You may also want to download  INTERNATIONAL ACCOUNTING STANDARD SETTING:  A Vision for the Future, 1998 Special Report of the Financial Accounting Standards Board (FASB) .  At the moment one copy of the FASB's Special Report may be downloaded from http://www.rutgers.edu/Accounting/raw/fasb/
For additional copies of this Report and information on applicable prices and discount rates contact:
Order Department
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, Connecticut 06856-5116
Please ask for our Product Code VFF.
Trinity students may view this document at J:\courses\acct5341\fasb\intnacct.htm

International Accounting Standards Committee Update

Presenter: Paul Pacter
International Accounting Fellow
International Accounting Standards Committee

1998 American Accounting Association Conference
In: New Orleans, Louisiana

Sunday, August 16, 1998

Table of Contents

Transcription Introduction

Overview of the IASC

• Introduction to the IASC
• Structure of the Board
• New Open Meetings Policy
• Consultive Group versus the Advisory Council
• Steering Committees
• History of the Enforcement Power (legitimacy) of the IASC
• IASs Issued in the Early Years
• IOSCO Agreement  Click here for Paul's comment on the need for even more enforcement clout)
• Role of national standard setters if harmonization is achieved
• Role of the IASC in Resolving Traditional Accounting Theory Disputes
• SEC Support and Criteria the SEC Will Apply to IASC Standards

IASC Standards to Date

• A listing of IAS 1 through IAS 38
• IOSCO Core Standards
• Important Dates
• Work Plan
• Overview of IAS 01 Presentation of Financial Statements
                                  (including a digression on the role of the Conceptual Framework in standard setting)
• Overview of IAS 12 Income Taxes (includes a discussion of IASC versus IFAC)
• Overview of IAS 14 Segment Reporting
• Overview of IAS 17 Leases
• Overview of IAS 19 Employee Benefits
• Overview of IAS 33 Earnings Per Share
• Overview of IAS 34 Interim Financial Reporting
• Overview of IAS 35 Discontinuing Operations
• Overview of IAS 36 Impairment of Assets
• Overview of IAS 37 Provisions, Contingent Liabilities, Contingent Assets (what Paul calls the "Provisions Standard")
                                  Click here for the IAS 37 Examples
• Overview of IAS 38 Intangible Assets (the IASC standard that the SEC may not accept)

Current Projects at the IASC

• Current Project:  Agriculture
• Current Project:  Events Occurring After the Balance Sheet Date
• Current Project:  Financial Instruments
  • Introduction
  • March 1997 Discussion Paper and Public Reactions
  • E 62 (Scope, Recognition, Measurement, Impairment, Derecognition)
  • E 62 Hedge Accounting (including comments about basis adjustment)
  • Disclosure, Effective Date, and Transition
  • Differences Between E 62 and SFAS 133 (also discussed later on)

• Current Project:  Performance Reporting (including comprehesive income, developing nations bookkeeping, industry-specific issues, and bartering)
• Current Project:  Discounting and Use of Probability
• Current Project:  Extractive Industries

Interpretations

Major Differences: IAS-US GAAP

No Longer Differences:  IAS-US GAAP

Other IAS versus FASB Issues:  Conceptual Framework and Level of Detail

Strategy Working Party

Degree of Use by Nations:  A Listing by Country

Stock Exchanges Allowing IAS Standards

Stock Exchanges Not Allowing IAS Standards

Significant Cross-Border Listings Table of Data

Some Nice Quotations About the IASC

Bob Jensen's SFAS 133 Glossary and Transcriptions of Experts

You may also want to download  INTERNATIONAL ACCOUNTING STANDARD SETTING:  A Vision for the Future, 1998 Special Report of the Financial Accounting Standards Board (FASB) .  At the moment one copy of the FASB's Special Report may be downloaded from http://www.rutgers.edu/Accounting/raw/fasb/
For additional copies of this Report and information on applicable prices and discount rates contact:
Order Department
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, Connecticut 06856-5116
Please ask for our Product Code VFF.
Trinity students may view this document at J:\courses\acct5341\fasb\intnacct.htm

Paul Pacter's Transcription Introduction

I personally am very interested in feedback on this session and, to that end, there are some evaluation forms, which I will --- that I pass them around now so that you have them available to you.

In the late 1960s with a Ph.D. in hand, I planed on a teaching career. Instead I went into public accounting with a medium sized firm. It was ninth largest from that followed the, then, Big Eight.    I got involved with the Accounting Principle's Board, because my boss in that firm was a member of the APB. Later when the  FASB started in 1973, I took a full-time position with them. And later in 1984 I diverted dramatically for eight years in four two-year terms in local government as the Chief Financial Officer, with sort of Deputy Mayor kind of responsibilities of the city of Stanford, Connecticut. That was the most interesting job I ever held needless to say; both the most rewarding and the most thankless --- but I loved it.

Then I said in 1990 --- I'm going to finally do what I set out to do which was to teach. I took a position teaching in an evening MBA program of The University of Connecticut.  But FASB hired me back, and I a segment reporting research study for them. And when that was finished, the International Accounting Standards Committee (IASC) approached me to do a similar study  --- at the international level. What I did for FASB was survey nearly 7,000 companies' reports.  We also did a complete literature review of the academic research in the area of  predictability of various kinds of segment information. And the international study was similar using about 1200 companies from 30 countries.

Once that study was done, I started going to the committee meetings on segment reporting as consultant.  Then the project manager left suddenly, and  I ended up as the project manager from the USA. And then starting in early '96 I took a full-time position with IASC. I am basically a project manager and did the IAS segment-reporting standard.   I just finished IAS 35 on  interim reporting IAS 34. I'm now the project manager on financial instrument recognition and measurement. And we're going to talk quite a bit about that today and how --- where we are on it as compared with FASB 133, 114, 115, 125, etc…I also do the IASC's website, I taught myself HTML and that's kind of therapy --- I love it.   I'm living in London --- that's excellent also.  I've been there over two years now.

I hope this session will be as informal as possible, since I seem to be the only one with a tie here. You all of course should have a set of these notes. These are my transparencies.  I  will follow this material through but elaborate along the way.

001

001.01
If you go the IASC booth in the conference exhibitors area, you will notice a lot of silver balloons hanging. The silver balloons represent IASCs Twenty-fifth Anniversary. IASC started almost to the day the same time that FASB started. And IASC didn't get anywhere near the same publicity in its launching. Nor was it anywhere near as successful in its first ten or fifteen years.  But now I think it's chucking along pretty nicely, and by the time this afternoon is finished maybe you'll agree.

