18(a). International Harmonization of Standards
[Context] The AIMR position paper provides a summary of the section (pages 11-20) entitled "The Changing World and Its Implications for Analysis," which describes the effects on financial analysis and financial reporting of three major phenomena:
The world constantly is changing and everyone must adjust to accommodate those forces over which they have no control. The nature and implications of three major phenomena that are expected to affect financial analysis and analysts are considered here. Those matters also have considerable influence on the views and conclusions expressed later in the paper. [Also included in 7(b), 16(a) and 19] [AIMR/FAPC92, p. vi-vii]
First, globalization of the capital markets and the spread of free enterprise throughout the world have enormous implications for analysts. Capital flows freely across many national borders. The need for information to compare investment opportunities of disparate character is greater than ever. Thus, an increasing amount of attention has been given to the activities of the International Accounting Standards Committee (IASC) and the International Organization of Securities Commissioners (IOSCO). We express our support for continued advancement of their work, but we also express concerns over the possible lowering of standards of accounting, disclosure, reporting frequency, and attestation. In sum, we support rapid internationalization as serving well the interests of financial analysts, but only if it is done so as to raise the level of information internationally without lowering it domestically. [AIMR/FAPC92, p. vii]
[Context] Those two paragraphs introduce the following excerpts pertaining to the first major phenomenon listed. Excerpts pertaining to the other two phenomena are included primarily in 16(a)-Databases, 7(b)-Other intangible assets, 8(b)-. . . [A]ccounting for business combinations, and 19-financial instruments and off-balance-sheet financing, with a few excerpts included in other categories.
Globalization and the Spread of Free Enterprise
Recent decades have seen an astonishing disappearance of geographical barriers both physical and psychological. Markets for products have become international -- no longer do we think of the United States alone when we speak of market share in automobiles, electronic equipment, computers and a variety of other industrial and consumer goods. Financial markets have not escaped this phenomenon. Large companies raise money throughout the world, in forms and locations that offer the most favorable terms. Investors follow suit by making capital available for equity investing around the globe. [AIMR/FAPC92, p. 11]
There is no sign that globalization of the capital markets will not continue until such time as almost all barriers have disappeared. The year this report is being written, 1992, is shortly before the year that the European Community is scheduled to spring into full-blown being. Intra-European economic barriers between its members are going down rapidly -- and other non-member European countries are waiting to be admitted. Even that bastion of autonomous independence, Switzerland, appears ready to join. The collapse of communistic socialism in Eastern Europe has implications not only for those countries, but also for many "third world" countries that emulated them. [AIMR/FAPC92, p. 12]
All of this change and its projected continuance has dramatic implications for financial analysis, many of which go beyond the limited scope of this report. They are caused by differences in languages and cultures, laws and ethics, business practices, and financial institutions and instruments. With respect to financial reporting alone, there are a myriad of problems to consider. These encompass analysts' needs for internationally acceptable standards of financial reporting, including common accounting methods, adequate detailed disclosure, sufficient frequency of reporting, and credible auditing or other reliability enhancement. [AIMR/FAPC92, p. 12]
Common Accounting Methods
The International Accounting Standards Committee (IASC) has done an admirable job with meager resources in bringing together accounting and standards-setting bodies from around the world to deal with the accounting standards problem. It has had two major accomplishments to date. First, it has codified accounting practice around the world and deemed idiosyncratic methods unacceptable while allowing to stand alternative methods that were followed in sizable portions of the world. Its second accomplishment is its "Improvements project" to eliminate most remaining alternatives in practice while at the same time initiating new projects (such as joint venture accounting and financial instruments) on which few national standards currently exist. [AIMR/FAPC92, p. 12]
