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U.S. Securities and Exchange Commission

Speech by SEC Staff:
What is Going to Happen in the US?

Remarks by

Mary B. Tokar

Senior Associate Chief Accountant
Office of the Chief Accountant
U.S. Securities and Exchange Commission

at the 2nd International Accounting Standards Conference, Belgium

March 10, 1998

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Ms. Tokar and do not necessarily reflect the views of the Commission or the other members of the staff of the Commission.

Thank you for your invitation to speak today; in the interest of full and fair disclosure – a theme I'll continue to come back to – I must warn you upfront that I am not willing to make specific predictions in response to the title of this session, "What is Going to Happen in the US?" What I do want to do is to provide some background – some context – for speculating with some accuracy about what may happen, in part so that this audience can understand how the SEC is likely to approach the issue of international accounting standards.

To accomplish this goal, I've prepared some remarks that cover the following areas:

A. Background

B. Key Tasks – A List of Things to Do

C. Key Issues to Be Addressed

D. Longer Term

But, before I speak any longer I must note that the remarks I make today are my own views and do not necessarily represent views of the Commission or other SEC staff members.


Capital Market Regulation in the US

In the United States, regulation of capital markets is based on a system that prescribes initial and continuing disclosures by companies that seek capital from the investing public. The regulatory goal is to promote informed investment decisions based on full and fair disclosures and to prevent misleading or incomplete disclosure. So, it is understandable that the Commission views high quality accounting and disclosure standards, and credible financial reporting, to be critical to the effectiveness of US markets and the interests of US investors.

The disclosure system in place today requires domestic registrants to file financial statements prepared in accordance with US generally accepted accounting principles. As many of you know, foreign registrants are permitted to file financial statements prepared in accordance with US, home country, or international standards, provided that, if standards other than US standards are used, a reconciliation to US GAAP also is presented. I think it is important to emphasize that this system does not impose either a higher or lower disclosure standard for foreign registrants than for domestic companies. Rather, it is designed to ensure that all companies coming to US markets provide disclosures that are comparable to disclosures by US companies and therefore are useful to US investors and protect those investors' interests.

It also is important to note that the SEC has not delegated authority for accounting principles to an outside body; while the SEC has formally acknowledged that the standards established by the FASB and its predecessors are considered authoritative, the Commission retains the authority to promulgate accounting principles for SEC registrants and to prescribe the form and content of financial statements filed with the Commission. 1 The Commission's willingness to look to the private sector has been with the understanding that the Commission and its staff retain oversight responsibility, and may exercise its statutory authority and supplement, override, or otherwise amend private sector accounting standards. And the Commission staff, through its process of review and comment on financial statements filed with the Commission, is active in shaping how US accounting standards are interpreted and applied. For example, the Commission has published minimum line item and footnote disclosure requirements in Regulation S-X; the SEC staff also publishes interpretive guidance in the form of Staff Accounting Bulletins, for example when we find an application of US GAAP that we question. It's important to understand that the SEC does not accept any set of financial statements, whether prepared in accordance with U.S., IASC, UK, or any other GAAP, without question.

With that general background, let me turn now to...

Objectives for the Core Standards Work Program

The SEC's involvement in the IASC core standards work program grows out of an ongoing initiative within IOSCO – the International Organization of Securities Commissions – to develop what sometimes is referred to as a universal passport for companies – a single document that could be taken to any capital market and used for listing or offering securities. IOSCO's Technical Committee, composed of representatives of securities commissions from 16 of the largest developed capital markets, has asked its Working Party No. 1 on Multinational Accounting and Disclosures to pursue this objective on three fronts:

a. financial statements;

b. non-financial statement disclosures; and

c. auditing requirements.

