Accounting standards: Common ground

Date: 20/12/03

A move towards global accounting standards is proving controversial

ALL those transatlantic arguments, over Iraq, trade and so forth, can make it seem that Europe and America have nothing in common. Happily, in at least one area - accounting - there are signs of a rapprochement. On December 15th the Financial Accounting Standards Board (FASB) proposed changes intended to bring American rules nearer to international norms. Two days later, the FASB's counterpart in Europe, the International Accounting Standards Board (IASB), presented rules for accounting for derivatives in line with American practice.

Since last October, the FASB and IASB have been working together to narrow the gap between their regimes. The ultimate goal is to create one set of global accounting standards. Doing so, they say, will boost cross-border investment, deepen international capital markets and save multinational companies, who must currently report under multiple systems, a lot of time and money. Much credit for the progress made is due to Robert Herz and Sir David Tweedie, presidents of the FASB and IASB respectively. Both have exhorted business people, officials and politicians to support moves towards common standards.

However, business people and politicians are less happy than the standard-setters might have hoped. In America, business groups are already grumbling about at least one of the FASB's four proposals. This would require firms to restate prior years' earnings after any accounting changes, rather than permit just a one-off adjustment as they do now. Businesses say that, in the wake of the big accounting scams at Enron and WorldCom, investors are wary of any earnings restatements, even innocent ones.

But the big fight in America is likely to break out early next year, when the FASB is to re-open the debate over stock options, which are treated as an expense in Europe but not (yet) in America. The last time this battle was fought, in 1993, the FASB backed down after some lawmakers, pushed by deep-pocketed lobbyists for the technology industry, which was a heavy user of stock options for employees, threatened to strip the board of its rule-setting powers. Once again politics is coming into play. Richard Baker, a key member of the House of Representatives' Financial Services Committee, introduced a “compromise” bill in November blocking the FASB from forcing firms to treat stock options for most employees as an expense. And yet, illogically, the bill would require that executives' options be regarded this way.

In Europe, the new accounting rules for derivatives are also controversial. Currently, European firms value derivatives at their purchase price, which is often close to zero. The new standards would force firms to use the market values of these instruments instead, as American and Japanese firms already do. The Bank of International Settlements estimated that there were $7.9 trillion of over-the-counter derivatives outstanding at the end of June.

Banks and insurance companies, which are big users of financial instruments, are riled, claiming that the new rules will make their profits intolerably volatile. Political heavyweights such as Jean-Claude Trichet, president of the European Central Bank, and France's president, Jacques Chirac, agree.

Although the European Commission has said that all listed European companies should use the IASB's accounting rules from 2005, the European Parliament has the power to reject any standards not to its liking. So far it has not done so, but there is a chance that politics could stand in the way of new rules.

More worrying, the rules that have been proposed so far are the easier ones. The IASB and FASB have the longer-term intention of tackling trickier accounting issues such as the treatment of mergers and deciding when revenue should be recognised. When these more difficult changes are proposed, the resistance is likely to be even fiercer.

A move towards global accounting standards is proving controversial.

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