We applaud the IASC for its productivity. But we also must look carefully at factors that may impair its ongoing effectiveness. First, it now is entering politically precarious territory and without the power of a Securities and Exchange Commission to back it up. Although its work is supported by the International Organization of Securities Commissioners (IOSCO), its authority is limited, as is that of the IASC itself, to the willingness of sovereign governments to be persuaded to adopt its views. Second, the politics of international standard setting may be exacerbated because the IASC is composed primarily of representatives of national professional accounting bodies, such as the AICPA in the United States, rather than its being an amalgamation of national standard-setting bodies. Third, in the United States it is the FASB that is designated to determine accounting standards. Under its rules of due process it is almost impossible for the FASB to participate directly in international standards setting, but it has reorganized its internal procedures to take account of international developments and sends an observer to all meetings of the Board of the IASC. [AIMR/FAPC92, p. 12]
Adequate Detailed Disclosure
This is an adjunct to the problem of common accounting standards. It raises the question of the extent to which an enterprise's securities can be issued and traded in a foreign country while adhering only to the disclosure standards of its home country. This is a current issue involving movement on the part of the SEC and its counterparts in the United Kingdom and Canada to allow filings that meet their home-country requirements also to be acceptable in the other two countries. An experiment in certain Canadian offerings is in effect now. Given that the U.K. is a member of the EC, this may be considered by some as a first step on the way to accepting security offerings that meet the quite diverse disclosure requirements of all the various EC countries. [AIMR/FAPC92, p. 12-13]
We believe that, at a minimum, IASC accounting standards (IASC GAAP) should be adhered to by foreign companies registering securities in the United States. But we are unable to answer the resultant question as to whether U.S. companies should be allowed also to follow IASC GAAP rather than FASB GAAP when they register their securities in the U.S. A yes answer would endorse some loss of information, a position no analyst wants to support. A no answer implies special treatment for foreign companies to compete in U.S. capital markets without disclosing all that U.S. companies must, thus perpetuating noncomparable financial reports between U.S. and non-U.S. issuers. Furthermore, if the SEC were to accept IASC GAAP for all public companies, their reports would be noncomparable with those of private companies who (presumably) would continue to follow FASB GAAP. [AIMR/FAPC92, p. 13]
We believe, for the time being, the SEC should continue to require foreign companies to provide a reconciliation from the accounting standards followed in their home country to U.S. GAAP. We believe that foreign companies should be allowed and encouraged to adopt IASC GAAP, but that the reconciliation to U.S. GAAP should continue to be required at least until the IASC Improvements Project is completed. At that time, we shall need to reconsider our position. [AIMR/FAPC92, p. 13]
Frequency of Reporting
In the United States, publicly owned companies are required to report quarterly on Form 10-Q filings with the Securities and Exchange Commission. Exchange regulations require listed firms to send quarterly reports directly to shareholders. Private companies also tend to report quarterly to their creditors and other financial statement users. In most other countries financial reports are issued semi-annually; in a few countries, only annual reporting is the norm. Some people now advocate that the United States abolish its quarterly reporting requirement and regress to semi-annual or even annual reporting only. [Also included in 11(a)] [AIMR/FAPC92, p. 13]
The membership of AIMR unequivocally supports quarterly financial reporting and is absolutely opposed to any movement to eliminate it. Our arguments on that subject appear in more detail later in this report. At this point, we wish merely to point out that some of the impetus for the eradication of quarterly reporting results from the phenomenon of globalization. We believe that financial markets, both domestic and foreign, are best served by frequent and even-handed dissemination of information to the public. We urge the Congress of the United States, the SEC, and its international counterpart, IOSCO, to heed the admonitions later in this report on the subject of quarterly reporting. [Also included in 11(a)] [AIMR/FAPC92, p. 13]
Auditing or Other Forms of Enhancing Financial Statement Credibility
In recent years the IASC has received a great amount of attention as it attempts to codify a globally acceptable set of accounting standards. Alternatively, more people should become informed of the role of a parallel organization, the International Federation of Accountants (IFAC) and its Auditing Practices Committee (IAPC), because its work is as necessary to the integrity of financial statements as is the IASC. As financial statements begin to conform to a worldwide GAAP, we need also to be able to rely on them. [AIMR/FAPC92, p. 13-14]
