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A Presentation by Paul Pacter
as Videotaped by Bob Jensen

Bob Jensen at Trinity University

Caveat: . I am grateful to my former graduate student, Paul Pacter,  for allowing me to videotape his inspiring presentation. The quotations from Dr. Pacter  that appear at various points in this document have never been edited by him or modified from a transcript of a presentation that I videotaped at a conference. My videotape was transcribed by my secretary, Debbie Bowling. The transcription was modified by me only when Debbie failed to understand certain terminology.  I prefer to minimize changes in the transcription so that what is read remains as close as possible to what the audience listened to at the conference. None of us speak with the formalized vocabulary and grammar used in our writing. Also we cannot edit what we said in the same manner that we can edit what we wrote.  Bob Jensen added notes in red text.

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
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Bob Jensen
Trinity University

International Accounting Standards Committee Update

Presenter: Paul Pacter
International Accounting Fellow
International Accounting Standards Committee

1998 American Accounting Association Conference
In: New Orleans, Louisiana

CPE Session

Sunday, August 16, 1998


Table of Contents

Transcription Introduction

Overview of the IASC

IASC Standards to Date

Current Projects at the IASC


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 NationsA 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
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

Bob Jensen's Home Page Bob Jensen's Helpers Mexcobre Case Table of Contents

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.


  • Independent Private Sector Body That Began 1973 (Office in London)
  • Mission Improve and Harmonise Accounting Standards World-wide
  • Members 140 Professional Accounting Bodies in 101 Countries
    16 Member Board Meets for One Week Four Times Each Year

*Australia                         *Canada              *France        *Germany  *Japan                        *India/Sri Lanka    *Malasia      *Mexico
*Netherlands                    *Nordic Federation   
*South Africa/Zimbabwe                                *Swiss Companies    
*United Kingdom                                      *United States
*Financial Executives                                   *Financial Analyst


*FASB                                *EC                         *IOSCO          *China

  • Advisory Council (Oversight, and Funding)
  • Consultative Group (Advisory Role)
  • Standing Interpretations Committee Authoritative Interpretations
  • Steering Committees

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.

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.

USA Representatives on the IASC Board
G. Michael Crooch, Arthur Andersen LLP, Chicago
Mitchell Danaher, General Electric Company, Fairfield, CT
Elizabeth A. Fender*, The American Institute of Certified Public Accountants, New York

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.

Are IACS meetings open to the public that meeting or does it matter?

Paul Pacter.

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.

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.

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?

Paul Pacter.

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?

Paul Pacter.

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

Question/Comment. With more from London?

Paul Pacter.

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.

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IASC's History

Most countries have a national accounting standards Board.
Regulators also set accounting rules.
IASC has no enforcement power.


Codify best practices.
Standards more descriptive than prescriptive.


Address more difficult issues.
Strengthen many original standards.
Eliminate alternatives.
Conceptual framework.


IOSCO core standards.
Recognition in major capital markets.
Interpretations programme.
Working relationships with national standard-setters.


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.

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?

Paul Pacter.

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.

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"The [IASC] Board has developed a work plan that the Technical Committee agrees will result, upon successful completion, in IAS comprising a comprehensive core set of standards. Completion of comprehensive core standards that are acceptable to the [IOSCO] Technical Committee will allow the Technical Committee to recommend endorsement of IAS for cross border capital raising and listing purposes in all global markets. IOSCO has already endorsed IAS 7, Cash Flow Statements, and has indicated to the IASC that 14 of the existing International Accounting Standards do not require additional improvement, providing that the other core standards are successfully completed."


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



EC statement of policy, Accounting Harmonisation: A New Strategy vis-à-vis International Harmonisation:

"Rather than amend existing Directives, the proposal is to improve the present situation by associating the EU with the efforts undertaken by IASC and IOSCO towards a broader international harmonisation of accounting standards."


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.


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

Paul Pacter.

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.


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.

Paul Pacter.

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.

Paul Pacter.

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.

Paul Pacter.

Exactly, I agree with you.


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




"The Commission is pleased that the IASC has undertaken a plan to accelerate its development efforts with a view toward completion of the requisite core set of standards by March 1998. The Commission supports the IASC's objective to develop, as expeditiously as possible, accounting standards that could be used for preparing financial statements used in cross-border offerings."

Criteria to Evaluate IASC Standards
  • Comprehensive basis of accounting.
  • High quality

full disclosure

  • Rigorously interpreted and applied.

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.



It is the sense of the Congress that:

  • high-quality international accounting standards would greatly facilitate international financing and enhance the ability of foreign corporations to access US markets; and
  • the SEC should enhance its vigorous support for the development of high-quality international accounting standards; and
  • the SEC should report to Congress on the outlook for successful completion of a set of international standards that would be acceptable to the SEC for offerings by foreign corporations in US markets.


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    It may come up faster by clicking on my version here.

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(Note that older numbers do not mean older dates since current revisions
and amendments take place without assigning new IAS numbers.)

IAS 01 Presentation of Financial Statements

IAS 02 Inventories

IAS 04 Depreciation

IAS 05 Financial Statement Disclosures

IAS 07 Cash Flow Statements

IAS 08 Reporting Profit And Loss

IAS 09 Research and Development Costs

IAS 10 Contingencies and Post-Year-End Events

IAS 11 Construction Contracts

IAS 12 Income Taxes

IAS 13 Current Assets and Current Liabilities

IAS 14 Segment Reporting

IAS 15 Changing Prices

IAS 16 Property, Plant and Equipment

IAS 17 Leases

IAS 18 Revenue

IAS 19 Retirement Benefit Costs

IAS 20 Government Grants and Assistance

IAS 21 Foreign Exchange Rates

IAS 22 Business Combinations

IAS 23 Borrowing Costs

IAS 24 Related Party Disclosures

IAS 25 Investments

IAS 26 Retirement Benefit Plans

IAS 27 Consolidated Financial Statements

IAS 28 Investments in Associates

IAS 29 Hyperinflationary Economies

IAS 30 Financial Statements of Banks

IAS 31 Investments in Joint Ventures

IAS 32 Financial Instruments Disclosures

IAS 33 Earnings Per Share

IAS 34 Interim Financial Reporting

IAS 35 Discontinuing Operations

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities/Assets

IAS 38 Intangible Assets



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.

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  • 40 items identified by IOSCO
  • Standards now completed address all but Financial Instruments.
  • Re financial instruments, IOSCO minimum for core:

Derivatives/Off-Balance-Sheet Items

  • E62 out for comment.
  • Covers the 3 above matters – plus.
  • Plan: Final IAS in 1998.


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.

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Effective Dates Beginning After

IAS 01 (revised) 15 July 1998

IAS 12 (revised) 1 January 1998

IAS 14 (revised) 15 July 1998

IAS 17 (revised) 1 January 1999

IAS 19 (revised) 1 January 1999

IAS 33                1 January 1998

IAS 34                 1 January 1999

IAS 35                 1 January 1999

IAS 36                 1 July 1999

IAS 37                 1 July 1999

IAS 38                 1 July 1999


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.

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  • Agriculture

Exposure Draft – 4th quarter 1998
Final IAS – to be determined

  • Financial Instruments - (Interim Project)

Final IAS – 4th quarter 1998

  • Financial Instruments – Comprehensive

Exposure Draft – 1999
Final IAS – 2000

  • Insurance Accounting (new project)

Discussion Paper – 1998

  • Events After the Balance Sheet

ED 1998

  • Investment Properties

ED 1998

  • Performance Reporting: (new project)
  • Extractive Industries: (new project)
  • Discounting: (new project)
  • Developing Countries: (new project)


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.

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New Standards: IAS 1
Presentation of Financial Statements
  • Four Basic Financial Statements:
  • Minimum structure and content. Certain information is required on the face of financial statements:
  1. Balance Sheet: major categories of assets, but current/noncurrent split no longer required
  2. Income Statement (Operating/non-operating separation):

-- revenue
-- results of operating activities
-- financing costs
-- equity method income
-- income taxes
-- profit or loss from ordinary activities
-- extraordinary items
-- minority interest
-- net profit or loss

(earnings per share (basic and diluted, on face of income statement)

  • Cash Flow Statement (IAS 7)
  • Statement showing Changes in Equity Various formats allowed:
  1. --Show only "unrealised gains/losses" with transactions with owners in a note
  2. --Show both "unrealised gains/losses" and transactions with owners
  3. -- Show both "unrealised gains/losses" and transactions with owners AND add "unrealised gains/losses" and net profit and loss to present a combined "comprehensive income."
  • Notes to Financial Statements.
  1. Summary of Accounting Policies.
  2. Disclosure of compliance with IAS.
  3. Very limited "True and Fair Override"
  4. Requires compliance with SIC Interpretations.
  5. Criteria for current/noncurrent.


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?

Paul Pacter.

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..

Paul Pacter.

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…

Paul Pacter.

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?

Paul Pacter.

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?

Paul Pacter.

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?

Paul Pacter.

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.

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New Standard: IAS 12, Income Taxes
  • Temporary difference = difference between tax base and carrying amount. Will result in tax or deduction when sold or settled.
  • Accrue deferred tax liability for nearly all taxable temporary differences. (Partial provision and deferral method prohibited.)
  • Accrue deferred tax asset for nearly all deductible temporary differences if it is probable a tax benefit will be realised.
         Note: Tax assets will be recognised more often than before.
  • Accrue unused tax losses and tax credits if it is probable that they will be realised. Review and reduce if appropriate.
  • Use tax rates expected at settlement.
  • Non-deductible goodwill: no deferred tax.
  • Unremitted earnings of subsidiaries and associates: Do not accrue tax.
  • Capital gains: Accrue tax at expected rate.
  • Do not "gross up" government grants or other assets or liabilities whose initial recognition differs from initial tax base.
  • Disclosures: components of tax expense, tax on equity items, reconciliation of tax expense and tax paid; balance sheet items.


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?'

Paul Pacter.

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?

Paul Pacter.

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.

Paul Pacter.

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.

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New Standard: IAS 14, Segment Reporting
  • Public companies must report information along product and service lines and along geographical lines
  • One basis of segmentation is primary, the other secondary (dominant source of risks and returns)
  • For primary segments, disclose revenue; operating result; segment assets; segment liabilities; cost to acquire PP&E and intangibles; depreciation; non-cash expenses other than depreciation; and equity method and joint venture income.
  • For each secondary segment, disclose revenue, assets, and cost to acquire property.
  • Organisational units for which information is reported to the Board and CEO.
  • If those organisational units aren’t along product/service or geographical lines, use the next lower level of internal segmentation that reports product and geographical information.
  • Never construct segments solely for external reporting purposes.
  1. 10% materiality to report individually.
  2. Segments must equal at least 75% of consolidated.
  • All of above, essentially same as FASB


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?

Paul Pacter.

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?

Paul Pacter.

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?

Paul Pacter.

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.


.New Standard: IAS 14  (Continued)

Segment ReportingDifferences With New FASB 131 and CICA Standard:

  • IASC: Consolidated GAAP and allocations;
    FASB/CICA: Internal accounting measures.
  • IASC: Symmetry of expenses and assets;
    FASB/CICA: Symmetry is not required.
  • IASC: Standardised measure of segment result;
    FASB/CICA: Whatever is reported internally.
  • IASC: Vertically integrated not segments;
  • FASB/CICA: Requires these to be segments.


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?

Paul Pacter.

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.

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New Standard: IAS 17, Leases
  • Distinction between finance lease and operating lease has not changed. Essentially the same as FASB.
  • Lessee accounting has not changed.
  • Lessor accounting changed a bit: Lessor must use the net investment method to allocate finance income (the net cash investment method, which takes income taxes into account, would no longer be permitted).
  • Substantially enhanced disclosures both lessee and lessor.


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.

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New Standard: IAS 19, Employee Benefits

Key Provision – Defined Contribution Plan:

Contributions of a period should be recognised as expenses (nothing new).

Key Provisions – Defined Benefit Plans:

  • Current service cost should be recognised as an expense.
  • Use the projected unit credit method (an accrued benefit method) to measure pension expense and obligation.
  • Projected benefit methods prohibited.
  • Discount rate is the rate on high quality corporate bonds of maturity comparable to plan obligations.
  • Measure plan assets at fair value.
  • A net pension asset on the balance sheet may not exceed the present value of available refunds plus reduction in future contribution due to a plan surplus.
  • If cumulative unrecognised actuarial gains/losses exceed the greater of (a) 10% of plan obligation and (b) 10% of plan assets, excess is amortised over not more than the estimated average remaining working lives of plan participants. Faster amortisation, including immediate income recognition, is permitted.
  • Past service cost is recognised over the average period until the amended benefits become vested.
  • Terminations, curtailments, or settlements recognised when they occur.
  • Key Provisions – Non-Pension Benefits:

    Includes vacations, holidays, accumulating sick pay, retiree medical and life insurance, etc.