Financial Statements

The financial statement leg of this project has focused on development of a core set of accounting principles that would provide a framework for preparing financial statements for cross-border offerings. IOSCO has looked to the efforts of an existing private sector group – the International Accounting Standards Committee (IASC) – rather than attempting to compile or draft these standards itself. Let me do a quick review of the recent history of this work:

  • In 1994, IOSCO reviewed the existing IASC standards and identified those that needed to be improved before acceptance could be considered.

  • In July 1995, IOSCO and the IASC agreed on a core standards work plan, and in March 1996, the IASC announced an intention to try to complete that plan in 1998.

  • In April 1996, the Commission released a statement in support of the efforts of IOSCO and the IASC. That statement articulated the key elements that will guide the SEC's assessment of the acceptability of the IASC core standards. Specifically, the Commission will consider whether the standards constitute a comprehensive basis of accounting; whether they are of high quality – that is, whether they result in transparency and comparability and provide for full disclosure; and whether they can be and will be rigorously interpreted and applied.

Let me emphasize that the scope of this project is limited in a couple of important ways. First, it is focused on creating a core set of international standards for cross-border offerings – this is not seen as an effort to replace the FASB or any other national accounting standard setter. Second, it is not intended to cover companies with specialized industry accounting standards. Specialized industry standards – for example, those used by oil and gas companies and insurance companies – are "suspense" issues, which I'll cover in a few moments.

Other IOSCO Efforts

As I mentioned earlier, IOSCO also is working on a project to harmonize non-financial disclosure requirements for offering and listing documents. As part of this project, referred to as the "disclosure project," some participants distributed domestic consultative documents last summer; this project now is nearing completion. IOSCO's Working Party No. 1 also is discussing efforts to standardize auditing requirements.

Clearly, capital markets are changing – and, as responsible regulators, we want to plan for that change rather than just struggling to play catch up with it. That desire to increase capital market efficiency, while fulfilling our mandate to protect investors, drives participation in these efforts.

Let me turn now to...

A List of Things To Do

There are four steps I'd like to cover in this section:

  • Completion of the core standards work program;

  • IOSCO assessment of the completed standards;

  • SEC staff assessment and recommendations to the Commission; and

  • Commission action.

Let me start with...

Completion of the Core Standards Work Program

The IASC has been working flat out on the core standards work program since July of 1995; at this time, final standards have been issued for seven of the 12 project areas originally identified; exposure drafts are outstanding for four others, and an exposure draft for an interim approach to financial instruments is scheduled to be debated at the upcoming April IASC Board meeting. There also are a further three projects scheduled related to the core standards work program. 2 At this point, it looks as if financial instruments, which has been split into separate interim and long-term projects, is determining the "critical path" for completion of the core standards work program. The IASC has indicated that completion of the interim project on financial instruments is scheduled for November of 1998.

I should point out that the open projects are among the most difficult and controversial included in the core standards work program.

The next steps will be...

IOSCO and SEC Staff Assessments

In 1994, when IOSCO reviewed the then existing IASC standards and identified standards that needed to be improved before acceptance could be considered, it identified two types of issues. "Essential issues" are issues deemed critical to the success of the project by some countries. "Suspense issues" are issues that would not require resolution before endorsement could be considered, but are issues for which individual jurisdictions might specify required treatments if those issues were not addressed by the IASC. The IASC used a listing of these issues (focusing on the essential issues) to prepare its core standards work program in 1995.

As part of its work on the core standards project, IOSCO's Working Party No. 1, as well as individual members, have been providing comments on each of the documents published by the IASC. The objective has been to provide input into the standard setting process at an early stage regarding regulators' concerns about accounting and reporting, rather than waiting to raise these issues when the core standards have been completed by the IASC.

When the core standards are completed, IOSCO will assess the status of each of the issues originally identified, as well as the standards subsequently issued by the IASC, to determine how these concerns have been addressed.

When Working Party 1 has completed its assessment, it will make a recommendation to the Technical Committee for action by IOSCO's membership regarding use of these standards for preparation of financial statements for cross-border securities offerings and listings.