Although we hold no brief for considering "made-in-America" audits supreme, we are aware that agreed-upon audit standards in this country -- general standards, standards of fieldwork, and standards of reporting -- are in some ways superior to those elsewhere in the world. In particular, we regard independence as an essential prerequisite to attestation. Yet, there are countries where the law mandates that the auditor be a member of the corporate governing board. In some countries the education requirements for auditors may be inadequate to keep them up to date with the electronic systems and sophisticated financial affairs of multinational companies. [AIMR/FAPC92, p. 14]
We believe that international agreement on auditing standards and practice would improve the standards of practice in all countries, including our own. For example, the recent collapse of the Bank for Credit and Commerce International (BCCI) indicates how a truly determined international renegade enterprise can shelter itself from effective auditing by hiding its records and conducting its corporate affairs in jurisdictions with less-than-strict financial regulation mores. We seek, together with professional accountants worldwide, means to prevent a recurrence of that unfortunate calamity. [AIMR/FAPC92, p. 14]
Preclude the "Lowest Common Denominator" Syndrome
As globalization of accounting, disclosure, reporting frequency, and auditing standards proceeds, we must guard against the penchant to avoid difficult choices. Standards differ around the world in substance and in quality. It is always easier to lower the barriers than to raise them, thereby adopting the basest rule rather than the most elevated. AIMR stands behind those who are willing to make hard choices and raise the level in the majority of the world (including, in some instances, the United States) rather than acquiescing in the lowest common denominator. Likewise, we anticipate that standards setters, regulators, and professional accountants all will aspire to raising global financial reporting to the highest and most useful level attainable. [AIMR/FAPC92, p. 14]
The preceding section of this report deals with globalization of the securities industry. In many respects that happening has been made possible by computing power aided by similar advances in telecommunications. As a result, money can be moved around the world quickly to take advantage of investment opportunities wherever and whenever they appear. Records can be updated instantly. Information may be formatted for computer processing and transmitted via modem or equivalent. [Also included in 16(a)] [AIMR/FAPC92, p.14-15]
[Context] The following brief summary of the topic "The Standard-Setting Process," is from the "Executive Summary" of the report the AIMR's Financial Accounting Policy Committee (FAPC):
Several topics are covered in this section. First is our assertion of support for the continued development of globally acceptable accounting standards. That support is accompanied by a discussion of the problems that we expect will be encountered in the quest for worldwide standards. [Also included in 18 (d) and 18(e)] [AIMR/FAPC92, p. x]
Second, we express our support for the standard-setting process in the United States and for the FASB as an institution. We provide refutation to many of the criticisms directed against it. We do not believe the FASB is to blame for many of the complications in financial statements today, nor do we believe that it has issued too many standards too quickly. We disagree with those who say its standards are too theoretical, that the cost of implementing them is too great, or that the FASB is inimical to the interests of financial statement preparers. Rather than following due process too little, we believe the FASB follows it too much. The reasons supporting these beliefs are set forth in the report. [Also included in 18 (d) and 18(e)] [AIMR/FAPC92, p. x]
Finally, we emphasize the needs of financial statement users in the standards-setting process. We argue that users of financial statements are also the owners of the enterprises being reported upon, and it is the users who, in addition to receiving the benefits, ultimately bear the cost of providing financial reports. We suggest that user viewpoints be incorporated in the standard-setting process through their direct participation as members of the FASB, in addition to the current practice of their providing written comments and oral testimony. [Also included in 18 (d) and 18(e)] [AIMR/FAPC92, p. x]
[Context] It indicates the scope of the discussion of the topic and lists the report's major recommendations, providing an introduction to the following excerpts from the report.