    Accrual basis during employee service.


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 will be at least what it is under FASB 87. But for those companies that want to take a tougher line on actuarial gains and losses, those companies will have a bigger hit on earnings because of our permissive recognition of actuarial gains and losses up front.

The biggest change from IAS 19 revised is the last couple of bullets down at the bottom of this page. We never had a standard on accruing vacation, sick pay and such. We never had a standard on post-employment benefits other than pensions. We now do, it's essentially the same as the FASB's SFAS 132.  You accrue these expenses while the employee is working --- so you'll accrue earned but not yet taken vacations. You will accrue post-employment benefits, OPEDs as you call them in the United States. A few countries have OPEDs, not too many andno where as near as the magnitude in the U.S., although it is growing also as governments try to privatize their social programs (such as national health plans).

Our new pension standard  is really now called employee-benefit standard that eliminates important areas of difference between American and international practice.


Is minimum liability accounted for in the same way in both standards?

Paul Pacter.

Yes, our minimum liability approach I would say it comes out very much like FASB's 133. It's just like FASB 87.

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New Standard: IAS 33, Earnings Per Share
  • Public companies only.
  • Disclose basic (undiluted) and diluted EPS on face of the income statement.
  • Numerator for Basic is net profit after minority interest and pref. dividends.
  • Denominator for Basic EPS is weighted average outstanding ordinary shares.
  • "If converted method" to compute dilution from convertibles.
  • "Treasury stock method" to compute dilution of options and warrants.
  • Pro forma EPS to reflect issuances, exercises, and conversions after balance sheet date
  • Effective: 1 January 1998.


Here's earnings per share IAS 33.  The IASC never had a eps standard, whereas theFASB had one that it actually inherited APB Opinion 15.  APB 15,  you may recall, required two per share numbers primary eps and fully diluted eps.   The primary eps reflected some dilution in the old U.S. standard. Dilution from it was called common stock equivalence for all options and warrants and some convertibles. And then fully diluted was kind of a worse case possible dilution. IASC and FASB worked on the project together to --- for FASB to redo their earnings per share standard (SFAS 128) and us to have one (IAS 33) for the first time. And where we came out is we have two measures, undiluted and fully diluted. Calculation?  We've agreed on calculation methodologies, and both eps outcomes must be presented on the face of the income statement with equal prominence. Our standard applies to public companies only; I guess theirs does as well. All the calculation methodologies and supplemental disclosures are essentially the same as FASB. So we have now harmonized earnings per share.

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New Standard: IAS 34, Interim Financial Reporting
  • Does not prescribe who must publish, how frequently, or how soon after period end. National regulatory responsibility.
  • Condensed balance sheet, income statement, cash flow statement, equity statement, plus limited notes.
  1. Balance Sheet – end of interim period plus prior full year end.
  2. Income Statement – current interim period and cumulative year-to-date, plus comparative for prior year.
  3. Cash flow Statement and Equity Statement – cumulative year-to-date and comparative for prior year-to-date.
  • Same accounting principles as used in company’s annual financial statements.
  • Recognition decisions and measurements on a year-to-date basis
  • Taxes accrued at the expected effective annual income tax rate.


Interim reporting --- this was one of my projects. IASC had no standard in this area. In the United States we have had quarterly reporting, for fifty years by public companies, mandated by the SEC. So all of us, when we think of interim reporting, think of quarterly reporting as the norm. In most countries of the world, quarterly reporting is the exception rather than the rule for a company that is not SEC listed  U.S.    There is interim reporting.  For most countries around the world it's half-yearly reporting that's the norm, only a few have quarterly reporting.  The IASC said it is not our place to decide how frequently companies should present interim information or even if companies should present interim data at all or how soon after the close of the interim period the interim report should be published.  the IASC said we believe that's a responsibility of local regulatory agencies like the SEC or its equivalent in other countries.

But we will set a standard that says, if you do prepare interim information and you want to say it conforms to international accounting standards, IAS 34  specifies minimum disclosures and specifies the way to measure this stuff. And here's where we ended up. We said you must present four condensed interim financial statements in any interim report --- a mini-income statement, balance sheet, cash flow statement, and equity statement. I've listed here which periods you must present it for so the balance sheets end of the current interim period and comparative end of the most recent full financial year. Income statement, current period and cumulative of the year-to-date, which of course for a half-yearly company would be one in the same, quarterly is not necessary, and comparable for those two periods for the prior year, and cash flow you can read this stuff.

The most important conclusion is we said the same accounting principles used in the annual statements must be used in your interim report as well. And secondly, all recognition decisions and measurement decisions are made on a year-to-date basis. Now what exactly does that mean? That means that in deciding whether to accrue an item revenue or expense you will follow the same principles that you've used in your last annual financial statements when you accrue that item now. [Part of the tape skipped here.]  Maybe for a pension accrual or a bad debt accrual at the end of the first quarter you decide that, on the year-to-date basis, you think the amount should be different for the first quarter for your second quarter. You would in effect do a catch up amount so that your six-month number would be the correct amounts of the six months --- you may in doing that adjusted part of your accrual for the first quarter.

We would accrue income taxes at the expected annual effective tax rate because taxes are assessed annually. So if you have a progressive tax structure, you would use an estimated effective rate.


So is it going to be very difficult to force a company to report on a quarterly basis? But if I am investing on the international market,  where am I getting my quarterly information to help me make these decisions?

Paul Pacter.

I wanted our Board to say quarterly for all public companies. Our Board just wasn't prepared --- they felt it wasn't their responsibility anymore than they say who has to publish an annual set of financial statements?  (Requirements to do meet a standard are different than making claims that you meet a standard.  For example in the U.S., the FASB sets the standards but the SEC requires who must meet those standards.)  If a company wants to say it follows international standards, then you have to do this, this, and this. I think the questions you just asked, Charlie --- you have to ask the regulators. You have to say in Britain, where the securities regulations is pretty mediocre, you've got to go to the new financial services authority and ask why aren't you mandating quarterly reporting? Because right now it's the London Stock Exchange who decides such it is trying to market stock. It really doesn't have the same mind set that a securities commission does.


Or professional analysts in a position to tap into management's of these corporations on a short-term basis to get information?

Paul Pacter.

I think for the largest companies around the world, yes. I mean the kinds of international companies that are listed here in the United States or similar large ones. I think so. In the same way they can here in the United States.  But for the most of the rest of them I don't know.  I don't think so. But we have just concluded that it's not --- it's not necessarily an IASC responsibility to decide who publishes which financial statements, how soon, how frequently. But I tried. Our Board just wasn’t prepared to make that decision.

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New Standard: IAS 35, Discontinuing Operations
  • Presentation and disclosure only.
  • Discontinuing operation: IAS 14 segment or sizeable part thereof, single disposal plan.
  • Initial disclosure at Board decision and public announcement: Carrying amounts of assets and liabilities, earnings and cash flows, and net selling price of assets for which there are binding sale agreements.
  • Continue those disclosures until disposal.
  • In addition, once the company is committed to dispose without any possibility of withdrawal, additional disclosures.
  • No special accounting recognition or measurement principles).


IAS 35 just was published in April.  The topic is accounting for "discontinuing" operations. Note that it is "discontinuing" as opposed to "discontinued."  And the reason for the change --- we had a couple of paragraphs in IAS 8 dealing with reporting income that said you should separate discontinued operations from continuing operations. But discontinued in the past tense implies that you don't even have to make any disclosure until it's a done deal, until you sold off that  big chunk of your business. And then and only then do you tell what happened. Our philosophy in this IAS 35, which is by the way only a presentation and disclosure standard,  is that you have a reporting obligation when you've made a (relatively) irrevocable decision to sell in any form ---  entirety, piecemeal, or abandoned or terminated operations. So we say a discontinuing operation for a big chunk of your business such as an  IAS 14 segment or something equivalent.

Once you meet what we call an initial disclosure date, you've got all sorts of disclosures to make about the piece that's being sold. The initial disclosure date occurs either when the firm has both developed a plan to sell off the business and made a public announcement of that plan that virtually locks in the decision.  The firm may in fact have already sold off a significant chunk of the business in its entirety or begun a series of piecemeal sales. So either way you've got the plan and public announcement or actual sales of pieces of the business.  If these tests are met, then you must begin an IAS 35 disclosure.  Disclosure means segregating revenues, expenses, assets, etc…disclosing forecasted sales price. It also means disclosing expected timings and various other disclosures, and those disclosures will continue until completion of the disposal.

Now why are such disclosures important? This is because if investors take a foreword-looking approach to accounting information and  want to predict future earnings and stock prices then a chunk of the business has been sold off that won't exist in the future.

Now we've also said that you've got to go back and segregate retroactively so that people can make a forecasted and analyzed trends. IAS 35 entails no special accounting recognition or measurement decisions --- we now have a new standard doiang that for impairments. We also have a new standard on provisions those primarily and maybe some others as well will apply. So IAS 35 just says apply recognition and measurements standards from our other rules but here's how you got to disclose this stuff.


Does this mean that the commitment to disclose without any possibility of recovery?

Paul Pacter.

No, it does require recognition but not from this standard. But we already have a standard that says if an asset is impaired you accrue the impairment loss. An asset is impaired if the recoverable amount on the discounted present value basis is below carrying amount.


So this no special accounting?

Paul Pacter.

No special accounting, but we give guidance on how to apply the impairments standards in this context. Similarly we have a standard that says you accrue provisions when certain conditions are met and that standard --- we give guidance in IAS 36 on how to do it.   In IAS 35 we merely apply disclosure guidelines discontinuing operation.

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New Standard: IAS 36, Impairment of Assets
  • Fundamental Requirement of IAS 36
  • An impairment loss is recognised when recoverable amount of an asset is less than carrying amount.
  • Detailed Requirements
  1. Review assets each balance sheet date.
  2. If impairment is indicated, detailed calculation.
  3. Recoverable amount is higher of net selling price and value in use.
  • Value in use is DPV of cash from use and disposal (FASB 121 uses undiscounted amount).
  • Net selling price means arm’s length sale less costs of disposal (can also be a DPV calculation).
  • Discount at a pre-tax rate that reflects current market assessments of the time value of money and asset-specific risks.
  • Assess recoverable amount for an asset’s cash generating unit (smallest group of assets that generates cash independently of other assets).
  • If an asset’s carrying amount exceeds recoverable amount, recognise a loss.
  • Subsequently, reverse to income (or to equity if carried at revalued amount) if there is a favourable change in the estimates on which impairment was determined (FASB 121 allows no reversal).
  • Impairment loss is an expense in the income statement for assets carried at cost, but a revaluation decrease for assets carried at revalued amount.
  • Initial adoption of IAS 36: prospective (prior periods not restated).


IAS 35 leads into IAS 36 on impairment of assets. IAS 36 for the first time addresses impairment of assets fairly comprehensively. We did have a paragraph in our old property, plant, and equipment standard that said you should accrue impairments but didn't give much guidance.  Now we're very explicit. IAS 36 one of our largest standards. We say as I just mentioned that impairment is recognized when the carrying amount exceeds recoverable amount --- recoverable amount is the higher of net selling price or value in use. And value in use is the present value of future cash flows from future used earned receipts; from using the asset plus the disposition amounts and selling price is a market based arms-length transaction that's cost of disposal. So IAS 36 gives guidance as to when you have to make a detailed impairment calculations and so on.


I have a question, obviously this value used on net selling price is below depreciated value.

Paul Pacter.

What are the indicators of impairment that will force a detailed impairment calculation?  Once you have been depreciating your assets, you now have a carrying amount on your books --- book value. And there are indicators of impairment.  Let's say it's a building, and it's been sitting vacant or you're unsuccessfully trying to rent it out.  It's been sitting two-thirds vacant for the last couple of years. That would be an indicator of impairment. We have examples of things that would indicate impairment. These things would force you, once those indicators are present, to make a detailed calculation of your expected cash flows.  

