't anticipate every single transaction or form of transaction that can take place. We have rules in the international standard, it's just a question of how far down in the level of detail do you go? The farther down you go and the more specific you get with rules, the more you run a risk of ending up in the wrong place by following all the rules because we can't know all the possible transactions, so we can't set out rules for all of them.

Q: Do you think that we are moving toward fair value rather than strict adherence to historical cost?

A: I think so. I'm a fair value advocate. Fair value is the most relevant information to investors. I'm not sure they care about what you paid for it; they want to know what it's worth.

Also, it will solve many of the difficult accounting problems we have today because we deal with using a “mixed attribute model.” We use historical cost sometimes and fair value other times.

The problems it brings is that fair values are hard to calculate and there's uncertainty. But one of the reasons you're seeing more of it now is that markets are more and more sophisticated and people are getting used to these things and its becoming easier to come up with reliable estimates of value.

Q: What has been your most surprising moment as an IASB member?

A: When companies outside the United States want to have an international set of financial statements, they have two choices: international standards or U.S. GAAP. There are companies out there, outside the U.S., using U.S. GAAP as an international set of standards.

But it's been surprising to me since the new IASB has been formed how much the world has changed and how fast we are making this transition. Things are different.

People are reading in the press what the IASB is up to. And when you see the FASB issue documents and make decisions that you can see are motivated by their relationship with us, then all of a sudden people realize there is another player here and they need to pay attention.

Mary Barth was interviewed by Zaf Iqbal, CPA, an accounting professor at Cal Poly San Luis Obispo. You can reach him at ziqbal@calpoly.edu. You can reach Mary Barth at (650) 723-8536 or mbarth@stanford.edu.

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