National Standards-Setting for Global Financial Markets
As discussed in some detail earlier in this report, financial markets have transcended national boundaries and the sovereignty of individual states. Accounting standards continue to be promulgated locally with all of the expected chauvinism, conflicts, cultural biases and other ingredients of heterogeneity. The International Accounting Standards Committee faces a huge task as it strives to set forth a common set of standards without the authority to enforce adherence to them. Given the degree of disputation in any one country when major new standards are proposed, international disagreement can be expected to be a multiple of that. [AIMR/FAPC92, p. 52]
We have been favored in the United States with a body of accounting standards and financial disclosure requirements that is more comprehensive than anywhere else in the world. We also have a single set of accounting standards that, with only a few exceptions, apply equally to all enterprises, large and small, public and private. Standard-setting generally has been done in the private sector, although not without intensive oversight and occasional supersession by the Federal government. In many other countries accounting standards are set by law or government fiat, sometimes by law intended primarily to serve purposes, such as tax assessment, only peripherally related to financial reporting. Some countries set rigid legal requirements for company accounts, but allow more flexibility for consolidated financial reports, Japan and France being prime examples. Some countries have written and agreed-upon conceptual frameworks to support their standards, in others the framework is implicit only. [AIMR/FAPC92, p. 52]
All of these differences, until somehow resolved, have certain deleterious consequences. Until such time as there are universal financial reporting precepts the risks associated with cross-border financing will remain high. Stock exchange listings will necessarily remain parochial.21 Transaction costs relating to trades of foreign securities will remain high. These consequences, although expensive, are far less costly than would be the degradation of the integrity and efficiency of the capital allocation process in North America should there be significant reductions in the frequency, quality or quantity of financial information available now. [AIMR/FAPC92, p. 52-53]
We are in somewhat of a quandary as to the best course to take to achieve truly meaningful and generally accepted international accounting standards. Our suggestions here are less forceful than elsewhere in this report. Much of the subsequent discussion of this topic consists of questions, not answers. As we consider the set of steps that can be taken to achieve true international standards some of the questions that arise are: [AIMR/FAPC92, p. 53]
Can a single set of standards be truly compatible with business methods and practices that vary from culture to culture around the world? [AIMR/FAPC92, p. 53]
Will competition amongst national interests cause international standards to be weak or robust? How many alternative choices should be allowed? Will smaller, weaker, less developed countries be able to influence standards setting? How and to what extent? [AIMR/FAPC92, p. 53]
What enforcement mechanism(s) will work? Is IOSCO the proper body to bring compulsion to international standards? What about countries that do not have representation on IOSCO? Are there more appropriate international bodies? Are non-adopters of international standards to be shunned in the capital markets of the world? [AIMR/FAPC92, p. 53]
Is the IASC as presently constituted the proper body to formulate international standards? Should the accounting profession, founder of the IASC, be supplanted by some other group such as national standard-setting organizations, thus making the IASC into a supra-national standards-setting body? [AIMR/FAPC92, p. 53]
How should the views of interested parties be presented to the IASC? Should, for example, each national or regional organization of financial analysts offer its separate opinions, or should analysts worldwide attempt to reach consensus first? The same questions apply to professional accountants and business enterprises. [AIMR/FAPC92, p. 53]
Will international standards be accepted by the SEC as an alternative to U.S. standards? Will they be accepted only for foreign companies or for all registrants? If so, what would be the effect on privately-owned U.S. companies? Would they also have to follow international GAAP? If not, would a separate set of national accounting standards have to be maintained solely for them? [AIMR/FAPC92, p. 53]
There are many other unanswered questions. This report is too brief to present all of them or to explore their answers in reasonable depth, particularly since so many of them are interrelated. In any event, financial analysts expect to play a major role in formulating answers to them. We are pleased with the extent of our participation on the international scene to date. We plan not only to maintain our presence, but to expand it as we continue to approach a world of finance that is truly global. [AIMR/FAPC92, p. 54]
[Context] The AIMR report's introduction to the section entitled "Summary of Important Positions and Guide to Future Actions" begins and ends as follows:
Much of this report relates to the present state of the art and implications for future developments in financial reporting. Righfully, so do most of the positions stated in this section . . . [T]hey all build on positions taken by AIMR in the past . . . [Also included in 1(b), 1(d), 3(d), 4, 5(a), 8(c), 11(a), 12, 18(c) and 18(d)] [AIMR/FAPC92, p. 59]
We expect the positions set forth below to build on the precedents of the past. That does not prevent them from breaking new ground, but they do not introduce significant inconsistencies with previous AIMR positions. To the extent that they do establish new stances those are largely the result of the changing world that we describe earlier in this report. [Also included in 1(b), 1(d), 3(d), 4, 5(a), 8(c), 11(a), 12, 18(c) and 18(d)] [AIMR/FAPC92, p. 60]
Those two paragraphs introduce the following summary of a position taken by the Committee.