Suppose you have still got the building one-third rented out. Here's my rental cash flow stream. I'm stuck in Boston where I had a ten-year supply of rental market --- well that's turned around now but the --- where ever you are you thought you had an over supply of rental properties. And here's where you think you're going to be able to get your cash flows over the next ten to twenty years from this building. You'll discount those to a present value.   You also say my intent is to sell the building and here's the disposal amount. Usually the present value of the sale is so far in the future, meaning the cash receipt is so far in the future, that the present value in the disposal would be pretty small. But in any event you'd add those together, if the sum of those two present values is below the carrying amount you'll write it down. That becomes your new depreciable base.

Now the FASB in the United States has an impairment standard which is fairly similar to this, although the FASB's SFAS 121 does not compare with undiscounted amounts.   Hence, IAS 36 is a little more rigorous, a lot more rigorous. But we also have a reversal rule in our standard on intangible assets.  Suppose you had a write down in value under our standard on investments securities in our standard on net realizable value of inventories. Whenever we have a write down for some kind of decline of value, our standards says, if a reversal in the market turns value around, you write it back up but not above where historical cost book valuet would have been had you not had the write down. So we have reversals that go back into income if the market drops --- turns around. Such reversals are also allowed  in IAS 36. Such reversals are not allowed all FASB standards, including the FASB's SFAS 121standard on impairment of long-lived assets. It is not true in FASB 115 on investment securities; it is true in FASB 114 on loan losses where you write down loans, you do write them up if the market reverses. And of course net realizable values essentially you do write it back up.

So the U.S. is a bit schizophrenic on whether you do these reversals.  The IASC is consistent, we always (allow income reversals from reversals the market --- a least to a point).

There was a question was on restructures. I would say all discontinuing operations constitute restructuring but not the other way around. That is a restructuring is dealt with in our new provision standard. A restructuring can be something much smaller than what we're calling a discontinuing operation. To constitute IAS 36 accounting for discontinuing operations must be selling off one of your business segments or something equivalent. In many companies it's three, four, five business segments. You're selling off twenty, twenty-five, thirty percent of your business. And then you've got all this segregating and disclosure to do. For restructuring you may be only closing a few plants, getting out of some product lines perhaps, that is dealt within provisions. And that's the issue there whether to accrue a provision or not; if so, then what amount.

Our standard on discontinuing operations does not address really restructuring.   It will be dealth with eventually in IAS 37 that's  not even at the printer yet, but it's been approved by our Board.  They're just tinkering with the final wording. IAS 37 will deal with restructures. FASB has dealt with it through an EITF.

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New Standard: IAS 37, Provisions, Contingent Liabilities, Contingent Assets
  • Recognise a provision when:

(a) present obligation as a result of past events
(b) probable outflow of resources to settle the obligation
(c) obligation can be estimated reliably.

  • Measure at discounted present value of expected settlement amount.

(A)  Most likely amount for a one-off event like a lawsuit.
(b)   Expected value if large population.

  • Restructurings – accrue when:

(a)  Sale: binding sale agreement.
(b)  Other restructuring: formal plan and public announcement.

  • Provide for future losses only for onerous contracts.
  • Recognise reimbursements only if virtually certain.


Let's move on because I've got other stuff I want to get to --- our new projects and then I'm going to get into a bunch of political stuff as well. We have a new IAS 37 standard on provisions.  We never had one in the past. To be honest, it's an area where I think there have been abuses --- perhaps people weren't trying to abuse anything but there have been traditions in many countries of accruing amounts that are deemed prudent by management. Their accruals debit expense and credit something on the right side of the balance sheet they call it a provision as distinct from a liability.

If you look at our Conceptual Framework, we have only two things on the right side of the balance sheet. We've got liabilities and we have equity. We don't have another class of credit balances called "provisions."  But many companies have had these in the past, and IAS 37 does away with those. It says you cannot accure a liability until you meet these three conditions. There must be some past event, took place, that causes you to owe somebody something. It must be probable that you're going to have to pay. So there's a past event and a probable payment and then the amount can be reasonably estimated. If you meet those three tests then you would accrue a liability, and you would measure it at the discounted present value if it's "one-off" event --- that's a British term ---  a single event such as when it's a lawsuit that you're going to win or lose. You don't have thousands of lawsuits, but you just have this one biggie. Then you would use the most likely amount. Otherwise you will an expected values calculation if there's a large population.

We don’t have a concept of a realized loss, you're asking really what's the debit, what is the debit in a provision?  Yes I think it’s a loss and you can call it realized it goes into profit and loss, definitely in profit and loss. If that's the issue as opposed to a direct debit to equity, is definitely profit and loss.

Maybe we can discuss that today. I think I have some [unsure] of the person here, but we can dismiss [faded]


The countries that have these practices by way of tradition and culture, and they have apparently signed on to this --- are companies truly going to implement this?

Paul Pacter.

We have to obviously wait and see. We've got effective date of years beginning July 1, 1999, and so we won't know until the year 2000. I mean --- but this standard…


This is a monstrous breakthrough in trying to change traditional practices.

Paul Pacter.

Yes, it's a monstrous breakthrough if it holds. And this is why we need the enforcement.  Since I'm speaking among friends here, I will say (I don't know if there are any Big 5 auditors sitting in this room) but I would say the enforcement of IASC standards is not uniform world-wide by the large accounting firms. People come from different cultures even within the auditing firms. What we need is in addition to the IOSCO, the regulated --- the legal authority --- we need the auditors to say look here is the standards. You don't accrue ---we're not income smoothing anymore, we're not just accruing reserves in good years and we are going to have to wait and see. But I hope by the time that this standard kicks in, the process for giving us the legal clout the authoritativeness of our standards; it won't be completed by the Year 2000, but hopefully it will be on a roll and companies will follow our rule.

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New Standard: IAS 37, Provisions, Contingent Liabilities, Contingent Assets
  • Warranties: accrue
  • Land contamination:
  1. Law requires cleanup: accrue
  2. Highly probable new law: accrue
  3. Company past practice: accrue
  • Oil rig removal and seabed restoration:

Accrue and add to cost of rig

  • Retailer’s refunds: No law, but company practice is to refund: Accrue
  • Decision to close down a division:
  1. And public announcement: Accrue
  2. No announcement: Do Not Accrue
  • Legal requirement to fit smOKe filters:
  1. 2 years from now: Do Not Accrue.
  2. Deadline passed: Accrue fines only.
  • Guarantee of debt of company that has now filed for bankruptcy: Accrue.
  • Furnace relining: Do Not Accrue, but depreciate lining over shorter life.


Now here are some examples of IAS 37 on provisions. You would accrue warranties because you sold a defective product that's your "past event." And the sooner you can measure the amount reliably you would accrue. Next let's say land contamination where you're facing a law that requires cleanup in your country and you've contaminated the land. Well sure you'll accrue and there's a "past event" which is the contamination. The law says you've got to do it. Now what if there is a highly probable new law, anticipated legislation, that makes the need for you to do the cleanup a little fuzzier. What we have said in IAS 37 is that, if it's a highly probable law not yet enacted but you can see it coming down the road in the next couple years, you've got an IAS 37 obligation. As long as you indeed have contaminated land and this law is almost surely to be enacted. (This statement confused Bob Jensen.)

Now what if it is your company's past practice, even if there is no law in the particular cleanup law in the country in whicj you've spilled oil. Suppose it is nevertheless your practice, where if you have an oil spill with one of your tankers, that will clean it up. You would accrue that loss because it's probable that you're going to pay.  It doesn't have to be a legal liability.  We have developed a notion in this provisions standard of a "constructive liability," a (moral) obligation that you cannot and will not walk away from for any number of reasons. And we developed that definition of constructive obligation.

Now let's consider oil rig removal.  This is a similar issue to the nuclear power plant removal --- an problem that FASB has been debating and then broadened the project into other types of removals as well. When you install an offshore drilling platform, the moment that platform is installed let's assume there is a law that says that, on eventual removal of that platform, you must restore the seabed. And let's say you purchased that platform on credit. What you have done, the moment that you installed that rig, is incur two liabilities. One of the liabilities is to repay the company you bought the platform from --- you owe them and that's why I said you bought it on credit even though you could have paid cash. But the other obligation is you've incurred an obligation to eventually clean up that seabed and restore it when you're finished using the oilrig. Accounting issues are just the same as with removal of a nuclear power plant. The moment you flip the switch you incurred the cost of building the plant plus you've incurred the obligation to clean it up 50 to 100 years from now.

So the accounting that FASB has adopted, and the accounting that we have adopted, for these situations is that it's an additional cost of the oilrig or it's an additional cost of the power plant --- nuclear plant. It's as much of a cost of building the plant as it is paying the bonds you use to finance it. So debit the oil rig and then take it as an expense through depreciation while you're using it.

You can read the rest of these examples on the above slide.   I mean furnace relinings is one examp.  , I don't know accounting educators always talked about whether that is accruable or  not accruable. You know you've got to do reline furnaces (and put on new roofs) so we said no --- it is not accruable. You don't owe anybody anything. You can sell the furnace unrelined even though  you'll get less for it.  Jet engine overhauls --- what we say it's the same issue there except what we say in our provisions standard is you really ought to be depreciating your jet engines over five years and the fuselage twenty years rather than blending engines and fuselage depreciation intothe same twenty years. That's the best answer we really push for.


New Standard: IAS 38, Intangible Assets
  • Recognise an intangible asset only if (a) identifiable; (b) controlled; (c) future benefits specifically attributable to the asset are probable; (d) cost is reliably measurable.
  • Recognition criteria apply to both purchased and internally generated intangibles.
  • Amortise over useful life, 20 years usually maximum (explain if amortisation 20 years).
  • Review for impairment each report date.
  • A detailed annual impairment calculation is required if (a) amortisation period is more than 20 years (purchased) or 5 years (internally generated) or (b) if intangibles are not yet available for use.
  • Revaluation of intangible assets (but not goodwill) is an allowed alternative (as in IAS 16) only if there’s an active market.
  • Immediate expenses:
  1. Training costs,
  2. Advertising costs,
  3. Self-created goodwill,
  4. Start-up costs.
  • In a purchase business combination, an intangible asset that cannot be recognised separately is included in goodwill, not written off immediately, for example, core deposits of purchased banks and purchased R&D.


Now this IAS 38 I think is going to cause a lot of ripples in the United States --- it already has! And it may well prove to be one standard that the U.S. SEC cannot accept --- to be honest. I don't know, we'll see. It is a standard that allows, in effect, a relatively unlimited life for amortization purposes for both purchased and self-created intangibles --- even when  there is a credible presumption that twenty years is the maximum.--- but none the less, it is rebuttable.

Here are the four criteria for recognizing intangible assets and those criteria would apply to both purchase and internally generated assets.

Now, we at the moment the IASC standards allow fixed asset revaluations.  The FASB still finds that abhorrent.  In England, in South Africa, in Australia --- revaluations are the norm or maybe not the norm but revaluations are at  least permitted. Sadly in England and Australia, particularly England, where revaluations are permitted, they're permitted in a haphazard way. So companies are sort of within limits, free to decide which assets to revalue and which one's not. They can cherry pick the good ones and how frequently revaluation takes place is not mandated.  The IASC has the   IAS 16 and its benchmark treatment is historical cost.  But if you want to revalue, number 1 you must do it for all assets within a major class such as  all buildings, all land, all machinery.  Within a class you can't pick and choose. And number two, you must do it at each balance sheet date or otherwise demonstrate that the revaluations are current. In IAS 16 you can't just revalue once every ten years as you can do presently in the UK.

So put some trigger to it, but it's none-the-less still optional. I tell you that because we had to face the same situation now with intangible assets in IAS 38.  If you can revalue tangibles why not intangibles? And so where IAS 38 comes out is that revaluation is permitted --- it's permitted with with the exception of goodwill that can never be revalued.


Do the revaluation amount go to the income statement?

Paul Pacter.

No it goes directly to the balance sheet and even more, why companies less and less are revaluing under our standard, is the fact that IAS 38 says you must start depreciating the higher revalued amount. And when you ultimately sell the revalued asset, you don't recycle the revaluation gain or loss to P&L. So it's sort of an onerous standard that says you are going to take the revaluation depreciation to P&L but the revaluation amount will never hit P&L.

There are other kinds of things are on the above slide --- immediate expenses, training cost, advertising, self created goodwill, startup costs.  This last one on startup cost was quite controversial.   In a purchase business combination you cannot write off purchased intangibles directly against goodwill. That has been happening quite a bit in the United States when they say we purchased R&D but R&D is not a capitalizable asset and, therefore, companies have been immediately writing off purchased R&D against goodwill --- against equity. So that purchased never hurts earnings.


