Comparing international accounting standards (IAS) and U.S. generally accepted accounting principles (GAAP) brings to mind the old lyric about tomatoes and to-mah-toes. On paper they look almost the same, thanks to diligent efforts by standards setters to eliminate the practical differences between them. But start applying them with different international accents, and suddenly you can understand why some people want to call the whole thing off.
That’s not likely to happen, however. The convergence of IAS and GAAP continues apace, with the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) now working in concert. “When [the IASB] puts projects on its agenda, we will try to put them on our agenda,” says Carrie Bloomer, FASB international project manager.
That means FASB is now caught up in the IASB’s race to revamp IAS. In March, the European Parliament ruled that the consolidated financial statements of all companies with public shares listed in the European market — some 7,000 companies currently using their home country’s GAAP — must follow IAS standards no later than December 31, 2005.
Currently, the Securities and Exchange Commission does not accept IAS; the roughly 50 foreign private issuers in this country that use it are required to reconcile their financial statements with U.S. GAAP. Their ranks will swell to between 500 and 600 as European companies convert from their home-country standards to IAS, estimates D.J. Gannon, partner at Deloitte & Touche LLP. This tenfold increase, coupled with the SEC’s burdensome reconciliation requirement, “puts pressure on the standard setters to get their act together,” declares James Leisenring, an IASB board member and a former FASB director.
You Say Principles, I Say Rules
Ultimately, getting their act together means eliminating the remaining significant differences between the two sets of standards. That task is complicated by cultural and political issues, such as the debate over FASB’s “rules-based” approach versus the “principles-based” approach of the IASB. Believers in the superiority of U.S. GAAP claim that IAS leaves far too much to interpretation, while defenders of IAS note that FASB’s voluminous guidance didn’t prevent Enron from parsing accounting rules to a fault.
“There is all this debate over whether Enron violated the 3 percent rule,” scoffs IASB member Robert Herz, referring to the level of outside investment required to legally define Enron’s partnerships as independent. In Europe, where control and recourse aren’t defined by quantitative thresholds, he says the reaction is, “That’s a nonsense rule to begin with.”
Indeed, last March, SEC commissioner Harvey Pitt gave principles-based standards a plug while testifying before Congress about Enron. The SEC plans to use its statutory authority, said Pitt, to ensure “that FASB’s standards evolve to become general principlebased standards instead of overly complex, rule-based standards.”
Variation in enforcement is also a source of controversy. “Part of the reason you can’t be sure you have eliminated the differences between standards is that we don’t have an SEC in the rest of the world,” observes Leisenring. “How do we know what people are really doing when they apply the standards?”