Strive for a World-Wide Acceptable GAAP, Including Disclosure Standards
This report discusses at some length the rapid pace of financial market globalization. One of the main impediments to the efficient movement of capital to the places it is best employed is a lack of information that is comparable in either quantity or quality. We support enthusiastically the efforts of the IASC, IOSCO and others to remove or at least reduce that hindrance. [Also included in 1(d)] [AIMR/FAPC92, p. 60]
Our enthusiasm is expressed with an unequivocal caution. We will not consent to a lowering of the standards of disclosure that we currently possess. Investment professionals have been integral constituents in establishing the disclosure system currently in effect. Our criticisms of it notwithstanding, there is none better in the world. Some persons in authority have suggested that it is more important for the United States to conform to a global set of disclosure standards than it is to maintain the level of disclosure that now prevails in the United States. We disagree. Our reasons are discussed in detail elsewhere in this report. [Also included in 1(d)] [AIMR/FAPC92, p. 60]
__________
[Context] Meeting of the Investor Discussion Group on October 16, 1992. When discussing whether they make adjustments for goodwill in their analysis, a comment was made on international considerations.
Participant I-12
Goodwill is one of those things that I look at because, for purposes of the BIS capital rules, you have to write goodwill off against capital. It also brings up another issue which is going to be the most important issue to be faced by analysts, and that is comparability of our accounting and reporting systems with those overseas, as all of us become more and more oriented toward global investing. Overseas, I believe that goodwill for the most part is written off the day an acquisition is made. [Also included in 1(b) and 7(a)] [TI 10/16, p. 38]
[Context] Meeting of the Investor Discussion Group on October 16, 1992. At the end of the meeting, investors were asked a specific question about the availability of information in other countries compared to the U.S.
Committee/Staff/Observer
Coming back to [participant I-6] point about the lack of production data. Do you have an explanation for the fact that you find more disclosures of production data overseas than in the U.S. because, to my knowledge, those disclosures are not required anywhere? [Also included in 13] [TI 10/16, p. 59]
Participant I-6
The only explanation I would have for it is that management of foreign companies tend to feel that it's a better way to communicate with shareholders on how they're growing the company. It is more readily available and more part of their financial disclosures and their presentations to the financial community overseas than it is here. Here, they focus on the financials more, which is very important, but in the basic industries it's hard to get to those numbers without understanding the production data. It seems that the companies here are very reluctant to disclose that information. [Also included in 13] [TI 10/16, p. 60]
Participant I-2
You're also talking about situations where the extractive industry is a much more greater % of GNP than here. In the S&P 500, I think metals are maybe less than 1%. But if you're talking about South Africa or Australia, for example, it's a much bigger %; in Canada, gold is 5% of the S&P equivalent in Canada. [Also included in 13] [TI 10/16, p. 60]
[Context] Meeting of the Investor Discussion Group on March 17, 1993. Part of the meeting was devoted to the topic of structure and process.
Committee/Staff/Observer
Question 13 moves us to the process of establishing reporting standards and improving external reporting. The first group of questions relate to U.S. investors investing in foreign securities, a trend that many expect to intensify. As a result, U.S. investors need to use external financial reports prepared under accounting and disclosure rules that are different from U.S. rules. Our question is: does relying on financial reports based on accounting rules other than U.S. rules negatively affect your investing decisions and the time and effort needed to complete the analysis process? For example, would using foreign financial statements on a different basis than U.S. GAAP require analysts with experience on that basis of accounting? Would certain benchmarks that you use in your analysis have to be modified? [TI 3/17, p. 50-51]
Participant I-12
When I looked at foreign companies, I tried to do my best to try to translate them as close as I can to U.S. GAAP to deal with something that is familiar. I have used our sell-side analysts to perform that work and it is an enormous effort. It's a deterrent to getting involved with foreign companies. To the extent possible, I like to look at foreign companies with registered ADRs; that counts out a large part of the world because many refused to do that because of the reporting requirements. But I have to deal with something I'm familiar with or sit down and spend a lot of time with analysts who operate in that foreign market and know the background, because otherwise the traps and the pitfalls are just enormous. [TI 3/17, p. 51]
Participant I-5