Current Project: Agriculture
Steering Committee Tentative Views:
  • Biological assets unique to agriculture at fair value.
  • Market value is starting point to determine fair value.
  • The change in carrying amount of biological assets is attributable in part to physical change and in part to fair value change. Both components should be reported in income (as opposed to directly to equity until the asset is sold).
  • Fair value measurement would stop at harvest. IAS 2, Inventories, would apply after harvest. Issue concerns assets with long maturation periods.
  • Non-biological assets: follow other existing IASC Standards.


Now I'm ready to look at some of our current projects. All I want to say on agriculture is that we're very close to an exposure draft. The proposal is to mark-to-market crops and livestock for the two ways market value can change.  One is simply that the crops grew and the livestock grew --- got bigger --- they matured on the farm. And the other day-to-day commodity price change. We say both of those constitute mark-to-market. Where we're coming off on mark-to-market for harvested inventories that subseaquently have a long maturation period such grain and fruit going into whiskey or wine or tobacco. So we'll mark the grapes to market value when we start to make the wine, but afterwards we're not going to revalue the inventory while the wine is aging..  At the wine stage, under IAS 2, inventory is to be on a historical cost basis. The same reasoning applies tobacco leaves. We're not going to impose mark-to-market for harvested leaves that are now curing in a maturation period.


And you kind of saying that you revalue until the stage where it sort of sells split off?

Paul Pacter.

Yes because there is a harvesting split point where it can be sold --- that was one of the reasons. The argument is you could sell the uncured tobacco or the grapes before they're made into wine. The other one is that at the harvesting split point. where it's really not much different from any other companys' harvested crops, its like a raw materials inventory where we don't mark-to-market. The steering committee was pushing, for these long subsequent maturation period inventories, to put market value accounting from them as well.  But the IASC's  Board felt that this also is a political issue as you can tell. So the Board said that's another  inventory accounting question we'll deal with that when we take a future look at IAS 2. It's not really uniquely an agriculture issue since it applies to other types of raw materials.  . I think they found some other examples of other inventories that changed --- long holding periods.

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Current Project: Events Occurring After Balance Sheet Date
  • Events occurring after the balance sheet that provide additional information on conditions existing at the balance sheet date should be reflected as adjustment of the financial statements at the balance sheet date.
  • For other significant and unusual subsequent events, disclosure is required.
  • Board tentative decision is to eliminate the provision of IAS 10 that currently allows recognition in the old year of a dividend declared after balance sheet date if dividend is legally classified as a distribution of the old year’s profits.
  • Exposure Draft being developed.


Another project deals with events occurring after the balance sheet date.   I think in the U.S. the auditing literature talks about Type A versus Type B events or something or whatever it is, we've got the exact same thing. If ex post evidence mounts about an ex ante situation that existed at the balance sheet date, you accrue it. But if it's an entirely  new event that accrues after the balance sheet date but prior to the actual reporting date, you disclose it. The only little wrinkles internationally are ex post balance sheet dividend declarations. In some countries around the world, many countries, the dividend declaration has a particular significance under the law that it really doesn't exist in the United States. Each year in many foreign countries,  the a company's board of directors will meet after the end of the year and decide how much of that year's dividends to pay out. Dividends are really looked at under the law in those countries as pay out of a specific years earnings. There are, in those countries, a traditional  practice of accruing dividends that are declared after the year end out of earnings specifically attributable to the previous year. And those are treated as accruable events. And that's the issue right now that our IASC Board is facing.  At first they said no, those ex post dividend announcements are really not accruable.  But nobody on the Board really thinks it's a big deal one way or the other, and I don't know where it's going to come out.    We're not at the exposure draft stage on that.

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Current Project: Financial Instruments

November 1997: IASC Board decided to pursue both:

  • comprehensive standard (jointly with national standard-setters), and
  • standard on recognition and measurement ("interim standard").

Comprehensive Standard (Long-Term)

  • Joint working group: IASC and national standard-setters from 12 countries.
  • Goal: Integrated, harmonised standard.
  • Completion end of 2000, perhaps later.
  • Build on 1997 IASC Discussion Paper and work of national standard-setters.

Standard on Recognition and Measurement (Immediate)

  • Urgent need.
  • Exposure Draft June 1998 (E62).
  • Final IAS planned December 1998.


Note 1 from Bob Jensen:  While it is on the web, you can read about this project at

Note 2 from Bob Jensen:  Since the date of Paul Pacter's presentation, the IASC issued the IAS 39 standard that emerged in December of 1998 from the E62 Exposure DraftThe IAS 39 "Financial Instruments: Recognition and Measurement" and other IASC standards are listed at .  You can read about the differences between IAS 39 from the IASC versus SFAS 133 from the FASB at more recent comparisons of  SFAS 133 and IAS 39 see

Paul Pacter.

OK, let's take the plunge into financial instruments. IASC has been working on financial instruments since it put on its agenda a big project 1989.    IAS 25 on investments existed slightly before 1990, but IAS 25 is nothing that I would say we're really proud of.  It's a standard that says for investment securities debt or equity, you can carry them at cost; you can carry them at lower cost of market or you can carry them at market. So it's not a great standard that narrowed the range of practice; but that's where we are at the moment. And that's all we've got on financial instrument recognition and measurement. We don't even have a standard really that even says accrue bad debts based on portfolio approach for receivables. It's sort of hidden in a revenue recognition standard in a sort of a fleeting reference.

So 1989 our Board took on the huge project on recognition and measurement of financial instruments. And we issued an exposure draft ED 40 that  did not fly very well. We went back and reworked it and issued ED 48. Once again the comments were not overwhelmingly favorable. So the Board split the project into two pieces, a disclosure project and a recognition and measurement project.

The IASC made very good progress on the disclosure project and published IAS 32. (Much like the now defunct SFAS 119 from the FASB.)  On the recognition and measurement project, the reconstituted the Steering Committee labored for several years.  In March of 1997, a year and a half ago. we published a discussion paper called Accounting for Financial Assets and Financial Liabilities. The discussion paper I think has been highly praised for its theoretical rigor. That discussion paper said all financial assets and all financial liabilities should be reported at market in the balance sheet --- mark-to-market on both sides of the balance sheet.   Furthermore, the fair value adjustments should be reported in income. However,   income could be a little more broadening to find than the net P&L. It might include if we were ever to get that, that statement that equity statement, that struggle statement or comprehensive income statement and it might in the statement of comprehensive income.

So that was published in March 1997 and proposed to mark-to-market all your companies' own debt, etc…You can imagine that the huge leap was received for their conceptual rigor but it was certainly not well received in terms of practical implementation. There was a lot of debate over whether users want companies to revalue their own debt to market?   Is it practical to estimate fair values for all financial assets and financial liabilities.  Are some specialized industry problems with requiring fair values?

Superimposed on that March 1997 Discussion Paper came the pressure for us to finish our IOSCO course standards in 1998 to meet our 1998 commitment to IOSCO so the IASC can get this recognition authoritativeness process going which is going to take three-four years. Our Board decided that back last summer to embark on a shorter term financial instruments project and then keep the big project going. The shorter-term project would be to get a standard in place on financial instruments recognition and measurement --- as far as we can go.

I became the project manager of that project and  tried to adopt the FASB's various standards, before the new SFAS 133 standard, essentially word for word. I literally took the CD-ROM of all the FASB standards, EITF interpretations, AICPA, SOP, blah, blah, blah. I lifted out all the standards, I put it in a logical sequence, there are about seven or eight major American standards, let alone all these others, there's a total of 180 pronouncements but we only lifted out the major ones. And I presented to our Board in November a three-hundred page document including the FASB's  162-B Exposure Draft that became  SFAS 133 in revised form.   I included all that stuff on the derivatives in hedging. And we gave the IASC Board  this wheelbarrow full of paper. And it to did not fly.  Number one, The Board did not think it was appropriate to adopt one nation's standard without more studey.. Number two,  there's some stuff in SFAS 133 and the other standards that we just don't agree with.  Number three, the IASC standards normally deal with matters of principle. We don't offer 50 pages containing 25 examples of embedded derivatives ---  maybe we should because we're going to leave some of our constituents a in the dark about this stuff.

The bottom line is that we're going to have our principles, and we won't offer 50 pages of examples on hedge effectiveness.  We will, however, discuss what we mean by hedge effectiveness. So the Board said for the reasons we want our own standards. And so we began working on a separate standard and that led up to our Exposure Draft 62.

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Current Project: Financial Instruments

March 1997 Discussion Paper Proposals:

  • All financial assets and liabilities recognised and measured at fair value.
  • Gains and losses from fair valuation recognised as income immediately.

Reaction to Discussion Paper:

  • Agree on need for comprehensive international standards.
  • Concerns about far-reaching proposals, particularly on how far to go toward fair value accounting at this time.
  • Practical and technical concerns:
  1. Lack of user demand for fair values.
  2. Say businesses manage risks differently than proposed accounting.
  3. Reliability and measurability issues.
  4. Balance sheet and income statement effects of fair value measurement.
  5. Special industry issues: banks, insurance.

Objective of Joint Working Group:

A comprehensive, integrated, internationally acceptable solution covering recognition, discontinuing recognition, measurement, income statement presentation and disclosures for financial assets and financial liabilities.

Next Steps:

  • Develop an exposure draft for consideration by each of the participating standard setters for adoption in their respective jurisdictions.
  • ED must first be agreed by Working Group.
  • Then by national standard-setters.


Let's skip on a little bit. Let me say that this huge project is moving along slowly. We've gotten a number of standards setters to join us in a small steering committee. Those standards setters include FASB, the Canadian Institute of Chartered Accountancy, some Australians, some New Zealanders, some French, some Germans and the Scandinavians. Those groups and IASC are trying to hammer out a comprehensive standard based on our discussion paper. And it would start out as an exposure draft and then each of those twelve countries is going to try and push through their own country and then get comments and adopt the final standard.

Needless to say, the going is slow. And I've summarized what's going on in their plans here.

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Current Project: Financial Instruments



  • Publicly-traded companies.
  • Insurance contracts excluded. But derivatives embedded in insurance contracts are included.
  • An enterprise’s own equity instruments are excluded. But a derivative that can be settled in cash or in the enterprise's shares, at the issuer’s option, is not an equity instrument.
  • Commodity contracts that can be settled for cash and that are not entered into to meet the enterprise’s normal inventory needs would be treated as financial instruments.

Initial Recognition

All financial assets and financial liabilities would be recognised on the balance sheet, including all derivatives.

Initial Measurement

All financial assets and liabilities, including derivatives: Cost, which is the fair value of consideration paid or received. This is no different from any other asset.

Subsequent Measurement–Financial Assets:

  • Fair value – except the following at amortised cost:
  1. Fixed maturity investments (debt, loans, receivables) that enterprise has intent and ability to hold to maturity; and
  2. Financial assets whose fair value cannot be reliably measured.
  3. Strict tests for intent and ability to hold a security to maturity.
  4. Single sale would taint the rest within a broad category of financial assets.

Subsequent Measurement-Financial Liabilities:

  1. All except derivatives and trading liabilities at the original recorded amount less amortisation of any premium or discount.
  2. Derivatives and trading liabilities would be remeasured to fair value.

Initial Declaration:  For financial assets and liabilities remeasured to fair value, a company would have a single option either to:

  1. Recognise entire adjustment in net profit or loss for the period; or
  2. Recognise in net profit or loss only the portion of the adjustment relating to securities held for short-term trading. The rest is reported in equity until the financial asset is sold or liability is extinguished; then the realised gain or loss goes in net P&L.

Impairment Test

  • For financial assets carried at amortised original amount:
  1. Strict asset impairment test.
  2. Write-down to net profit or loss.
  3. Reversal of impairment to net profit or loss, up to cost.
  • Impairment is the difference between carrying amount and estimated recoverable amount (present value of cash flows discounted at the loan's original effective interest rate).


  • Only when control is surrendered and transferee is free to sell or pledge the asset. Control is not surrendered if the transferor can or must rescind without fully compensating the transferee.
  • In-substance defeasance accounting is prohibited


But now I want to talk about the more immediate project, E 62. This is our core proposal with comment deadline September 30, 1998.   We have Board meetings in early November, mid-December, and we want to finalize it this year. The number one key decision number is to apply this only only to public companies. I'm not thrilled with this decision. I don't mind our Board having differential disclosure standards. You can say, public companies only disclose segment information,  public companies only disclose earnings per share --- that's all right and justifiable. Added disclosures are a price you pay to enter the public securities markets. 