Like FASB, the IASC is an independent private sector organization. It is itself not a government agency nor sponsored by any government agency. It has the same mission as FASB --- to improve accounting standards. And I guess IASC takes on a greater role in harmonize then, to get the countries in the world to all agree on a single set of accounting standards instead of the kind of accounting battles that we have right now in large and small countries. We are sponsored by 140 professional accounting associations in 101 countries. That is virtually every country of any size in the world with the exception of Russia, and the reason is that we don't have any sponsor in Russia. Our sponsors are the professional accountancy bodies in each country --- in the U.S. it's the American Institute of CPAs. The problem in Russia is it's hard to identify the main professional accounting body in Russia. They're several pretenders to the throne and, until that can be sorted out, none of them are members.    The Peoples Republic of China is a member of the IASC along with   virtually every country in the world. Now those are members in the sense of sponsoring organizations. We have the Board, the IASC Board, that actually sets the accounting rules. That Board has sixteen members, and I've listed here the country members on the IASC  Board. You'll notice that most of the larger countries in the world are represented along with only a few smaller ones --- smaller countries rotate. In addition to those thirteen country seats, there are a number of organization seats, three to be precise. Notice I say Swiss companies, there is a federation of Swiss holding companies and they rather than a CPA profession hold one of our sixteen Board seats. 

From industry, the Financial Executives Institute (FEI) has an international equivalent called the International Association of Financial Executives.  IAFE is a member alonge with the Word Wide Association of Financial Analysts that of course includes the AIMR in the U.S. and Canada and the European Federation of Financial Analysts and the Asian-Pacific Federation. So the analysts are well represented.

001.02
Even though I've said there are sixteen seats on our Board, that's not the number of people that sit around the Board table, because for each section there are usually two Board representatives plus a technical advisor. So right there is three people time's sixteen "seats" giving rise to 48 people sitting around the Board table. The United States representatives actually count for two accounting associations --- the American Institute of CPAs and the Institute of Management Accountants.

So the current American representatives are Mike Crooch from Arthur Andersen. He's another one that started out to be an academic. He went to school with me at Michigan State and got diverted into public accounting. He recently finished up a five or six-year term as chairman of ACSEC ---  the AICPA's senior accounting standards committee. Mike is only one of the two American representatives on our Board.  The other is Mitchell Danaher from General Electric --- I think his title is Deputy Controller;   He was an Industry Fellow with FASB and worked on segment reporting in fact while he was there.

And if you look at our website (by the way, in addition to being the web guy, I'm also the photographer), you'll see a few pictures on there of Board meetings with what looks like the United Nations with the General Assembly. We have some observers; the U.S. FASB is an observer. That seat had been Jim Leisenrings for about five years and then switch to Tony Cope about a year ago; and Tony has the full right to the floor, as do all of the observers, and like Jim Leisenring, he does not hesitate to use that right of the floor. Observers make a very effective contribution to IASC even though they do not have voting privileges. Other observers include the European Commission.  There is an EEC Director of Accounting and, as you probably know,  there are several directives which are really EC Laws. The Fourth and Seventh Directives in particular focus entirely on accounting.   Unfortunately, in my opinion, they have locked accounting into law ---  it backfired on them a bit. We'll talk about that later on today.   I say backfired --- once you get something into law it's very hard to change it. For example, an issue that they're wrestling with right at this moment is one of those directives that says you cannot put current (fair) values on the face of the balance sheet.  At the moment we have a proposal (E 62) on financial instruments that says certain financial instruments are to be marked to market. So that's already a violation of law in the European Community. So the EEC is trying to deal with that by amending the directives by pulling the accounting regulations out of the directives and making them subject to regulation but note law.

Another important key group  among the five observers and that's five people is IOSCO --- the International Organization of Securities Commissions. That is the worldwide association of securities commissions, including the SEC in the U.S and a hundred other commisions like the SEC. Every country that has a public securities market obviously has some sort of regulatory agency that oversees that market; regulates securities dealers, regulates issuers to some extent, a big extent in the U.S. and a small extent in Britain.   Securites commisions regulate issuers and regulate exchanges and markets. And so the dealers, the markets and the issuers are all regulated by commisions that are part of  IOSCO.

And the final observers go to the Peoples Republic of China. There are 1.2 billion people in china,  and it's very important that China gets off on the right foot in terms of accounting.  Chinese observers at IASC meetings are very enthusiastic supporters of IASC.  China is busily adopting our standards for all Chinese business firms. So it's a good thing I think that we got China on our Board as observers.

Our Board meets four times a year for one week each time. We just met in Canada in July, the next meeting will be in November. I can tell you, although you'll say I'm biased, that the quality of the discussion is excellent.  It is not word smithing or editorial stuff --- it is good high level debate on matters of substancel. Obviously when you have representatives of sixteen different countries there are certainly a number of schools the thought on accounting --- for example in some countries they revalue the property equipment as a matter of course. And others like the U.S. these revaluations are absolutely prohibited.  In some nations you have companies with hidden reserves and income smoothing as a matter of tradition. In the U.S. that maybe was a tradition twenty-five years ago, but over the last twenty-five years the FASB weaned business away from a income smoothing.  The debate may be far-reaching but it's always I think at a very high level.

001.03
Question/Comment.   Are IACS meetings open to the public that meeting or does it matter?

Well, I'm embarrassed to answer that Question/Comment. The answer is at the moment it is no --- the meetings are not open to the public. That's the bad news; the good news is by next March they will be. Our Board has approved that policy and we're studying now how best to implement the policy. Implementation is more difficult when you meet all around the world --- I mean this year London was January, Malaysia was April, Canada in May; then   Zurich, Warsaw, Rome and Washington. But meetings will be open to the public. For the moment, however, it is a closed meeting. And we've been often criticized for that by the FASB in the U.S. And rightly so.  I think the IASC matured to the point where our meetings should be open. I think we have nothing to fear from that in terms of being embarrassed about thesubstantive level of the discussion.

Please ask questions as we go along --- that would be the best way I think.

In addition to the Board, which is the key organization in the structure, we have several groups.  I will go through these slides much more quickly than we are now. I'm just setting the scene here.

001.04
Like FASB, the IASC has an advisory group. The FASB's  FASAC, the Financial Accounting Standards Advisory Council, that brings to the FASB table views of organizations that are not normally represented as members of FASB. Our similar group is called the Consultative Group. That includes, for example, people from the United Nations, from the worldwide Association of Stock Exchangers, from the worldwide Association of Lawyers, from the Worldwide Banking Association, and  ---well I can't quite think of them all right now. But they're many other organizations, not accounting organizations that have a direct interest in financial reporting. So that's the Consultative Group.

What we have misnamed as the Advisory Council is more similar to the FASB's Board of Trustees in the Financial Accounting Foundation. The IASC's Advisory Council is compriesed   of seven or eight very high-powered people, presidents of stock exchanges and/or national accounting societies. Their goal is to oversee IASC structure, operations, independence, raise money for the operation --- much like the FAF Board of Trustees with respect to FASB. We have an Interpretations Committee, kind of like FASB's Emerging Issues Task Force.  Our Interpretations Committee has been meeting about eighteen months. It has ssuesd a series of interpretations,and we'll look at those in a few minutes.