It was very hard to learn the U.S. GAAP language the first time; trying to learn other accounting languages is very hard also. There is a big cost there. [TI 3/17, p. 51]
Participant I-7
It depends on the organization. Our organization has set up groups in the international marketplace who understand accounting and political differences in the companies and the countries that they're following. We're constantly running into valuation problems in terms of trying to melt that information. [TI 3/17, p. 51]
Participant I-5
So your answer is that you don't even bother having the same people trying to do both parts because it's too hard? [TI 3/17, p. 51]
Participant I-7
And very time-consuming. [TI 3/17, p. 51]
Participant I-12
I work for an organization that has a very large international portfolio. Historically, we have been divided into the international (country portfolio managers) and domestic industry analysts. Over the last 4 or 5 years, we have been encouraged as analysts to become global analysts. It's a lot of work and effort but there is no doubt in my mind that it is the way this business is going; with the communications that we have today, the capital needs, we won't have any choice in the matter. But the learning curve is very steep; it's not easy. [TI 3/17, p. 52]
Committee/Staff/Observer
Our next question relates to the harmonization of accounting standards, that is, the use of a single set of accounting standards for all companies interested in raising capital in foreign markets. We note that there is growing support for international harmonization of accounting standards. Currently, standards issued by the IASC seem to represent the most realistic basis for international harmonization. IASC standards are less detailed than the U.S. standards and would probably result in financial reports containing less information than currently in U.S. reports. Our question is: would you favor the use of one set of accounting standards, presumably IASC standards, by all companies worldwide? [TI 3/17, p. 52]
Participant I-7
Does that mean that we have to give up what we have here? [TI 3/17, p. 52]
Committee/Staff/Observer
Yes. [TI 3/17, p. 52]
Participant I-7
Then the answer is no. I don't want to give up what I have here; what we have here is the best. [TI 3/17, p. 52]
Participant I-16
I agree with [participant I-7]. [TI 3/17, p. 52]
Participant I-12
I wouldn't want to give up what we have here. I think we need something where we can look at companies on a comparable basis but I'd fight to the death to keep what we've got. [TI 3/17, p. 53]
Participant I-16
At the same time, we should not try to prevent foreign companies from raising capital in our markets. To the extent that we can tighten their disclosure requirements, that would be terrific. But if they don't want to meet our standards, I don't think we should foreclose them from our markets. It may sound inconsistent but I don't think this country really gains by closing itself off to the rest of the world. [TI 3/17, p. 53]
Committee/Staff/Observer
You would allow U.K. companies to raise capital in the U.S. markets with no reconciliations or no additional disclosures? [TI 3/17, p. 53]
Participant I-16
I didn't say no additional disclosures. I would not necessarily hold them to go fully to our standards and report on U.S. GAAP. I would expect them to make some kind of reconciliation. [TI 3/17, p. 53]
Participant I-11
I disagree with that. [TI 3/17, p. 53]
Committee/Staff/Observer
The second bullet from the bottom on page 17 of the meeting materials is [committee/staff/observer]'s point. Assuming that you answer no as you did, would you then favor a requirement for foreign companies to provide a reconciliation of earnings to U.S. GAAP? [TI 3/17, p. 53]
Participant I-16
I would settle for that; I would prefer the first one (U.S. GAAP statements) but I would settle for that. [TI 3/17, p. 53]
Participant I-11
It seems to me that if they're going to play in our gym, they have to play with our ball. I can't see why a company that wants to raise public capital in the U.S. should be allowed to do anything other than report under U.S. standards. [TI 3/17, p. 54]
Committee/Staff/Observer
Even if that means driving capital away from the U.S. markets? [TI 3/17, p. 54]
Participant I-11
So be it. [TI 3/17, p. 54]
Participant I-7
I think that's a function of the investor. If the investor chooses to accept the information as released or with a reconciliation of earnings, that's up to the investor. I would challenge any process that would drive foreign companies away from our markets. [TI 3/17, p. 54]
Committee/Staff/Observer
What would you think would happen in the marketplace if a U.K. company filed information in the U.S. that was solely based on U.K. standards, and we allowed that, what do you think would happen? [TI 3/17, p. 54]
Participant I-7
Since I don't follow those companies, I can only say anecdotally that the market would place a different, likely a lower, valuation on the company. But it's only anecdotal. [TI 3/17, p. 54]
Participant I-12