What bothers me about financial instruments accounting is that an asset for some companies might not even be recorded as an asset for another company. What's a liability for some companies might not be a liability for others. As you can see in the above slide is that  standard is going to say all derivatives belong in the balance sheet.   But that will be true only for public companies. And I think that's a dangerous step to take. So I'm going to, needless to say, push our Board to reconsider that public-company-only decision. What I would rather see them do is maybe delay the effective date for the private companies.


I applaud you for that.

Paul Pacter.

Thank you!  There is a first time for everything, right? I really think it's dangerous ground to do that. But you can understand how the Board got to there,

Let's go on to the accounting.  We will exclude insurance contracts any specific derivative product in an insurance --- if their really selling derivatives and not insurance coverage then you pull that out and account for it as the derivative. And there are a couple of other scopes issues there.. All financial assets and all financial liabilities would be booked. What has happened today, many financial derivative instruments assets and liabilities are costless at the initial acquisition date. A foreign exchange forward contract, for example, doesn't cost either contracting party anything to enter into this contract. But one minute after you enter into it, it may attain a non-zero value, a positive or negative value. But the fact that you didn't pay anything has been used as a historical cost accounting  justification to keep it off the balance sheet forever.. Under our proposal it's on the balance sheet maybe for an instant at a zero amount,  but as soon as the foreign currency exchange rates change even a tiny little bit, it's going to have a positive or negative value.

And so it's on our financial statements --- it's booked. That's a huge step.    It may not seem like it but it is an enormous departure from present practice.   The initial measurement would be at cost --- OK fine. And so for a moment those forward contracts might have a zero cost. But all subsequent measurement would be at fair value for financial assets.  I'm only now talking about financial assets at fair value with two exceptions. One exception would be fixed maturity securities that we intend to hold to maturity. Our Board does have very many standards that are driven by management's declared intentions  to hold to maturity. It's very hard for an auditor to attest to management intent. What is management's intent today, when they write something on a piece of paper, may change ---  tomorrow their intentions change.

On the other hand, as you know in FASB 115, that U.S. accounting is already   intent driven --- the same intent driven accounting. We hear from those who hold fixed maturity securities that value changes are irrelevant. We've decided that that's an issue our big project will have to deal with. So we have what we hope are rigorous criteria for intent and ability to hold to maturity. The single sale of a security that you had previously declared as supposedly being held to maturity will seriously call into question your intent to hold all others in that category.

I have a couple of slides that compare the FASB's SFAS 133 standard and our proposed standard.   The FASB standard has the same avoidance of revaluation by amortizing historical cost for financial instruments managment intends to  hold to maturity. But the FASB says if you sell one, if a bank sells the securitizes, securities one mortgage loan portfolio, that you previously declared as wanting hold to maturity, then that calls into question the entire package of debt securities you're going to hold to maturity that you said you were going to hold to maturity and now you do not hold to maturity --- that act that calls into question all of your declarations on holding securities to maturity.  The IASC says it's got to be a broad category and that's the difference we have with SFAS 133 from the U.S.

The other group that we would carry an amortized historical cost, besides the held to maturity ones mentioned previous, is the group of securities that are not practical to measure reliably at fair value. Althought that's intuitively sensible, we were concerned that it might be a loophole big enough to drive a truck through. A company will just say that well we can't get reliable measures of fair value for any of our stuff then because value bounces around every day. So we have built into the E 62 exposuredraft guidance on when fair value is reliably measurable. It's reliably measurable if there's a quoted public securities market.  Fair value is reliably measurable if there's a mathematical model that’s commonly used by the industry to value that type of financial asset or liability. But we do have this exception to the rule for inability to get fair value.


Itt says here that this applies to fixed maturity investments.   What about a trade payable denominated in a foreign currency that does not have a fixed maturity?

Paul Pacter.

It's a foreign --- it's a receivable denominated in a foreign currency.  We have a provision in our E 62 where you would separate out the foreign currency component from the receivable --- a hedging derivative on foreign currency becomes an embedded derivative. Sounds to me like an embedded derivative issue.

Now with respect to liabilities, we would carry all liabilities at amortized cost, original amount amortized, except for derivatives. There are some places where liabilities are actually traded such as gold futures contracts and things like that. So if you have either a liability that is held for trading or or embedded derivatives, then these would be mark-to-market..

Now that deals with the balance sheet.  What about the impact of the adjustments on earnings? Remember E 62 in some ways is a giant leap forward. In other ways there modest baby steps toward that controversial Discussion Memorandum of March 1997. And here's one example of where it's sort of a more modest baby step, besides the fact that we're not marking liabilities --- most liabilities to market, and even some assets.   We are proposing that companies will have an enterprise wide one-time election. Either all value mark-to-market changes in fair value, assets and liabilities, to the extent that the previous slides required those value changes. All of those value changes would hit P&L immediately. The other alternative is to make this apply only trading assets including all derivatives and securities held for trading purposes. For derivative securities held for trading purposes, the value adjustments would go to the income statement. The others, which would be what FASB calls the available for sells securities, the company  would put the value change directly in equity as a separate component of equity, just as you do under FASB 115 until the security is sold at which time it's recycled into earnings.

Now I would say there's some, a bit of good news in this choice and a bit of bad news. The good news is that we have actually said to companies you can make a one-time company-wide election that all of these value changes go to P&L. That's a bigger step than FASB is taking, because for the available for sell securities under FASB 115 held-to-maturity value changes cannot go to P&L until you sell the securities.

But the bad news side, the flip side of the IASC proposal,  is the non-comparability that I think we're going to get from letting some companies put it into P&L while others put it into equity. And as you'll see if you've read E 62 in our laundry list of disclosures, we've got all sorts of information about what's been put in equity this period. Confusion will arise as to how much is still dangling in equity, how much has been recycled out --- for users and preparers it's a mess.  I have a feeling, to be honest with you, that the comment letters are going to force us to do away with this choice in initail declarations.  In that case we won't go further than FASB for now --- do that part the same as in SFAS 133.   I like to think that this furthers us toward fair value accounting but it is a mess when some companies doing it one way and some doing it another way.…


Is industry pressure, is that a part of the reason for this? Banks and so on?

Paul Pacter.

No! The pressure from this sight letting it all go to P&L came from a few forward-thinking countries like the Australians andthe British  --- they wanted everything mark-to-market with everything going to P&L. It also came from the proponents of our March 1007 Duscyssion Paper that proposes the same thing.


It is a terrible compromise.

Paul Pacter.

Yes, I don't know what's going to happen here. I really don't know on about this compromise.  I really don't think it's going to survive.  But that is how exposure drafts serve a purpose.

Moving on --- we are going to have an impairment test for financial assets.   Things like that would go away if you had full mark-to-market.  You wouldn't even have hedge accounting except for forecasted transactions if everything was mark-to-market. We wouldn't have to deal with impairment tests if everything was mark-to-market.  But everything is not mark-to-market, and so we've got hedge accounting and we've got impairment tests. And here's a good example. What we say is that if you're continuing to carry an asset at amortized cost, the financial asset, then you would write it down. If the present value of future cash flows, now there's a new timing or new amounts of future cash flows discounted at the loan's original effective interest rate. I'll talk about that in a minute. But you discount at the loan's original effective interest rate, if that discounted present value is below carrying amount, write it down.

Why are we using the loan's original effective interest rate? Why don't we use today's current market rate of interest? The Board's reasoning was once we say these are amortized cost, that is these are held to maturities securities, that the basis of accounting is amortized cost. To use a current market rate of interest really is a back-door way of bringing mark-to-market current value accounting for these securities. So that led the Board to conclude that if the amount of future cash flows changes, maybe you're not going to get your interest but only your principal.  Or if the timing of future cash flows changes, that is they're delinquent in their payments. Ultimately you think you're going to get it all but ten years late. Then you would discount the new amounts and new timings of cash flows at the historical rate and that will give you an impairment --- that is the impairment test without imposing mark-to-market accounting using a new market rate of interest. That's the reason.

Now derecognition for changed rights and obligations is something we must work into this area as well.  We have a committee on the big project that's dealing with thederecognition. And they are now split of the issue.  the American's standard, SFAS 125, is a clear.  It's what they call a components approach  ---you can derecognize a component of a financial asset while retaining another component, while recognizing a new financial liability. In the UK and the Canadians have a standard that's very similar to SFAS 125. In the UK they have a sort of a "all or nothing" derecognition approach. If the majority of the risk and rewards of ownership have passed to somebody else, you derecognize. Otherwise, you leave it on the books. What that has led to a little fuzzy wording in E 62, is that you derecognize a financial asset or liability when you've lost control of the benefits. Losing control means the transferee, the receiver, is free to sell the asset, is free to pledge the asset and there's no way that you can get it bac, including when the recipient goes bankrupt and can't pay you. Defeasance is a thing of the past now under FASB 133 in the U.S.   And defeasance removals of debt would  be a thing of the past under our standard as well. This is where a company accounts for debt as having been extinguished, to get it off the balance sheet even when they really have not legally extinguished the debt. Defeasance means that debtors have merely have deposited a present value sum of securities with a trustee that will grow exactly to pay-off this debt in the future. But technically there's been not extinguishment and so under our standard and under FASB 133, you show continue to show that asset and liability.


Is derecognition to be done retroactively?

Paul Pacter.

Under our transition provisions, no. We have some things retroactive. You use new hedging criteria, but you may have to write off old assets. You have new recognition criteria, but I believe under our proposal --- I forgot to be honest with you. I think if you have derecognized something in the past,  we are not going to force you to put it back. But off hand I'm not sure of that.

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Current Project: Financial Instruments


Designating a derivative or other financial instrument whose value or cash flows are expected to move inversely and approximately proportionately with changes in the value or cash flows of an asset or liability, a firm commitment, or an uncommitted but probable future transaction to offset the change in the value or cash flows of the hedged item.

Hedge accounting:

Symmetrically recognising and measuring the hedging instrument and related item being hedged, so that offsetting gains and losses are in income in the same periods.

 Hedge accounting would be permitted in certain circumstances, provided that the hedging relationship is:

  1. clearly defined,
  2. measurable,
  3. actually effective.

Guidance is provided on when a hedge is effective

Fair Value Hedges

  • For a fair value hedge of a recognised asset or liability, any gain or loss on the hedging instrument and on the hedged item would be included in net profit or loss for the period.
  • The carrying amount of the hedged item is adjusted even if that asset or liability is otherwise carried at cost.

Cash Flow Hedge

For a cash flow hedge of a recognised asset or liability, an unrecognised firm commitment, or an uncommitted forecasted transaction using a derivative or other financial asset or liability, the gain or loss on the hedging instrument is reported as a separate component of equity until the hedged transaction affects net profit or loss. For example:

  • Forecasted sale occurs
  • Depreciation expense
  • Interest income or expense

Key question for hedges of anticipated asset and liability acquisitions:

Whether the amount reported in equity becomes part of the acquisition cost of the asset or liability when the forecasted transaction occurs?   E62 invites comment on two alternatives, but expresses no preference:

  1. Leave in equity and amortise.
  2. Transfer and amortise as part of cost of acquired asset or liability. This "basis adjustment" was required by FAS 80. Will be prohibited by FAS 133.


In the above slide I just defined what hedging is --- you already know what it is.   Probably the most important word for hedging is the first word in my definition --- designating.  From and accounting standpoint, a hedge is something that a management of a company says it's a derivative instrument entered into to changes in the value of this asset or liability ---  to offset the changes in the value of some other financial asset or liability. Most importantly it's something that's designated by management (to manage financial risk).


Is this the same definition that is used in SFAS 133?

Paul Pacter.

Exactly the same as 133.  I've tried as much as we can to use, to follow FASB 133. You've probably read in the American press in the last few weeks that the FASB had written us (the IASSC) a big letter and one of their Board members has given several speeches saying there are 38 substantive differences between FASB 133 and our E 62.  I have a follow-up  article that's coming out in Accountancy Magazine next month, September. Its  title is "E 62 and the Notorious 38. And I respond to each of their 38."  Later today for you I'm going to cover the five or six substantive differences --- there are no more than a half dozen big key differences.  The rest of them, the remaining 32 differences, are small potatoes in my viewpoint.   But for the most part we have tried as much as we could to use the IASC'a SFAS 133 standard, because that's all there is on this to date in the world. And in about 15 or 16 of those 38 differences we just didn't address the issue and we easily can take them up later on. In another 10 of the 38 differences  or so we just don't have the kind of detail that they have in SFAS 133. And in a few of the differences, I think we got a better answer than they do in SFAS 133 and so do the FASB staff members. I spent a few days with some FASB  staff in the U.S. a few weeks ago.  And in five of the differences with SFAS 133,  I think that at the moment we've agreed to disagree. I hope we amend a few of those like that E 62 requirement for only publically traded securities.