Assessment by the SEC staff is expected to overlap with and build on the IOSCO assessment.

Last, let me walk through possible...

U.S.Securities and Exchange Commission Action

As I mentioned earlier, the SEC currently requires foreign private issuers registered with the Commission to provide financial statements prepared in accordance with or reconciled to US GAAP. If, after assessment of the completed core standards, the SEC staff concludes that the current reconciliation requirements should be reduced or removed, the staff will need to bring a rule proposal to the Commission to amend the current filing requirements for foreign private issuers. If the Commission supports the staff's recommendations it would publish proposed amendments for public comment. The staff would then analyze the comments received and make final recommendations to the Commission, which would then be included, if approved by the Commission, in an adopting release. This procedure of announcing proposed rule changes, allowing time for public comment and then publishing final rules is mandated by US law and applies to any SEC rules and regulations.

Key Issues

With that overview of the process I expect to unfold, let me now focus for a few minutes on key issues that are expected to be considered in assessing the completed core standards. When the Commission considers changes to its accounting and disclosure requirements, it must evaluate the impact of potential changes on capital formation, including the possible impact on the cost of capital for domestic companies, and, critically, on investor protection. These basic concerns helped shape the three criteria for assessment of the completed standards identified in the SEC's April 1996 press release. What I'd like to do now is cover some more detailed points that have been identified to date. Let me mention a Report to Congress issued by the SEC in October 1997 addressing progress with harmonization of international accounting standards; many of the items I am about to cover are summarized in that report, and it is available on the SEC website.3

Let me start with a few remarks about the...

Open Core Standards Projects

As I mentioned before, the IASC's remaining projects are among the most difficult and controversial on the original work program. To illustrate this, let me focus for just a moment on two projects: financial instruments and intangibles.

Financial Instruments

I'll make just a few remarks about this project: first, this is an essential part of the core standards work program. While the IASC has two standards in this area covering disclosure, it does not have comprehensive recognition and measurement principles. Given the significance of these issues, the IASC published a paper in March of 1997 that has been recognized widely as an excellent comprehensive discussion paper. As I mentioned before, the IASC has split work in this area into an interim and a long-term project, the latter as a joint project with standard setters from a number of countries. The interim standard is meant to complete the components of the core standards project. Since the Board has not agreed on an exposure draft yet, I'll limit my comments to noting that it is important that this interim standard not undermine the advances being made in individual jurisdictions and not create barriers to progress by the long-term joint working group.

Turning now to...

Intangible Assets

The SEC staff has expressed its fundamental concerns about the IASC's proposals included in its recent exposure draft. The proposed approach, under which internal development costs would be expensed up to some point in the process – and then capitalized after certain criteria are met – would, at best, be applied inconsistently and, at worst, permit manipulation of reported income.

Further, the staff also has questioned the relevance and usefulness of recording on the balance sheet an amount that can only be described as an accumulation of some, but not all, of the costs of certain internally developed intangibles. It would be unlikely that the reported amounts would convey any meaningful information about the value of the intangibles, the company's efficiency in developing intangibles, or how the intangibles might contribute to or otherwise impact future cash flows.

These comments don't preclude any capitalization of costs for internally generated intangibles, and are not aimed at trying to protect any specific current US practice. However, the staff believes that good accounting in this area – accounting that will be useful to financial statement users – needs to focus on specific, narrowly defined categories of activities, rather than seeking to develop broadly applicable criteria that are unlikely to be applied in a consistent and meaningful fashion.

These issues are exacerbated by the proposal to permit an unlimited useful life for amortization of both internally generated and purchased intangibles. While the IASC has conditioned this approach on development of a robust impairment standard, it is difficult to believe that any impairment standard can be an effective backstop to an unlimited life.