001.05
This last box on the screen is for steering committees that are quite different from the FASB's task forces.   Does not --- is quite different from FASB task forces. Our steering committees really do the leg work on our agenda projects before our Board digs into the issues. Steering committees are high-powered committees much like FASB taskforces, but their role is to oversee the staff research, to define the boundaries of the project, to decide what research needs to be done, and either to do farm it out to be done.  These committees will often publish an "issues paper" That's a neutral document much like a FASB Discussion Memorandum. On the screen I've listed the sequence of steps in releasing an issues paper. The most recent one we published was about a year ago on financial assets and liabilities in the financial instrument area. I'm just beginning work on one in extractive industries accounting. Its Steering Committee then assesses the comments of the viewsreported in the issue paper, which is a neutral document normally. And then the Steering Committe develops what is called --- what we call --- a draft statement of principles. It looks just like an Exposure Draft, except its got a bluish cover to distinguish it as a proposal from the Steering Committee. It's actually very tentative preliminary conclusions, not of our Board, but of the committee. And these are published for public comment. We get letters of comment between a hundred and two hundred --- more likely closer to two hundred letters.

At that point, the Steering Committee will modify the draft statement for the comments received and what has learned from the SOP process draft statement of principles.   The amended statement is eventually submitted to the Board along with a Committee recommentation to build an Exposure Draft. And then the Steering Committee moves out of the picture. Our Board then debates the principles with an eye toward all the comment letters that have come in --- our Board sees all those letters. And it's the Board then that develops an exposure draft and approves the principles. A required vote out of our sixteen for an exposure draft is eleven votes. That's published --- public comment, comments come in more modifications and finally the final standard, and twelve out of sixteen votes.

So our steering committees thus take the initial pass at the decision making.   This is different from the FASB taskforces.

Question/Comment. Are the steering committee members representatives of the various countries?

A steering committee chairman is always one of our Board members --- a Board representative. So at least one of the committee members sits on those sixteen Board seats and chairs the steering committee. Other steering committee members, in most cases, are experts on the committee issue. So if it was pension accounting we'd appoint actuaries, pension accounting specialists, pension fund managers --- that type of thing. For extractive industries issues we have mining accounting specialists, oil and gas accounting specialists --- people from oil and gas companies, oil analysts and that kind of thing along with some from public accounting, some from industry analysts, some from academe.

Question/Comment. From across the world?

Yes. These committees usually roughly eight people from most anywhere in the world.

Question/Comment. With more from London?

Almost no one is from London. The Chair of the Segment Reporting Steering Committee was Patricia A. McConnell from New York. The Chair of my Discontinued Operations Accounting Committee happens to be England's Professor Chris Nobes from the University of Reading.   For the Interim Reporting Committe it waswas a Coopers & Lybrand partner from Stockholm. For the Financial Instruments Recognition and Measurement Committee, it was IASCSecretary General, Bryan Carsberg.  Brian is an academic by background from London School of Economics and the University of Manchester.   Before that chairs of steering committes were a partner in KP&G in Paris and so on from all over the world.

001.06

IASCs history is boiled down into one page here. It's a little hard to do that. The environment in which the IASC operates is that we've got 101 member countries, and virtually every one of those has an some type of accounting standards board. Some of those boards are independent of the public accounting profession. U.S. is an example, Australia is an example, and Britain is an example. These accounting standards setting bodies not part of the CPA or chartered accounting professions.  In most countries the   standard setting boards are part of the public accounting professions in those countries. In a few countries, the accounting standards board is actually an arm of government, Japan is an example of that. Most countries among our 101 member nations have a public securities markets.  This means there is some sort of regulatory agency overseeing the market. Most of those agencies  have developed disclosure requirements, financial statement disclosure requirements, that are superimposed  on top of the recognitiion and measurement standards arising elsewhere. For example, the SEC in the U.S. super imposes disclosure requirements on top of FASB accounting standards.   On occasions the SEC also superimposed something affecting  recognition and measurement requirements as well.  That's done infrequently in other countries as well, but in most cases regulatory agencies only generate disclosure requirments.

I will acknowledge an Achilles' Heel of IASC right now --- IASC has no enforcement power!   You know you can respond to me that the FASB also has no enforement jurisdiction.   I agree, but  from day one, in early 1973, there was SEC recognition for all FASBs standards. So almost from the date that FASB started, the Securities and Exchange Commission enforces FASB standards for every one of the 13,000 public companies in this country required to register with the SEC. And the code of ethics of the public accounting profession and the licensing laws of every one of our fifty states in one way or another enforce FASB standards --- the AICPA makes an undisclosed departure from FASB standards a violation of the code of ethics and a violation of a CPA licensing law. Unlike the FASB, the IASC, I have listed every country --- about 130 countries.  We're in the middle of trying to figure out exactly where we stand in each of these countries. I've summarized some of that in your notes and we will get to that this afternoon.

But right now we have no enforcement authority and we need enforcement --- we need an equivalent of an SEC recognition in every one of our countries. That's why you keep hearing about the IOSCO agreement with the IASC.  The ultimate objective is. IOSCO agreement to get our standards enforced  throughout the world.

001.07
In the first ten years, the IASC's standards IASs) were short and sweet. And often they simply were a listing of accounting's best practices in the larger countries around the world. IAS 2, for example, on inventory says you can use FIFO or you can use LIFO. There weren't very many countries that used LIFO, but those that do had a lot of clout in the world economy.  IAS 2 allows a range of inventory costing alternatives.  You've got to use a cost-base method --- it can be either LIFO, FIFO, or weighted averages. You have to write inventories down and then realizable values and so on.  So IAS 2 constrains certain practices, but in very short order in ten paragraphs that standard's [econifide--unsure of spelling] the then existing practice of accounting --- in accounting for inventories. The standards were more descriptive than prescriptive; even the wording you don't see the words [unsure] nor should; you did not see those words in early standards.

What it really said is in some countries they use LIFO, other countries use FIFO, or if you look at the segment reporting standard it said in many countries revenue and result of operations is disclosed by line of business --- by industry. Many countries use 10% as the materiality guideline. Now our new IAS 14 says thou shall use 10%, thou shall disclosure revenue and result etc. etc…So the philosophy has evolved dramatically but the first 10 years it was more descriptive that prescriptive. Also, for the most part the first ten years they didn't get into the tougher you know more technical issues. Well that happened in the next years, let's say in the mid-80's to the mid-90's they took on issues like pension accounting, like business combinations and we have a pretty rigorous standard on goodwill --- on the --- on the poolings including a size test, etc…

We went to a program of strengthening many of the earlier standards so the change --- in many of those were changed from descriptive to more prescriptive. We eliminated alternatives but some remain. Where alternatives remain, you'll find that we identify maybe one as a benchmark and another as an allowable alternative. It's not quite preferred and inferior, but that's the [unsure] and many alternatives have been eliminated completely. We developed a conceptual framework I should --- I really should say they copied a conceptual framework from the FASB, changed a few words but the principles are the same. What is very dramatic from the conceptual framework that IASC adopted which is the same as FASBs framework, is the acknowledgement that investors and creditors prevail.