Anyway, let me keep going on E 62 (that preceeded IAS 39), because I want to get into a few political things before this session ends. We would allow hedge accounting if there is a clearly defined hedging relationship that's measurable and actually effective. We don't have fifty pages of examples of hedge effectiveness like you find in SFAS 133. That's not our standard setting style. Showing greater levels of detail is a two-edged sword. It can come back and bite us in the behind if the SEC, in reviewing our IOSCO core standards says this is not acceptable to because the IASC standard does not have enough guidance on hedge ineffectiveness. But what I think might happen is the SEC, since our definition of hedge effectiveness is the same as FASB's definition in SFAS 133, what could happen is simply the SEC will ask issuers, if there's no guidance in IAS 39, l to look to the FASB standards.  That's not a bad outcome.

Note from Bob Jensen:  You can read about the differences between IAS 39 from the IASC versus SFAS 133 from the FASB at .

Like FASB, we identify two types of hedges; fair value hedges and cash flow hedges based upon changes in the hedging derivative's  fair value.  The gain or loss on the hedging instrument would hit earnings for a fair value hedge.  At the same time, corresponding change in the value of the hedged asset or liability would hit earnings.   So we would revalue all of the hedged asset or liability even if it were otherwise carried at historic cost, this is like FASB also. And credit or debit earnings and we would revalue the financial asset that which is --- that is the hedging instrument and hit earnings. So you have the offsetting effect in earnings. 

For cash flow hedges, let's say you have a forecasted transaction. Let's say you ordered an airplane. Suppose you're a British airline and you've ordered an airplane. Assume that you must pay Boeing in U.S. dollars at the contracted dollar price when the airplane is delivered. You can immediately enter into a cash flow hedge of the settlement difference between Pounds Sterling and U.S. Dollars for any change in the currency exchange rate. That's one type of hedge of a forecasted transaction. You don't book the purchase commitment to purchase the plane even if you signed a contract.  In futures standards of  accounting, we actually book the value of the commitment to buy the airplane, but we don't traditionally book forecasted transactions or firm commitments. That's something off balance sheet and possibly should be disclosed.  (Actually Paul's illustration is more like a firm commitment than a forecasted transaction since he says you "ordered an airplane" at a contracted price  What is unknown is the future amount of Pounds Sterling that it will take to get those dollars at the time of the settlement.  But you can hedge the foreign currency risk if the airplane purchase either a forecasted transaction without a hard contract or a firm commitment  with a hard contract.)

Meanwhile on the books you record the foreign currency forward used to hedge the change in the exchange rates. What we say in our standard is that the forward contract is a financial asset and must recorded (and revalued between the time of recording and when the price of airplane is paid in full.). As the value changes, you would adjust the value of that financial asset --- that forward contract in your balance sheet. (But  a cash flow hedge declared as such need not affect earnings to the extent is is an effective hedge.) The forward contract derivative's fair value adjustment would be reported in equity as a separate component of equity until the forecasted transaction occurs. (Recall that Paul said there are options to credit equity and report the change in an equity statement, a struggle statement, or a comprehensive income statement (OCI).) At which time that amount that's in equity will hit earnings in the same way as whatever you acquired in the forecasted transaction hits earnings. In the case of that airplane then, any gain or loss that's in equity on the hedging instrument will be amortized into earnings as the airplane is depreciated by that airline.

Note from Bob Jensen:  You can see an example of how complex and controversial cash flow hedging becomes by looking at my Mexcobre Case.


Will your standard require use comprehensive income in the same manner as SFAS 133?

Paul Pacter.

No, we don't. It would go into alternatives to P&L under our standard.


What, not a cash flow hedge?

Paul Pacter.

On a cash flow hedge, it would bypass the P&L --- up front it would go directly to equity. (That is only true for cash flow hedges, including foreign currency cash flow hedges, since value changes of fair value hedges must go to P&L.)


Yes, that's what I mean, you should book it to comprehensive income.

Paul Pacter.

But we don't call it comprehensive income….


But, by any other word, it's still the rules, right?

Paul Pacter.

Yes by any other word but is what the FASB calls comprehensive income. It's what the Brits call the struggle statement.--- remember that I said we came down squarely on both sides of the issue.


Then the net effect of the standards you wait until the end and then you dump it upstairs.

Paul Pacter.

When you say "dump upstairs," what do you mean? Put it as part of the cost of the airplane?


Net income, net income.

Paul Pacter.

Oh net income, yes. Now you see you might've hedged a forecasted sale, you were going to have sales in a foreign currency and so you hedged those. Then the gain or loss on the hedging instrument will hit earnings when the forecasted sales take place.


But if it's a good hedge you don't gain or lose anything..

Paul Pacter.

Yes, that's right. But now the most heated debate is one that I absolutely don't understand. It's called basis adjustment.  I don't know if you've heard this term. Let's take my airplane examples. So you bought, you're the British airline and you are now paying for  your new airplane. You pay in U.S. dollars, and either you had to actuall pay more or less Pounds Sterling because of the change in the exchange rate. But that gain or loss exactly offset by your cash flow hedging instrument, the forward contract. But that gain or loss on the hedging instrument is now in equity.

 Note from Bob Jensen:  Actually what happens is that the airplane is debited for the full amount in Pounds Sterling that it takes to meet Boeing's current price in U.S. dollars.  Suppose that is 10 million Pounds Sterling on the date you settle the transaction.  A question arises in the accompanying hedging transaction regarding how to book what you either receive or pay out on your foreign currency hedge.  Suppose that you receive 100,000 Pounds Sterling from the forward contract because the dollar grew in strength over time.   In other words your U.S.-type OCI account or your U.K-type struggle statement account has a credit balance for this equal to 100,000 Pounds Sterling.  To close this out, neither E 62 nor SFAS 133 allows you to debit this account and close it out to earnings immediately.   In addition, SFAS 133 no longer allows you to perform a basis adjustment on the airplane's fixed asset account.  Under SFAS 133, the airplane stays on the books at the current price of 10 million Pounds Sterling rather than the original contracted cost of 9.9 million Pounds Sterling before U.S. dollars gained strength in international currency exchange markets.

The issue of how to disclose the spreading out of the 100,000 Pounds Sterling into earnings is the core of what is known as the "basis adjustment controversy."  The controversy does not center on the amount of net earnings each year.   Under SFAS 133 the 100,000 Pounds Sterling would be amortized over the economic life of the airplane.  It must be amortized as a separate account rather than being buried in lower depreciation charges.  Any remaining balance becomes fully written off early only if and when the airplane is derecognized in the accounts.   Paragraph 24 on Page 16 of SFAS 133 requires basis adjusting for fair value hedges.  Paragraphs 31 and 376 if SFAS 133, however, forbid basis adjusting for cash flow hedges.   As  Paul Pacter points out below, the basis adjustment controversy is a tempest in a teapot other than for the supposed added disclosure investors get for isolated reporting of the amortization amounts.  I provide a more complete eaxmple of the  basis adjustment controversy in my  SFAS 133 Glossary.

Paul Pacter.

Basis adjustment says take it out of equity (either the U.S.-type OCI account or the U.K.-type struggle statement) when you buy the airplane and adjust the carrying cost of the airplane. The forward contract's settlement will either add to the cost of the airplane or reduce it depending on the success of your hedge. If you don't basis adjust you can leave it in equity and amortize over the life of the airplane.  Unlike SFAS 133, our IASC may eventually allow you to basis adjust ---   you can take it out of equity and basis adjust the airplane.  Both alternatives have the same impact on earnings while you are depreciating the airplane since you just take a net depreciation after basis adjustment.   I don't understand what is so God-awful about basis adjustment, moving it up into the airplane account. Not only is it not so god-awful, it was the required standard under FASB 80 for the last fifteen years. Now all of a sudden it is like the black plague to have basis adjustment and FASB 133 prohibits it.

And our Board, we're divided on the issue. In Exposure Draft 62 the Board said we are not going to make a decision now. We'll ask the public --- we're going to make a commitment to choose one or the other. All we're talking about is balance sheet geography. Industry has said that to leave it in equity creates a horrendous record-keeping problem because we've got to track each little piece of this gain or loss on the hedging instrument. It may not be Boeing 747's you're paying a hundred million dollars for, but it may be lots of small stuff to just be able to amortize all these together, it's not worth it. So that's an issue.


You don't have any differentiation between the effective and the ineffective on the hedging?

Paul Pacter.

Here's the wrinkle that we have that FASB in SFAS 133 avoids.  Let's say you have a financial instrument that is not involved in the hedged transaction. It's just you own a financial instrument (such as a forward contract speculation rather than a hedge). We say, OK, you mark it to market but in that fair value adjustment you have an option either to put it immediately into  P&L or in equity (such as OCI) until you dispose of that financial asset. (Recall that, unlike E 62,  SFAS 133 would not let you put it into OCI if it was not an effective portion of a cash flow or foreign currency hedge.)   So then we you have an ineffective hedge since it is not even a hedge.  We've allowed you to put those ineffective hedges into equity.

Note from Bob Jensen:  You can read about the differences between IAS 39 from the IASC versus SFAS 133 from the FASB at .


This has complicated everything.

Paul Pacter.

Yes, yes I know it does. But remember you know project managers try to guide the Board in the right direction. And I think 95% of the E 62 they did move in the right direction.

I have in your notes five or six pages of differences between FASB standards, mostly 114, 155, 125, and 133 and E 62. You can read those, you can read my article it's coming out in the Accountancy Magazine.


What month?

Paul Pacter.

September, that's the one that article entitled  "E 62 and the Notorious 38."  

Note from Bob Jensen:  You can read about the differences between IAS 39 from the IASC versus SFAS 133 from the FASB at .

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Current Project: Financial Instruments


  • Most IAS 32 disclosures continue
  • Methods of determining fair values
  • Whether fair value changes are in profit and loss or in equity
  • Describe risk management policies
  • Cumulative amounts in equity
  • Info about financial instr. if fair value cannot be reliably measured
  • Detailed info about hedges
  • Detailed info about current period amounts reported in P&L or equity
  • Reclassifications of financial instr.
  • Impairment and reversals.

Effective Date

Financial years beginning on or after 1 January 2001.


  • Recognise all financial assets and liabilities, including those that had not previously been recognised.
  • If a previously designated hedge does not meet the new conditions for an effective hedge, hedge accounting would no longer be appropriate.


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Current Project: Financial Instruments

Main Differences with US GAAP


  • E62: Applies public companies only
  • US: All companies

Definition of held-to-maturity securities

  • E62: Securities, receivables, loans
  • US: FAS 115 securities only (but FAS 5 treats others as H-T-M)

Transaction costs

  • E62: Accounting is addressed
  • US: Silent

Unrealised fair value changes on non-trading financial assets

  • E62: Option of equity or P&L
  • US: Equity only

Test for H-T-M Tainting

  • E62: By major category
  • US: All (but only applies to securities)

Liability with variable principal

  • E62: Change recognised in P&L
  • US: Silent

Fair value—adjust for sizeable block

  • E62: Yes
  • US: No

Transfer into/out of trading category

  • E62: Prohibited
  • US: Permitted

Impairment 1:

  • E62: If DPV recoverable amount is below carrying amount
  • US: Only of "non-temporary"

Impairment 2:

  • E62: Individual assets or portfolio basis (loan loss provisions)
  • US (FAS 114/115): Individual assets (but FAS 5 is a portfolio approach)

Reversal of impairment write-down

  • E62: Required (to P&L)
  • US: Prohibited (new cost basis)

Objective evidence of impairment

  • E62: Contains a list of indicators
  • US (FAS 114/115): No such list

Hedging instruments

  • E62: Nonderivatives if effective
  • US: Nonderivatives only for hedges of foreign operations and foreign currency firm commitments

Guidance on hedge effectiveness

  • E62: Broad principles
  • US: Detailed guidance, examples

Derecognition: legally isolate asset?