Other Issues

The comments I just made are intended to illustrate the complexity and controversial nature of the issues left on the IASC's agenda. Some additional issues that the Commission also will have to consider include the following:

Transition Issues

Even if financial statements produced using the completed core standards may be judged acceptable for cross-border offerings and listings, historical financial statements prepared in accordance with prior standards will not reflect the improvements achieved by the core standards program. Thus, the timing of acceptance of international standards will need to be addressed, and those decisions will be affected by the IASC's transition provisions.

"Suspense" Issues

Although individual "suspense issues" generally are relatively narrow concerns, the number and significance of suspense items not addressed, particularly if the number is large and the issues collectively are significant, may impact the overall assessment of the core standards. Further, because IASC standards tend to provide less explicit guidance than US standards, some additional guidance for filings in US markets likely will be needed before they are acceptable for cross-border trading. An open question is whether the additional interpretive issues will be so significant that the core standards may not be fully operational, either because they cannot be uniformly applied or because the extent of the additional guidance required would be so great that endorsement would not improve significantly the efficiency of cross-border filings.

Specialized Industry Standards

As I mentioned earlier, the core standards project does not cover specialized industry accounting practices. These practices are expected to be addressed as "suspense" issues, which means that individual jurisdictions can be expected to continue to specify the required accounting and disclosure.

Supplemental Disclosures

Currently, the Commission's supplemental interpretive and disclosure requirements apply to both domestic and foreign registrants. As it evaluates the IASC core standards, the Commission will need to consider whether these supplemental requirements – for example, the minimum line item requirements of Regulation S-X that I mentioned earlier – should continue to apply, regardless of the basis of accounting used to prepare the financial statements.

Longer Term

Earlier in these remarks I commented on the interaction of private sector standard setting in the US and the oversight of that process provided by the Commission and its staff. The SEC staff has been involved directly, commenting on the IASC's core standards projects not only to provide input on a timely basis but also because detailed knowledge of the standards – and the debate that shaped them – will help the SEC in assessing the final standards and in preparing any rule proposal.

Some have suggested that, in addition to assessing the resulting standards, the SEC should focus on the quality of the process for setting those standards – and that the objective should be an SEC endorsement of the process and organization. This broader endorsement, of the type the SEC has given to the FASB, is dependent upon an oversight role and responsibility for the SEC – a role that is unlikely to be duplicated at an international level.

Another perspective on this project is that it signals the end of a role for domestic standard setters. I believe the opposite is true. Active engagement of national standard setters seems an obvious answer to the question of how to get a more process-oriented endorsement from national regulators. If national standard setters are involved more directly in the IASC process, formal endorsement of new IASC standards will be less significant. Clearly, there will need to be due process at both levels, which means that the possibility of differing answers will remain. These (and many other) issues currently are being debated by the IASC's Strategy Working Group, and I'm sure many of us are looking forward to seeing the consultative paper that group is expected to publish shortly.


Having flagged an number of potential issues, it is important to point out that the IASC's efforts have already made a significant contribution to raising the level of accounting standard worldwide and have sparked an ongoing dialogue among national standard setters that should reduce differences going forward. As I said at the beginning, I'm not willing to make specific predictions about what will happen in the US. I can say, however, that a tremendous effort has been expended, and will continue to be expended, focused on the right objective – making quantitative improvements in the accounting principles used to prepare financial statements that are the basic means for communicating with investors and all capital market participants.

Thank you very much for your attention during this rather detailed review of background and progress to date. I look forward to trying to respond to at least some of your questions.

1 See, for example, Sections 7, 19(a) and Items 25, 26 and 27 of Schedule A of the Securities Act of 1933, and Sections 12, 13(b)(1) and 17 (e)(2) of the Securities Exchange Act of 1934. The Commission also was given the authority to define accounting terms. See Section 19(a) of the Securities Act of 1933, and Section 3(b) of the Securities Exchange Act of 1934.

2 Investment Properties, Post-Balance Sheet Events and Reporting Financial Performance.

3 http://www.sec.gov/news/studies/acctgsp.htm