Now this may seem trivial almost in the United States where since the early 19 --- mid-1930's, accounting standards and securities regulation has had an investor-creditor focus --- focus on providing information to people who might be buying securities for selling. Who might be lending a company money? This is kind of unheard of in many large countries around the world, accounting is really a kind of a management report of --- a report card on how we did last year to the existing shareholders. And the concept in many countries, and I'm talking about countries like Switzerland and Germany and a lot of the Scandinavian countries, is that management knows best. And we have long standing --- Japan is another one --- long standing relationships between capital providers and companies, and we don't need to --- we don't need full disclosure. Equity markets are much less important overseas than they are in the United States. Most companies --- companies in this country have at least half of their capital from equity markets, not so in many big developed countries in the world where it's more like 25%.

So by adopting the same framework, an investor/creditor objective --- a relevance objective by saying relevance is key. This was earth shattering around the world, it's very common place in the U.S. Now what do we do --- what do we do --- doing lately? The IOSCO course standards I'm going to talk about probably the next slide coming up; we have got a commitment to get a body of standards in place by the end of this year, and it's a commitment we made in 1995 to this international organization, The Securities Commission. This is the way we see to get that enforcement I was talking about. They in turn have a commitment to us and the best thing could say is to consider recommending to our members to their hundred securities commission the adoption of --- the recognition of IASC standards for cross-border offerings.

So we are trying to seek recognition in major capital markets and little by little, one by one countries are allowing our standards. Who would've thought even two or three years ago that domestic companies in Germany and France by law, by laws enacted in 1998 may use IAS standards to report to their stockholders domestically? I mean nobody would have expected it that the French and the Germans the last hold-outs of sovereignty or states rights or whatever you want to call it over there, would've allowed that; as well now Belgium and Italy allowing their own public companies. Not just across borders but I'm talking about within their countries.

May use or must use?

May, may and only in consolidated financial statements; see now here in this country consolidated is all we have. Maybe ten years ago the SEC parent only statements. In many --- most countries around the world parent only are the legal official statements and there's a lot of law dividend paying issues that are very important for parent only statements. But consolidated --- all of a sudden they are realizing the importance of consolidated statements and most countries now require it. Japan is soon to require consolidated. Do you know that their shareholders haven't been getting consolidated statements, ever? Just parent company statements with all the subsidiaries carried at cost. And so basically on a cash basis for dividends received are profits. Well that's changed --- that's beginning to change now.

We've begun our interpretations program, this is our toughest nut to crack, this last item trying to develop working relationships with national standards setters. And toward the end of this afternoon I'm going to talk about that --- that's a tough one.

001.08

The above slide I gave you the actual wording of the IOSCO agreement. The commitment was made three or four years ago.

I 'm not going to read this stuff in the above slide.   I just want you to be aware that it's not just IOSCO that's committed to support us. The European Community has over the years rattled the cage, the European cage, a number of times to set up an EEC accounting standards board. But a couple of years ago they announced that they were not going to do that. It's inefficient for them to go  off by ourselves and they threw their lot in with the IASC.  Be that as it may,  I just saw in Accountancy Magazine this month that the woman who is in charge of accounting for the EC says that maybe the EC needs own standards board. This is another way of putting pressure on theIASC to keep the pace up in standard setting.  The bottom line is that the EC has   thrown their lot in with the IASC.

001.09
Question/Comment.

Could you tell me why national standard setters will be needed if the IASC achieves harmonization due to IOSCO?

Well, a very good question, it's a very hard question to answer.  I would say right now if I had to define it in one word, it's "convergence."  But me my personal view is that in the long run there can only be one set of accounting rules. Accounting is not a natural science, you don't sit in the laboratory and bubble a test tube and find out some truth as you might in a physical science. What we are is a group of professionals, intelligent people experienced, fortunately guided by a framework --- to which we hopefully agreed and signed in blood --- sitting around a table and agreeing on a set of standards.   If you get two equally intelligent and experienced groups of people, you are going to come up with two sets of accounting standards. And so if we are going to have lots of national standards setters, I don't know if we can ever achieve harmonization.  So my definition of harmonization would be that the major national standard setters and IASC will have to agree on a single set of standards. Everybody else will have to go along, we'll  have no choice but to go along. And maybe even someday ten years, twenty years down the road, you won't even need the national standards setters.

001.10
Question/Comment.

I hope that I will not be aggravating you.  How can you build a global set of standards on a framework that only has two basic principles.   Now that's the accrual principles and the going concer principle. So why don't you include into your work place the research of what accounting is about or made?  I am hoping all together there is a description of the monetary flow of an open tracking; nothing else. So somehow it seems to be pretty confusing that there is so much discussed about the financial statements and so little discussed on the basis which they are constructed --- on the bookkeeping what are the transactions we are keeping track of? And why don't you think first this basis and come to a convergence what it is all about? Because otherwise it wouldn't be very logical to put together a universal set of axioms.    As you said, accounting  is no natural science. It's a man-made science you say.

So we need, we need a set of axioms we can agree upon first, then we can continue on with deriving a set of standards. So I'm hope I don't use a rough language, but I'm not very good in English.

It seems to me that the work is now down from the top of the tree toward the roots, instead of coming from the roots to the top of it.

I'd like to make two comments in response. I think our basic principles are at a higher level than simply accrual accounting and going concerne.  Our most fundamental principles I would say are relevance for decision makers and reliability of the information. I would also say that I don't see tracking the monetary flows into and out of a business as an important part of our job to be honest with you. I see our objective as helping people make forward-looking decisions decide should I buy this stock today and then what price should I lend today and what rate of interest do I charge? And to know that, I want to know what would the future earnings be, what will the future cash flows be, what will the future…

OK, cash flows, evaluate them.

Wait a minute, wait a minute --- future I said future. Admittedly historical cash flows and historical earnings, performance measures and historical asset information, are important.  I don't think our framework, the IASC framework, views tracking historical cash flows as our overriding objective as you would have us do.

No annual financial statement cannot be without a cash flow view of the futures.

Exactly, I agree with you.

I'm still confused, but on a much higher level.

001.11

In addition to support from the European Commission; we have a fair degree of support from the U.S. Securities and Exchange Commission (SEC). They haven't signed on the dotted line to everything we've done. They've made no commitments to everything we have done or will do. But they are working very closely with us.  Either the Chief Accountant or the Deputy Chief Accountant of the Commission comes to every one of our IASC Board meetings and often to many of our steering committee meetings. And in the slide above you can read the SEC's statement  made a couple of years ago in support of what we're doing. hey have said they are going to consider whether to allow foreign issuers to use our standards without reconciliation to U.S. debt. The SEC said it intended to evaluate our core body of standards, that we're committed to produce for IOSCO.  In the slide above you can read the criteria on which the SEC will evaluate it. Does it constitute a comprehensive basis of accounting similar to the existing FASB basis ---  not identical --- but similar?  The SEC wants us to provide investors with good information on which to make investment and credit decisions?

Are the standards high quality, will it achieve comparability among companies, full disclosures, etc…and are they rigorously interpreted and applied? And this enforceability at the moment is another --- is one of our Achilles' Heels.