  • E62: Not required
  • US: Required

Derecognition: call option on asset

  • E62: Sale accounting prohibited
  • US: Sale accounting prohibited only if not-readily-obtainable asset

Note from Bob Jensen:  While it is on the web, you can read about this project at

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New Project: Reporting Performance


  • Concept of comprehensive income?
  • Single performance statement?
  • Grand total of all measures of performance?
  • "Core" earnings vs. everything else?
  • Recycling?

Possible Issues for Developing and Emerging Countries

  • Should IASC develop a basic system of accounting similar to the French Plan Comptable for developing countries?

  • Should there be different accounting standards or different disclosure standards for companies in developing countries and countries in transition?

  • Should IASC develop industry-specific standards that will be particularly relevant for these countries, in addition to the current projects on agriculture, extractive industries, and insurance?

  • Should IASC develop a standard on accounting by joint ventures?

  1. Should IASC develop guidelines on accounting for privatisation, including changes in accounting entities, changes in accounting systems, and valuation problems?
  2. Should IASC develop standards or guidelines on bartering?
  3. Special problems with applying existing IAS in developing countries or countries in transition?

Segment disclosures

Related party disclosures

Foreign exchange controls, and

Hyperinflationary economies.

Next Steps – to be determined after Committee evaluates the issues.


What I really would like to talk about a bit is some of our new projects.   Performance reporting, we have actually undertaken this project --- a project on performance reporting.  I told you that in IAS 1 we only were able to get so far in this notion of comprehensive income. We know it's not far enough --- it's hurting us on the financial instrument project, it's hurting us on the agriculture project. Anytime we are looking to market values as a basis for accounting, how to distinguish realized and unrealized becomes an issue. And how do you report that so that people understand performance? Anyway, so we are taking on the comprehensive income question.

Developing an emerging countries contains lots of issues, I bulleted a few of them. Number one --- should IASC get involved in something as basic as bookkeeping?    And you know in some countries around the world basic bookkeeping is mandated by law for every single country. The French and the Germans have different bookkeeping schemes, and so on. And that's a big need in smaller countries to harmonize bookkeeping systems. Should we do that at the IASC?  We have to face up to this differential disclosure, and we have been doing it ad hoc up until now.  Now we really need to find a way --- we need some criteria. When should you have differential disclosure and even differential measurement?

Are there some special industry issues that affect developing countries besides the ones we're now looking at? Possibly there are. We have a standard on accounting for interests in joint ventures. But we do not have a standard on accounting by the joint ventures themselves. The real gut issue is when the assets are contributed to a joint venture, when do you step up to a new basis of accounting? It's very much like new basis accounting imposed by the SEC here. It's also an issue similar to first time adoption of international accounting standards. So anyway, should we deal with accounting by joint ventures in addition to interests in joint ventures?

Privatizations are a big type of transaction in developing countries, and there really are no guidelines --- there is no guidance for privatization issues.  What is the accounting entity is a big question? And there are also issues on when you had state entities in the past that maybe didn't even maintain cost records. They had production records and whatever the records they may have maintained, but the system is not complete.    In such confusing environments, how do you now begin accounting under international accounting standards?

Bartering (also called counter trade) --- we have a one-sentence standard in our revenue recognition pronouncement that says if you have non-monetary transactions, use the fair value that consideration received or given but there's a need for a lot more than one sentence.

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New Project: Discounting and Use of Probability

Key Issues

  • When should assets and liabilities be measured at present value?
  • How to determine present value
  • Possible Outcomes of the Project
  1. Amend existing Standards to make discounting requirements more detailed or to remove choices.
  2. A general Standard on discounting to supplement individual IAS.
  3. Amend the Framework, to guide the Board in future projects that involve discounting.

Next Steps

--DSOP: 3rd quarter 1999.

Exposure Draft: 3rd quarter 2000.

Final IAS: 2nd quarter 2001.


Discounting --- we have just begun a project there. We have some standards where to discounting is required and some where it was considered and rejected.   he Board debated use of discounting in the Income Tax standard for deferred taxes ended up concluding not yet.   In some standardss we do discount and generally allow discretion in choosing the discount rate.   Anyway, we are now taking on a comprehensive standard on discounting and probability issues.  The IASC hasn't even begun the study yet, but its being launched..

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New Project:  Extractive Industries

Possible Issues

  • Accounting for preproduction costs (acquisition of rights, exploration, evaluation, development).
  • Accounting for production and inventories.
  • Restoration costs.
  • Revenue recognition.
  • Recognition of reserves.
  • Disclosures.

Next Steps

Discussion Paper: 4th qtr. 1998

DSOP: 2nd quarter 1999
Exposure Draft:  3rd quarter 2000
Final IAS: 2nd quarter 2001


Extractive industries --- this is oil and gas and mining. I am very proud to say I am the author of FASB 19 on oil and gas accounting in 1978, and it sank before we could make it float (it sank because of SEC actions following heavy lobbying efforts by the oil and gas drilling industry)..



Paul Pacter.

Torpedoed ---  thank you Bob. It was torpedoed!   I still think it was an excellent standard. It helped develop the concept of what is an asset --- assets should not include deferred "what-you-may-call-its" on the balance sheet. We've got the same issue at the international side. There is no mining standard anywhere in the U.S., not from the FASB anyway. And so that's what this IASC  project is going to do. It hasn't started yet and was just added to the agenda a few months ago.

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SIC - 1 : Consistency - Different Cost Formulas for Inventories

The same cost method must be used for inventories having the same characteristics. Where the nature or use of (groups of) items differs from others, different methods are allowed.

SIC - 2: Consistency - Capitalisation of Borrowing Costs

The allowed alternative of capitalising all borrowing costs should be applied consistently for all qualifying assets and periods.

SIC - 3: Elimination of Unrealised Profits and Losses on Transactions with Associates

Under equity method, unrealised gains and losses from transactions with associates should be eliminated proportionately.

SIC - 5: Classification of Financial Instruments - Contingent Settlements

Financial instrument whose settlement (in cash or in equity instruments of the issuer) depends on uncertain future events should be classified as liabilities, unless the possibility of settlement in cash appears to be remote, in which case, equity.

SIC - 6: Costs of Modifying Existing Software

Costs of modifying existing software systems for Year 2000 or the Euro should not be capitalised – they merely maintain existing capabilities.

SIC - 7: Introduction of the Euro

The issue is how the introduction of the Euro, affects IAS 21, Foreign Exchange. Monetary assets and liabilities should continue to be translated at the spot rate. If an enterprise has an existing accounting policy of deferring exchange gains and losses related to anticipatory hedges, an enterprise should continue to account for such deferred exchange gains and losses notwithstanding the changeover to the Euro. Cumulative differences classified as equity relating to foreign entities should be recognised as income only on disposal.

SIC - 8: First-Time Application of IASs as the Primary Basis of Accounting

In the period of first-time application of IASs as the primary accounting basis, the financial statements of an enterprise, including comparative information, should be prepared and presented as if the financial statements had always been prepared in accordance with current IASs.

SIC - 9: Business Combinations - Classification either as Acquisitions or Unitings of Interests

The overriding criterion for a uniting of interests is whether an acquirer can be identified, i.e. whether the shareholders of one of the combining enterprises obtain control over the combined enterprise.

Therefore, even if there is (a) an exchange of the substantial majority of the voting common shares of the combining enterprises, (b) relative equality in fair values of the combining enterprises, and (c) continuance of substantially the same percentage in voting rights and interests of the shareholders of each of the combining enterprises -- a business combination cannot be classified as a uniting of interests if an acquirer can be identified.

SIC - 10: Government Assistance - No Specific Relation to Operating Activities

Government assistance to enterprises that is aimed at general long-term support of business activities either in certain regions or industry sectors should not be credited directly to shareholders' equity.

SIC - 11: Foreign Exchange - Capitalisation of Losses Resulting from Severe Currency Devaluations

Foreign exchange losses on liabilities that result from the recent acquisition of assets should only be included in the carrying amount of the assets if those liabilities could not have been settled or if it was not practically feasible to hedge the foreign currency exposure before the severe devaluation or depreciation occurred. Only in these cases foreign exchange losses are unavoidable and therefore part of the asset's acquisition costs.


I am not going to cover the Interpretations. I included in the above slide a list of Interpretations and a quick summary just to demonstrate to you that our Interpretations' committees have hit the ground running. We have, in addition to the twelve finalized Interpretations, we have four or five more out for exposure and another dozen or fifteen in the hopper. So you have little summaries of each of our interpretations in the above slide.

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Major Differences: IAS-US GAAP

IAS 1 – True and Fair Override

IAS: "rare" but allowed. US: Not in FASB standards but allowed by Rule 203. Degree of difference remains to be seen.

IAS 2, 16, 36, E62 - Impairments

IAS:  Reversals of impairment/NRV writedowns required (but not above amortised cost)

IAS 8 – Voluntary Accounting Changes

IAS:  restate or current period. US: Current period.

IAS 16 – Property, Plant & Equipment

IAS: Revaluation of PP&E and Intangibles is allowed. US, no. If done:

  • Adjustment goes to equity
  • Not recycled into P&L when sold
  • Depreciation of revalued amount hits earnings
  • Revaluations must be updated and apply to all assets in major category

IAS:  Investment properties at fair value or cost. US: Only at cost.

IAS 22 Business Combinations

  • IAS: Fewer poolings than US – size test.
  • IAS: Minority interest can be at fair value. US: At old book values.

IAS 23 – Borrowing Costs

Interest capitalisation optional whereas required by FAS 34

IAS 27 – Consolidation

IAS: Control. US: Majority ownership.

Financial Instruments

IAS at proposal stage, plus IAS 25, 32. See separate discussion in these notes.

IAS 38 - Intangibles

  • IAS: Development costs capitalised and amortised after product feasibility. Likewise for some other internally generated intangible assets. US: Expensed.
  • IAS: Goodwill and other intangibles may be amortised over more than 40 years if longer life is demonstrable.


Now, I then thought it would be useful to say how different is IASC GAAP from American GAAP?  You hear a lot of different things. So I tried to make a list of things where there arguably are differences. There are not many significant differences.  The FASB and SEC do have that  "true and fair override" in the U.S., but it's commonly invoked. So I don't know if it should be viewed as a difference in the standard or a difference in application of a standard.

Impairments, I already explained IASC consistently recognizes reversals back into P&L. The FASB is schizophrenic on that issue.

Voluntary accounting changes --- the IASC allows an alternative of prior restatement for hitting the current period.  The FASB's current period. PP&E, Property Plant & Equipment allws such thinks, but you do it we require it rigorously.  Someday we're going to have to take that on. This is such a tough issue when you have some major economies where revaluation has been a way of life.  In other major economies there is no tradition of adjusting for revaluations.  At the moment IASC standards have got a revaluation alternative but that's admittedly an alternative and not a requirement.

Business combinations --- because we have a size criterion.  Remember in the U.S. the criterion to have a pooling requires an  exchange by one company's common stock for common stock of another company. It's a stock for stock exchange without regard to the relative sizes of the companies. So you can have a whale swallowing a minnow and it's still a pooling.  The IASC says that we have two conditions; an acquirer cannot be identified and the sizes of the companies are approximately the same.   If they are not the same, the bigger one is presumed to be the acquirer.  We have a size test, now it's not quantified.  The practice has been roughly 60-40 as long as there is no greater disparity than that and, in addition,  it's a stock for stock exchange of a pooling. So our "uniting of interest" --- we call the uniting of interest --- is really a pooling.  Pooling should be  rarer, at least in theory, under IASC criteria than U.S. criteria. (But newer SEC restrictions have almost eliminated accounting for business combinations as poolings in the U.S.)

Borrowing costs --- I remember when FASB pumped out SFAS 34 on capitalization of interest because some companies did not capitalize interest during long-term construction periods.  . The whole world. probably 98% of the world, expected FASB to prohibit interest capitalization.   Instead they only suggested it as the conceptually preferable answer --- which it is.  The IASC did not like interest capitalization.   But on the other hand, they did not want at this juncture to issue a standard that was in blatant conflict with FASB --- at least not in the early 1990s when the IASC's IAS 23 was adopted. So capitalization is an optional alternative under IAS 23 and SFAS 34.

Consolidation --- we have a control rule. ARB 43 speaks of control but then says control is demonstrated by majority voting interest. So it's turned out to be a 50% plus 1 vote criterion to require consolidation.  I'm not sure how many cases under IASC demonstrate a control without having a strict majority voting interest --- there are some. I don't think we are as far apart as you might expect.