Even the U.S. Congress got involved with IASC in an effort to promote U.S. capital markets. Congress said to the SEC, in form sense a Senate resolution, that the SEC should push for adoption of international accountings standards for foreign issuers in the United States  and report back to Congress about progress being made.  The SEC made such a report in this past year. All it is it's not a law, it's just a form of that Senate resolution for promotion registration of foreign securities in the American capital markets.

Right now there are about one 1,000 foreign companies with equity securities trading publicly in the U.S. --- that is out of the 13,000 possible companies. Naturally registered companies tend to be the largest of the companies overseas, because the biggest foreign companies tend to list here first.  It is said that there are only 200 American companies that today meet the New York Stock Exchange listing requirements but that are not now making equity share available to the public via stock exchanges. In contrast there are 2,000 foreign companies that meet the size criteria and the other New York Stock Exchange listing requirements that are not listed on the New York Stock Exchange. So you can see where they see the largest market opportunity over the next twenty years --- it's to try and get more foreign companies into the U.S. capital markets fold. There's a wonderful article in a recent issue of  Business Week. I just read it on the plane coming over here.  It deals exactly with this very issue. I recommend it to you. And Arthur Levitt (head of the SEC)  is very comes down hard on the IASC.   He says look, the SEC has not yet signed up with IASC at all. The SEC will  wait and look at forthcoming IASC standards, and if they're not good high quality, we're not going to allow it (to take the place of FASB standards). High quality is paramount.

Note from Jensen:  A message from Arthur Levitt to the IASC is linked at http://www.iasc.org.uk/news/cen8_129.htm    It may come up faster by clicking on my version here.

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002

What where we now stand --- I just put the above listing of our standards together. At our July meeting, our Board approved the last two standards on this list, provisions and accruals of provisions and accounting for intangible assets. So we have 38 standards in place. We reuse our numbers when revisions and amendments are made,  unlike FASB, so almost every standard on the list,  certainly the older ones from IAS 1- IAS 20, have been amended at least once. But even when taking that into accout, we still don't have near the number of standards as the FASB.

002.02

Now, how do those 38 standards to date relate to the IOSCO core standards summarized above? Both IASC and IOSCO agreed on the list of 40 standards or forty issues that must be in place before IOSCO will consider endorsing IASC standards for each of their member countries to adopt for cross-border offerings. Of those 40 issues, we have finished 37 of them to date and the other three are all financial instruments issues --- one was a derivative and hedging. one was off-balance sheet financing, and the third one was accounting for investments.  We now have a proposal, which also happens to be my project, in exposure draft ED No. 62 on financial instruments recognition and measurement. And the comment deadline is the end of September in 1998.  We have a Board meeting in November, we have another Board meeting in December. Why do we have one back to back, six weeks apart? Because E 62 is a make or break for us, and we want to make sure we get it done, with a thorough debate, if at all possible in 1998. If we don't make it by the end of 1998, we don't make it. But that's our goal and our firm commitment.

002.03

I just included in your notes some important dates, in particular the above dates are the effective dates of our most recent pronouncements. Several of them have now gone into effect, for example IAS 12 which is our equivalent to FASB 109 on accounting for income taxes. That has now gone into effect, and you can see there are a couple of others have gone into effect for financial years beginning mid-July.

002.04

We are now going to get into the technical stuff on each of those. Let's look at what we're still working on. The slide above shows a listing of the projects that are now on our agenda. Accounting in the agriculture industry --- this is accounting for crops, livestock, etc. during the growing or maturation period up until you have a harvest or a slaughter. And we'll talk about each of these current projects as well as the recent standards. We have a financial instruments project, that's the ED No. 62 project,  to meet the IOSCO for standards.  ED No. 62 us on recognition and measurement for financial instruments.  We also have a more comprehensive long-term project on financial instruments to try to get an integrated standard of more of a mark-to-market approach for all financial assets and liabilities. We are doing that with a number of national standards setters, including FASB --- that's a longer-term project.

We've begun several industry projects. We've not done industry accounting standards up to now. Obviously agriculture is an industry --- we started that one for several reasons. One is that agriculture accounting is a great concern of developing countries, and they've encouraged us to do it.  The second reason is that the World Bank gave us $300,000 for it because it's an issue the World Bank feels is important in the kinds of countries that they serve. So we got into agriculture. Insurance accounting --- we're in the middle of developing an issues paper on it now. The steering committee has met several times. The extractive industries project is about to get going. So for the first time, we're getting involved in some industry-specific accounting standards.

Events after the balance sheet date --- we already have a standard. It's much like the FASB's standard with only a little difference regarding accruals of post-balance sheet date dividends --- that's allowable, believe it or not. That's the issue we're working on at the moment. This problem is a fall out from the provisions and contingencies' standards.

Investment properties --- this is focuses on holding  real estate as an investment rather than for operations.

Performance reporting is a project similar to FASB comprehensive income project. We're trying to decide what is meant by "performance"? How do we report it in the best set of financial statements.  This may involve some historical cost accrual accounting and some fair value adjustments.

Our two newest projects, which just have not started yet at all, is the one on   discounting and probability issues and the other is on on special issues in accounting by developing countries.

002.05

So I'm ready to take the plunge and start talking about some of the individual standards, unless there's questions just speak up.

How often are you looking at the Conceptual Framework while developing the fairly new standards? Are you doing that more often than before or not?

I think the Board does look to the framework. Our Conceptual Framework is really a document whose biggest consumers are our Board members themselves. Everybody who takes a seat around our Board table comes with some sort of the personal pre-conceived framework regarding what accounting ought to do or ought to be. What we say to new Board members with this framework is appreciate that the people who came before you, in their wisdom, said here are our objectives of accounting. Here's what we mean by assets, here's what we mean by performance, and here's what we mean by liabilities, revenues, expenses, gains and losses. Here are the qualities that make accounting relevant, reliable, comparable,   and so on. And we're urging all Board members to buy into that framework, because if you bring a different set of concepts to the table, then very likely you will reach different accounting recognition and measurement answers. So while the framework, I guess, is useful out in the real world to people who are preparing financial statements, it is the most useful to our Board and our interpretations committees to guide them, to give them frame of reference in looking at individual standards.

Being the ultimate aim of the Conceptual Framework is to be so specific that any two preparers of financial statements would be consisstent with each other even if there were no standard because they would begin with the same set of axioms..

I think that is is some sort of ideal goal of the framework, but in reality it's hard to look to the framework to get a very detailed and specific accounting answer.

The framework was not meant for specific…

That's my point, it's really at a higher level --- it's to guide our Board in it's debates. For example, we just finished a standard on provisions, and we're going to look at that in a few minutes. And important question is should your company be allowed to accrue a provision (e.g., a liability; debit expense, credit liability) simply because your company had a good year? And you say, well, we want to squirrel this away in case we have a bad year needing more flow into income.   Mangers know best whether this is a good year or not.  The are so impacted by the accounting outcomes.  But our shareholders want to see a nice, smooth trend of earnings, etc…It's the same arguments we've had in the U.S. over accrual of self-insurance reserves for example. Our Conceptual Framework says wait a minute!  A liability is that deferred what-you-may-call-it on the right side of the balance sheet. A liability is an amount you now owe to somebody outside the business as a result of past event or transaction. And so no --- you cannot accrue provisions and be consistent with the Conceptual Framework at the same time. And I'm sorry Germany or Scandinavia or the Netherlands, you cannot invoke your principle of prudence to simply say to the firm's directors that we know this was an extra good year, thereby, leading to debit expense and credit some kind of liability. Managers are going to bury that liability in with our long-term debt, and because they know better than their shareholders how to measure income. And that's a big step forward for IASC.   The Conceptual Framework helped us in the provisions standard. That is one example.

The sixteen Board members --- do these sixteen Board members to the greatest extent speak for their own constituencies or for themselves?

Well, it depends. You have to look country by country. In the FASB, for example, Board members must consider their constituencies.  For example, Mike Crooch is not a member of FASB.  He's a representative of the American Institute of CPAs.

Is there a commonality of reference points to national standard setters?

Yes there is. Consider our representatives from Britain, David Tweedy and Chris Nobes. David Tweedy is the Chairman of the UK Accounting Standards Board. From Australia it's Warren McGreggor who is the Chairman under the Australian Accounting Standards Board. From South Africa it's a past Chairman of the South African Accounting Standards Board. And the other Australian representative is Ken Spencer who's the current chairman of their board. Japan no, Germany no, France, no. So some yes, some no. I mean they're asked to vote their own conscious; I suspect some do and some don't. I mean it's like any other body whose representatives are drawn from industry. You have the same thing in FASB too.   Naturally your background affects how you're going to vote. I would say most of the industrialized nation standard setters are somehow are represented around our table.

Back to the standards.   IAS 1 is a rework of the old IAS 1.  It accomplishes some very important objectives. Number one, it says every company must present four basic financial statements with at least one-year or comparative figures --- the balance sheet, income statement, cash flow statement and equity statement. Number two, it spells out certain minimum line items and subtotals that must be presented on the face of these financial statements. Cash flows actually in IAS 7, but for example on the income statement, companies are required to arrive at a results of operating activities to separate out financing and income taxes and the earnings of equity-method associates investees. They are required as well to have these other line items on the face of the income statement.

The cash flow statement is very much like the FASB standard. The three main categories you can use direct or indirect methods, etc…This equity statement is one where our Board did not make quite the progress that FASB or the English Board has in defining exactly what do you mean by performance? What do you mean by income? IASC standards, like the FASB accounting standards, have had certain kinds of recognized gains and losses debited or credited directly to equity rather than flowing through the income statement. Foreign currency translation gains and loses --- we have property revaluations for fixed assets, which you don't have in the United States, but the IASC allows revaluations. And ED No. 62 these are items of gain and loss that in effect use fair value accounting on the balance sheet, but we have been unwilling to put them in the traditional income statement. The same practice exists United States ---  those items I've just mentioned. other than revaluations,  plus securities gains and losses in the FASB's SFAS 115.

So our Board debated whether to have an equity statement that really would combine net income for the income statement plus these other gains and losses that are recognized through other accounting standards but not on the income statement. And then we somehow arrive at a grand total that is a broad-based measure of performance. The UK now requires this. The U.K. requires a statement of total unrecognized gains and losses. It is called call it their struggle statement.  It starts with net income and then adds in these other items and comes up with a grand total.

The FASB uses comprehensive income (see SFAS 130) as you know. Our Board came down squarely on both sides of the issue. So in IAS 1 you can understand it's a very controversial issue to say that fair value adjustments are a measure of performance. Here's what our Board said with regard to this equity statement.   This is an equity statement  that we are requiring for the first time. One way you can do it is just like the UKstruggle statement where you can show both the unrealized gains and losses --- well that's the third way here. You can show the unrealized and net income from the income statement or show a grand total of comprehensive income or show it on a struggle statement.

You can do the equity statement and put transactions with owner's investments, treasury share purchases, dividends, in the notes.  A second way you can do it is to show both, but not have a grand total. In the equity statement you would just have the unrealized gains and losses. You would have maybe net income or it may only in the income statement but not have a grand total of comprehensive income. Or a third way,  the more traditional what we call in the United States the statement of stockholders' equity --- showing changes in stockholders' equity where you've got lots of columns --- including investments with new investments by owners, purchases of treasury shares, payments and dividends, and all of these unrealized gains and losses. And we allow this as long as it's all spelled out clearly.  The users of financial statements can decide what measure of performance, which alternative measure of performance, is most useful to them.

Is that the best way to do it? No, I wish we could narrow this down to one alternative. But at least we've got what we think is transparency of outcomes for investors.

How come you use the expression unrealized gains and losses? Which point of the framework does it refer to that?

It's a very good Question/Comment.  Today I've been a little loose with my use of the word "unrealized" by assuming that everybody in here knew what I'm talking about. I'm talking about mark-to-market value changes that have, for whatever reason, we have said (in other accounting standards) do not go directly to the profit and loss statement. We don't have a written concept of realization in our framework, but we do have definitions of revenues and expense. And then we have standards; we have a standard IAS 18 on when you recognize revenues. We have various standards on when to recognize expenses.  But the notion of realization was a loose term on my part, it's not really in our literature.

We have a list of items that should be disclosed in the notes to financial statements and the summary of accounting policies, obviously. If your financial statements comply with international accountings standards, you should disclose that in fact. But more importantly, you cannot say that they comply unless they comply with every one of our standards. Before the revised IAS 1 went into effect in 1997, I saw any number of foreign financial statements, Swiss for example, claiming that the financial statements were prepared in conformity with international accounting standards. But then you read the notes that the financail statements have omitted segment information or segment revenues are reported without bottom line segment results. You could get away with that before 1998, because IAS 1 requiring that all standards be me hadn't yet taken effect.

Starting in 1998, you cannot pick and choose. It's all or nothing --- if you don't comply with every IASC standard you've got to point out the exceptions. Secondly, we require compliance with interpretations. In the United States there is a hierarchy of authoritativeness with the FASB standards being the top and there's level A, B, C, and D or level 1, 2, 3, 4 for authoritativeness. In our little world, we have statements and interpretations and there is no such hierarchy.   Now "true and fair" criteria override --- true and fair is shorthand for saying a company may in its judgement determine that following a particular international accounting standard produces misleading results.  If managers do make that judgement in their heart of hearts, then they do not have to follow that standard.  But they must also waive the red flag and disclose why they did not comply with a standard.  The true and fair overrides are  possible United States as well. There's Rule 203 of the Code of Ethics of the CPA profession that says in a rare circumstance that you can depart as long as you disclose. And with respect to public companies I think, since 1973, there have been maybe two cases that that has been done. Out of 13,000 that are public, and considering both annual and quarterly reporting over more than 20 years being able to override with true and fair criteria, two instances are very, very rare.