Intangibles --- we're beyond twenty years amortization. the FASB says 40 years is the maximum,  and the SEC have been pushing that a lot lower number.  The IASC standards allow longer amortization periods longer than that, and we do require a capitalization of some R&D costs that are banned in the FASB's SFAS 2.

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  • Income Taxes – IAS 12 and FAS 109 similar
  • Pensions – IAS 19 and FAS 87 similar
  • Other Post-Employment Benefits – IAS 19 and FAS 106
  • Vacation etc. accruals – IAS 19
  • Earnings Per Share – IAS 33 and FAS 128


I've already talked about some former differences that are no longer differences.

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Conceptual Frameworks – virtually identical:

  • Investor/creditor focus
  • Relevance, reliability, comparability, and understandability are overriding
  • Assets must be resources and liabilities must be obligations
  • Income smoothing and "hidden reserves" rejected

Degree of Detail in Standards

IAS broad principles. US detailed examples and quantified guidelines (for example, leases, business combinations, derivatives and hedging).


Conceptual Framework --- I mentioned earlier that the IASC virtually imported the FASB Conceptual Framework.

Level of detail --- the IASC standards do not go into as much technical detail as you find in FASB standards.  Unfortunately, this the trend, however, is toward our adding more detail.

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Fundamental Issue: Should IASC be:

a. Standard-setter – THE supreme body for global accounting standards?


b. Harmoniser – provide a forum for world standard-setters to deliberate and try to harmonise among themselves?

 Latest Thinking of the Committee

3-Part Structure:

  • Board of Trustees
  • Standards Development Committee: SDC
  • IASC Board
  • Two other advisory bodies:
  1. Standards Development Advisory Committee–standard-setters not on SDC
  2. Consultative Group – as today, non-accounting organisations.

Role of Trustees

  • Appoint Board and SDC
  • Oversight, budget and funding
  • Broad strategic and political issues

Role of SDC

  • Add projects to work plan
  • Develop Discussion Papers, EDs, IAS
  • Submit ED and final IAS to Board
  • Approve final SIC Interpretations

Latest Thinking of the Committee

Role of Board

  • Approve (but not amend) ED or final IAS,
  • If not approved, send back with reasons.
  • Comment on draft SIC Interpretations before SDC approval.

Composition of Trustees

12 Trustees (6 from organisations, 6 at large), unpaid except part-time chairman

Composition of SDC

  • 11 individuals:

7 or 8 voting members of national standard-setter with strong technical and financial resources

  • 3 or 4 from other groups (preparers, users, auditors, academics)
  • Full-time chairman (serves as CEO)
  • At least 2 from emerging markets
  • 5 year term, renewable once
  • Voting:

Submit ED or IAS to Board: 7 out of 11.
Approve SIC Interpretation: 7 out of 11

Latest Thinking of the Committee

Composition of Board

  • 25 members (organisations)

20 country seats (professional accountancy bodies)
5 other organisations

  • Each delegation represented by two part-time delegates unpaid.
  • Chairman part-time, paid
  • Voting

One vote per delegation

Standard or ED 15 out of 25 (60%). But if 9 or more (82%) SDC members vote to resubmit a rejected proposal, Board can approve at 13 of 25 (simple majority).


We have a structure review taking place right now. I think the fundamental question revolves around whether the IASC going to become, quickly or slowly the world, one standard setter or are we going to continue to be more of a forum for national   standard-setters around the world attempting to gain accounting harmony among themselves on ways, to narrow their differences. You asked about harmonization, one way to harmonize is to say everybody else that there is one and only one accounting standard setter, and every one of the 101 countries follows those standards. That's very abrupt harmony.  A less abrupt way of harmonizing, the way we've been doing in the last few years, is to try to get the world standard setters under one tent to talk about issues.   While they may not harmonize word for word, they do try to eliminate outlier practices.

These are the types  issues that the Structure Committee is debating. I've included in your notes and I may be chastised for even putting this in here because it's only preliminary:--- it hasn't been published yet. So don't distribute this widely.

Note from Jensen:  And so I won't!

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  • AUSTRALIA – National GAAP. Objective is that compliance with IAS would result in compliance with Australian GAAP.
  • BARBADOS - Fully adopts IAS.
  • BELGIUM - National GAAP. Multinational listed companies may follow IAS.
  • BOTSWANA - IAS recommended. No legal requirement to apply them.
  • BRAZIL - National GAAP. IAS considered.
  • CAMBODIA - National GAAP being developed based on IAS.
  • CANADA - National GAAP. IAS considered.
  • CHINA, PEOPLE'S REPUBLIC National GAAP developed "in harmony with IAS."
  • CROATIA - IAS fully adopted.
  • CYPRUS – IAS fully adopted since 1981.
  • FRANCE - National GAAP. Listed companies allowed to follow IAS in their consolidated financial statements for domestic reporting purposes.
  • GERMANY - National GAAP. Listed companies allowed to follow IAS in their consolidated financial statements for domestic reporting purposes.
  • HAITI - IAS adopted.
  • HONG KONG, CHINA - National GAAP. Policy is to harmonise with IAS, and a programme to do so is under way.
  • INDIA - National GAAP. Most standards conform in all material respects to IAS; those on R&D, foreign exchange, borrowing costs, banks, and business combinations do not.
  • INDONESIA - National GAAP.
  • IRELAND - Follows UK ASB GAAP.
  • ISRAEL National GAAP, substantially the same as US GAAP.
  • ITALY - National GAAP. Listed companies allowed to follow IAS in their consolidated financial statements for domestic reporting purposes.
  • JAPAN - National GAAP. Committee "takes into consideration IASC standards and those issued by leading national standard-setters."
  • KENYA - IAS adopted fully.
  • KOREA - National GAAP.
  • KUWAIT - IAS adopted as national standards, with explanatory material added.
  • LATVIA - IAS recommended. No legal requirement to apply them.
  • LESOTHO - IAS recommended. No legal requirement to apply them.
  • MALAYSIA - Malaysian Accounting Standards Board has adopted substantially all IAS. MASB has announced that it will continue to pursue a policy of harmonisation of Malaysian accounting standards with the standards issued by the IASC.
  • MALTA - Compliance with IAS mandatory.
  • MAURITIUS - National GAAP. IAS are used as a guide.
  • MEXICO - National GAAP. IAS must be followed if there is no national standard.
  • NAMIBIA - National GAAP. IAS used as a guide.
  • NETHERLANDS - National GAAP.
  • NEW ZEALAND - National GAAP. IAS considered. All new standards must include a comparison with both Australian and IASC standards.
  • OMAN - IAS recommended. No legal requirement to apply them.
  • PANAMA - IAS required by law.
  • PHILIPPINES - National GAAP developed.
  • POLAND - National GAAP. IAS required if no national standard. Standards committee has adopted IASC Framework. IAS are the basis for Polish standards.
  • RUSSIA - - National GAAP.
  • SAUDI ARABIA - National GAAP.
  • SINGAPORE - National GAAP, usually identical to IAS. Several IAS have not been adopted, including requirements on business combinations, goodwill amortisation, definition of extraordinary items, and long-term contracts.
  • SLOVENIA - National GAAP.
  • SOUTH AFRICA - Policy is to base South African GAAP on IAS. Compliance with IAS means compliance with national GAAP.
  • SPAIN - National GAAP.
  • SRI LANKA - Sri Lankan accounting standards conform to IAS. Therefore a company following Sri Lankan GAAP will comply with IAS.
  • SWAZILAND - National GAAP is identical to or conforms with IAS.
  • SWEDEN - National GAAP.
  • SWITZERLAND - National GAAP. Compliance with IAS ensures compliance with national GAAP, and many large Swiss companies follow IAS.
  • TAIWAN - National GAAP.
  • THAILAND - IAS required by law starting 1999.
  • TRINIDAD & TOBAGO - IAS are adopted as national standards.
  • TURKEY - National GAAP.
  • UNITED KINGDOM - National GAAP. Policy is that UK standards "build whenever possible on accepted international foundations."
  • UNITED STATES - Accounting principles set by FASB since 1973. FASB policy is to "consider adopting foreign national or IASC standards that are judged through due process to be superior to their U.S. counterparts. The FASB will evaluate standards of other countries and of the IASC in areas where current U.S. GAAP is limited, problematic, or nonexistent."
  • VENEZUELA - National GAAP. IAS must be followed if no national standard.
  • ZAMBIA – IAS adopted as national GAAP. No legal requirement to apply them.
  • ZIMBABWE - National GAAP based on IAS. Compliance with IAS results in compliance with Zimbabwe standards.


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  • Australia - Australian Stock Exchange
  • Belgium - Brussels Stock Exchange
  • Austria - Wiener Börse (Vienna Stk Exchange)
  • Croatia - Zagreb Stock Exchange
  • Cyprus - Cyprus Stock Exchange
  • Denmark - Copenhagen Stock Exchange
  • Estonia - Tallinn Stock Exchange
  • Europe - EASDAQ Exchange
  • France - Paris Stock Exchange
  • Germany - Deutsche Börse, Frankfurt Stock Exchange, Bavarian Stock Exchange, Stuttgart Stock Exchange
  • Hong Kong - Stock Exchange of H.K.
  • Italy - Rome Stock Exchange
  • Jordan - Amman Financial Market
  • Luxembourg - Luxembourg Stock Exchange
  • Macedonia - Macedonian Stock Exchange
  • Malaysia - Kuala Lumpur Stock Exchange
  • Malta - Malta Stock Exchange
  • Netherlands - Amsterdam Stock Exchange
  • Norway - Oslo Stock Exchange
  • Pakistan - Karachi Stock Exchange and Lahore Stock Exchange
  • Singapore - Stock Exchange of Singapore
  • Slovenia - Bratislava Stock Exchange
  • South Africa - Johannesburg Stock Exchange
  • Sri Lanka - Colombo Stock Exchange
  • Sweden - Stockholm Stock Exchange
  • Switzerland - Swiss Stock Exchange
  • Thailand - The Stock Exchange of Thailand
  • Turkey - Istanbul Stock Exchange
  • Ukraine - Ukraine Stock Exchange
  • United Kingdom - London Stock Exchange
  • United States
    • New York Stock Exchange,
    • NASDAQ
    • American Stock Exchange,
    • Arizona Stock Exchange,
    • Boston Stock Exchange,
    • Chicago Stock Exchange,
    • Pacific Stock Exchange,
    • Philadelphia Stock Exchange.

A note reconciling income statement and balance sheet items to US GAAP is required by regulation of the U.S. Securities and Exchange Commission.

  • Zimbabwe - Zimbabwe Stock Exchange


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  • Canada
  1. Toronto Stock Exchange
  2. Vancouver Stock Exchange
  3. Alberta Stock Exchange
  4. Montreal Stock Exchange
  • Indonesia - Jakarta Stock Exchange
  • Iran - Tehran Stock Exchange
  • Israel - Tel Aviv Stock Exchange
  • Jamaica - Jamaica Stock Exchange
  • Kazahhstan - Kazakhstan Stock Exchange
  • Korea - Korea Stock Exchange
  • New Zealand - New Zealand Stock Exchange
  • Uzbekistan - Tashkent Republican St. Exchange


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New Zealand













Total Non-U.S. registrants


Number of countries represented



NUMBER OF LISTED COS. 2,171 533 2,704
% OF TOTAL 80.3% 19.7% 100%
MARKET VALUE OF THEIR SHARES £1.012 trillion £2.258 trillion £3.270 trillion
% OF TOTAL 30.9% 69.1% 100%


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Lawrence Summers, Deputy Secretary of the US Treasury:

"If one were writing a history of the American capital market, it is a fair bet that the single most important innovation shaping that market was the idea of generally accepted accounting principles. We need something similar internationally."

Union Bank of Switzerland 1997 Annual Report (they switched to IAS in 1997):

"By so doing, we bring greater transparency, furnish additional information and simplify international comparisons."

Morgan Stanley Dean Witter:

"Global investors and companies are impatient for regulators to converge on a global accounting standard."

"Today, differences in accounting practice can completely obscure comparisons of equity values between countries, between sectors, even between companies in the same industry. Many investors are frustrated, pleading for a single system."

"For reflecting economic substance in most industries, IAS is easily of comparable quality to US GAAP, if auditors do their jobs."

Bayer AG 1997 Annual Report:

"IASC provides investors and the financial world with a reliable basis for evaluating our company and its performance."



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