Unfortunately, in the real world of accounting in 101 countries around the world true and fair overrides are not quite as rare. They are not very common, but we have left the door open in this standard the tiniest little bit. We are waiting to see what happens. Our Board were quite divided on this issue, and the way we've ended up with the wording, the override.  Actually the exposure draft leading up to IAS 1 permitted no exceptions. If you did not follow our standards, you could not say you follow IAS even if you felt that the standard didn't do your financial statements justice that you feel that it was misleading. We backed off on that when IAS 1 was eventually issued.

002.06

IAS 12 on income taxes is quite similar to FASB's SFAS 109 on income taxes. It does away with the old income statement approach of timing differences and instead looks at balance sheet approach of temporary differences. If there's a difference between an asset's tax base versus its booked carrying amount, you  must provide for deferred taxes on thedifference. Our old standard had allowed partial provision, and this is still true in the UK today, where you don't accrue deferred taxes unless the reversal will take place within the next three years. We've said sorry!  You accrue all deferred taxes.   IAS 12 is virtually identical to SFAS 109.

We also have a "more likely than not test"  --- do you know what I'm talking about?  Under FASB 109, you will accrue a deferred tax asset if it's more likely than not that you would realize that asset through future taxable income. We say if it's probable that the tax would be realized but it's the same point; more likely it's not. I'm not going to read all this stuff. The important issue is IAS 12 and FASB 109 are quite similar.

What kind of safeguard do you have on the "true and fair override?'

I must tell you we're nervous on the issue of true and fair override because we think its been abused over the last ten to twenty years. We tried to get a IAS 1 without itm but we failed. The standard places a burden on company and their auditors to reach a conclusion that following the IAS 1 would mislead investors. That's a pretty harsh conclusion, you really have to --- you've got to think long and hard before you're going to say that following of a recognized standard will mislead people.

Secondly, the safe --- we now have the safeguard of litigation, which is one of the exports from the United States, that's quickly finding its way all around the world. And following a standard is a safe haven in a litigious environment to the point where there is a strong incentive for companies to stick to the standard rather than try to do an end run. And thirdly, probably most importantly from our point of view, we have all sorts of disclosure including disclosure of the effect of the departure from any IASC standard. So if somebody disagrees with you that it would be misleading, it is possible to go another route and reconcile the departure with our standard. And that's the best we were able to accomplish in this version of IAS 1. A few years down the road probably we'll take a look at that issue again.

Does this reconciliation have to be in the auditor's report?

We do not set auditing standards. There is an international auditing standards committee called the IFA International Federation of Accountants Committee.  Our IAS 1 does not tell the auditors what to put in their repors. IAS 1 does say that if you want to use this true and fair override, you've got this, that, and the other disclosure to make and we want that in the notes to financial statements. It's up to the auditing standards setters, either at the international level or country by country, to decide whether that should also appear in the auditor's report.

Would you please comment on the relationship between IASC and IFAC.

Yes, it's a good Question/Comment. I said earlier that we have 140 IASC members in 101 countries. Those people are also IFAC members. You cannot be our member unless you're a member of IFAC. Once you've become a part of IFAC, you are automatically a member of IASC. IFAC is an associate organization. If you look at the IFAC organization chart, they view us as one of their committees or something like that.   I don't recall exactly how that works --- but we have a very close working relationship with IFAC.  They have appointment power over the thirteen people filling country seats on our Board. The IFAC Council approves those members; that's about their only responsibility for the IASC. IFAC has a public sector committee, a public sector accounting standards committee, dealing with government standards and non-profits accountancy.  Somebody from that committee attends all of our Board meetings. I did not list them as an official observer, but they are allowed to attend. We have a very good working relationship with IFAC.

002.07

Our new and revised SFAS 14 on segment reporting this was my project. And by the way, I wrote the original FASB 14 on the same subject back in 1975/76, along with its Discussion Memorandum, its Exposure Draft.   I've sort of made a career out of segment reporting.  Obviously, I'm not doing well, because it keeps getting revised everywhere. But where we are now at the international level is --- well I should say that where we were before this past year --- is that we had a five-paragraph standard, five paragraphs. I mentioned that before that many countries use a 10% guideline; many countries report revenue and results of operations, many countries report both industry and geographical --- that's the way it was.

Now we've added a lot of "thou shall" and "though shall nots" in more rigorous guidelines. We say that all public companies must report both product information and geographic information. One of those two bases is primary, whichever one is the predominate source of the company's risks and prospects, and the other is secondary. And for the primary source you must disclose an awful lot of information for secondary three items of information and I've listed here in these bullets, the specific items of information that must be disclosed by segments.

So companies have separate domestic from foreign revenues, does that also mean country by country?

For defining their geographical segments I pushed as hard as I could for country by country, any country more than 10%, because I think the risks there usually are political --- that is political boundaries mean something. We in the steering committee bought off on that and so our draft statements of principles said country by country. The Exposure Draft backed off that a little bit, and the final standard does not say one way or another. It says "you define it."  It gives a list of factors to differentiate geographical areas. But --- and now your question was if you isolated domestic versus all others.  Would that qualify? I can't answer that until I know a lot more about the circumstances for a specific country. I can honestly say I am not sure today what the value would be of co-mingling Indonesia and Singapore if you claimed that's our entire overseas operations. Because the states in the economies in those two countries are so different, the co-mingling may not reveal the risks   appropriately.    Certainly said all Pacific Rim or you took Australia and co-mingled Indonesia with it and said that is the Pacific Rim segment. What in the world would that mean in 1998?  I don't know.

So we know that if you look at the academic research, which is considerable over the last twenty years on both industry and geographical disclosures that have often been domestic and joined nations in major continents. One of the things we discovered is that the predictability of industry information, such as ndustry sales, line of business and profits and assets, is much stronger to by industry segments earnings in stock prices than is the geographic segment reporting,  But none the less,  even with what we've had is continent-typed disclosure, almost every research study on geographical information finds a positive correlation, even  with the old geographic disclosures. So I think while it's not ideal to still have continents or maybe even something broader, it's seems to have been useful. So that's where we are at the moment.

Our segment definition takes a management approach just like FASB. We began working on the revision to IAS 14 the same time FASB began working with FASB 14 hand in hand with the Canadians.  After moving to England in 1996,  I found myself commuting to Toronto and Norwalk getting battle scars in the process of going back --- trying to battle out,  to minimize the conflicts in our standards.  IAS 14 has a very precise objective.  Our objective is to report information about the lines of business in which a company operates and the geographical edges. It deals with  risks and returns associated with the lines of business and the geographical areas a compnay operates in. Once you accept that objective, you can see how our standards fell into place.

The FASB's objective is to report, to shareholders, the breakdown of the company --- the segmentation of the company that is reported to management for whatever reason. The FASB's statement of the objective of the new standard is blah, blah, blah. It is to report to shareholders the same segmented information that reported internally.  The North Americans have taken a "management approach," and you've heard that term it means looking to management information, not just for segment definition, but also to decide what information should be presented and how to measure it. We couldn't swallow it.   What we swallowed is the management approach for segment definition. We say OK, but there are constraints.   If your management segments co-mingle product lines of diverse risks, you must look at your next lower level of internal management reporting and see if that breaks those apart. And if it doesn't, look at the next lower level. Somewhere in you internal structure you must be reporting where you differentiate these risks.

But we take a management approach to segment definitions, but unlike the FASB, we stop there. We then say we want standards as to which information should be presented and how to measure it. We've got the same 10% test for materiality, and we've got the same requirement that segment information must represent 75% of consolidated as in the new FASB standards.

Assume that I am reporting on a SBU basis internally?  And let's assume that I've run in six products. Do I go to a second bullet?  Am I required to report on a product basis criterion regarding diverse risks I heard you say?

It is and it is product orientated. So if you are managed by business unit internally, that co-mingles let's say your bank subsidiary or insurance company subsidiary with a hi-tech subsidiary together under one manager…

Five or six products I --- am I right to assume that they are all same risk? I don't have to go to the second line item?

If you end up with product line information; we have some guidelines as to what constitutes product lines. They are broad guidelines but if you have six very diverse products, if you co-mingle chocolate bars and wheels --- tires for automobiles you would have to break that out even if you contend the diverse product lines are their equally risky.

Now here's a list of the five big differences between IAS 14 and FASB's SFAS 131 that replaced SFAS 14.  IAS 14 says you must in your segment information must use the same accounting principles as in your consolidated financial statements. FASB's new SFAS 131 wants the same basis for measurements that were reppoted internally. These may not all be on the same underlying principles.  For example, a company internally may only allocate cash pension contributions by segment when accrual of the unfunded pension liability reported at the corporate level  --- for whatever reason. FASB would say that you would have cash basis pension expense in your segment information even though you had accrual in consolidated financial statements.  If you make your LIFO adjustment at the corporate level somehow, and you judge your managers of your segments on the basis of FIFO, then your consolidated financial statements will be on LIFO but your segment data FIFO.

Or maybe if you impute a cost of capital which many companies will to each segment and say this is your hurdle rate --- you're going to be charged 14% cost of capital.   That's not an expense that's on the income statement. We say you can't do that. We want consolidated GAAP to control the segment reporting.  The FASB says that's the way you report internally, that's the way you report externally. We have a symmetry requirement for assets and expenses and they don't have this requirement.   So if for some reason under FASB rule, a company allocates an asset to a segment but does not charge the segment with the depreciation expense, that's OK for to leave out depreciation in the segment reporting under the new FASB SFAS 131. We say wait a minute!  To get a some sort of return on investment measure if you're allocating the asset, we want to expense the depreciation at the segment level as well.

We have a standardized measure of segment results. This means every company and every segment will be essentially operating profit before interest, taxes, minority interest equity, extraordinary items, therby isolating operating pre-tax, pre-interest operating profit.  The FASB says you report to your shareholders the level of profit that you report internally. So for some companies reported segment profit might be a gross profit number, just cost of goods sold subtracted from revenue. Other companies might go all the way down to net income. For some companies I think it's certainly possible, and I know it's true for taxes, that you'll have different levels of profitability for different segments. Some companies will allocate some income taxes to a segment where there's some abnormality or somewhere a segment has a special tax effect.

The IASC permits, but does not require companies, to treat vertically integrated activities as segments. We say a reportable segment must have at least half of its revenue from outside customers.  This is not so under FASB's SFAS 131. It says that, if it's reported internally, it's a segment even if when it's a possibility your bank's computer department where bills out for two lines of business ---  commercial lending and the trust department or something like that. So you've got one segment of business, a computer center, that bills itself out to the two internal lines of business, I'm exaggerating this example. But for the FASB, you might be report three lines of business if that's the way you report internally. For the IASC could only have two lines of business.

Can a company were to design its internal reporting system in such a way to comply with both IAS 14 and SFAS 131?

Definitely!  That was where we, the FASB and the IASC,  finally agreed.   We agreed to disagree on this stuff,  we did everything in our power to make that possible.   And when I say "we" I mean a staff of FASB, CICA, and me from IASC along with  our respective steering committee chairmen. We actually had a conference committee, like you'd have in the U.S. Congress,  laboring to insure that a company could comply with both standards in a single report. For example, if company only reported gross profit by segments internally, that becomes the segment basis for SFAS 131. We would say, all right now you've got to allocate other operating expenses for purposes of IAS 14. So you would have --- you would arrive at a gross profit number in your FASB accounting, and then you'd additionally derive a pre-tax, pre-interest operating profit number for IASC accounting..

We believe that in nearly all cases the segment definition would be simila. We even developed, internally, some schemes the layouts of how you could do this reconciliation. There are going to be some oddball cases where you cannot; where they'll be forced to make two separate segment accounting presentations. I think these will be few and far between --- that's our hope.

002.08

Disclosures in the old IAS 17 were limited, particularly for operating leases. And what we just did was review the old IAS 17 and beef up the disclosure side of that standard. And that was the primary objective of that project was to enable investors who felt that more leases should be capitalized to have the information that they could use to do that.

We changed a little bit of lessor accounting.  Personally I'm not sure that was for the better, but we changed it none the less. It was for the better in the sense that we eliminated an alternative that was allowed under the old IAS 17. That alternative was in determining whether the lessor has made a sale and whether you discount the cash flows on the net of tax basis or pre-tax basis?  We all know that some leasing transactions are only economically viable because as a result their tax impacts. And so there was a school of thought that said you really, in measuring your cash flows, should do it on a net of tax basis.   There was another school of thought that said that we don't do any other accounting measurements on a net of tax basis, and we do it gross in deciding poolings or whenever. Anyway, we came down in the IAS 17 on ignore taxes. That's called the net investment method as opposed to the net cash investment method.

But the big change in the IAS 17 was expanded disclosures.

002.09

IAS 19 on employee benefits, there were a number of revisions --- we already had an old standard numbered IAS 19 on pension accounting. That standard had said for any defined contributions plan, your expense is the amount of the required contribution to the period. And that standard had said for a defined benefit plan you would accrue the expense using a sound actuarial method, but that was where guidance on the matter stopped. The old standard did not say which actuarial calculation method to use. It had very broad guidelines as to how to account for actuarial gains and losses.

The new IAS 19 standard is very specific. It says you must use the projected unit credit method to measure pension expense and obligation. You cannot use projected benefit methods that take future service into account, that kind of try to smooth pension expense over the entire working life of the employee. Only you do take salary progression into account, but only based on service rendered to date, not expected future service. We say that this cap rate to use is the rate on high quality corporate bonds. This is very similar to FASB's SFAS 87 approach.

We now have a net realizable value test, kind of, for the net pension asset on the balance sheet.  This test did not exist in the past.  In the final revised IAS 19, we allow a range for amortizing actuarial gains and losses. We have a 10% amortization   approach which is exactly what FASB 87 has --- that is if actuarial gains and losses exceed 10% of the pension fund or the obligation, then you've got to begin amortizing and at a minimum over the remaining working life of employees. But our standard says if you want to take all your actuarial gains and losses in immediately up front when they arise, you can do that or anything in between.  That is fairly broad ranged for recognizing actuarial gains and losses and mainly to some non-comparability. I guess the bottom line of IAS 19 revised is our pension expense wil