Our reporting standards are built around the notion that the SEC has a role to protect investors. In general, that protection has taken the form of "buyer beware", that is, companies should disclose all the necessary information and if an investor still wants to buy a dog, he can. To me, that's fair. I agree with the notion that it doesn't make sense to preclude foreign companies from raising capital here. We have enough precedents in this country of all kinds of filings where only sophisticated investors (large institutions) are allowed to participate. There is a presumption that professional analysts know enough about an industry or a company that we can make a reasoned judgement based on lesser disclosure. Something like this might work in terms of foreign companies. An individual investor could participate through the device of a mutual fund if that's what he wants to do. But I don't think we should give up our disclosure rules. [TI 3/17, p. 54-55]
Committee/Staff/Observer
I could make the argument that if you can make do with those companies with lesser disclosure, why can't you make do with lesser disclosure with all companies, including U.S. companies? The corollary to that is that if you allow foreign companies access to our markets with lesser disclosure, doesn't that give them an advantage? [TI 3/17, p. 55]
Participant I-16
What's the advantage? I would make the counterpoint that increasing disclosure increases efficiency and U.S. companies and the U.S. economy benefit from greater disclosure. To preclude people from doing something which they would choose to do, who benefits from that? Who benefits from a U.S. investor precluded from investing in a U.K. company? [TI 3/17, p. 55]
Committee/Staff/Observer
It may be an unsophisticated U.S. investor who invests in a lousy U.K. company? [TI 3/17, p. 55]
Participant I-11
I said public investor. If [a financial institution] wants to put money in the Argentine tunnel railroad, that's fine. [TI 3/17, p. 55]
Committee/Staff/Observer
Following from what [participant I-12] said, we are seeing that happen with non-U.S. companies going to the private placement market through rule 144A and so on. Now, the New York Stock Exchange is putting pressure to let companies like that register on their exchange. That's where we do get to the public investor. The real issue is whether you're going to drive the capital market more and more into a private environment as opposed to a public environment. [TI 3/17, p. 55-56]
Participant I-16
But if you don't, the sophisticated U.S. institution will invest in London in those same securities. You're not going to prevent them from investing; you're just going to make it happen some place else, and you'll have less control over what's going on. [TI 3/17, p. 56]
Participant I-12
Ten years ago, U.K. companies would come here and tell us how wonderful they are, and we analysts would promptly beat up on them, asking for the numbers. What has been happening over the last 10 years is that a lot of these companies are reporting more and more information, coming closer to our U.S. GAAP basis. And I think that's important that we hold up that standard. Another factor is that any U.S. company that is going to invest overseas on a private basis is going to go into that company and beat up on them just as much as analysts in the public markets do, and make sure that they know what they're doing. So there is an evolution taking place and there has to be some compromise. But I concur; [a financial institution] is going to invest wherever in the world we want to invest. That may force us to start investing overseas more than we invest here if that's where the better investments are. [TI 3/17, p. 56]
Participant I-5
I have a problem with [a financial institution] being able to invest wherever they want to invest, and they should be allowed to, but the small retail investor will not be allowed. Why can't they do that? Why not make U.S. GAAP optional? Otherwise, you have an inherently unfair system. [TI 3/17, p. 56]
Participant I-12
It is anyway. [TI 3/17, p. 56]
Participant I-5
Well, it's only getting worse. [TI 3/17, p. 56]
Participant I-12
There's a lot of rules that already prohibit selling certain deals to small investors. [TI 3/17, p. 57]
Participant I-5
Tons of them, but do we want more? Surely we haven't helped people avoid being sucked into frauds? You haven't stopped them from incurring losses because when [a financial institution] loses the money, I get taxed for it anyway. [TI 3/17, p. 57]
Participant I-12
Our markets are built on the concept of full disclosure. The SEC's view has been that they don't care if our 85 year-old aunt June invests in an oil & gas partnership so long as the risks and rewards of that are fully disclosed. If we're going to allow self-registrations, for example, in order to remain competitive as a capital market, then it would make a lot of sense to limit the coverage of who can invest in foreign companies not reporting under U.S. GAAP. If they want to be fully opened to the marketplace, then they can have a registered ADR or whatever, but they have to be fully disclosed just like a U.S. company. [TI 3/17, p. 57]
Participant I-5
And the only other choice in my opinion is to make GAAP optional to U.S. companies. [TI 3/17, p. 57]
Participant I-12
I'd love to see German companies report on a GAAP basis. I think we need to keep GAAP as a requirement. I'm a big believer in full disclosure. If you own a piece of paper, and you own a company, and you don't have any idea of what's going on because they don't tell you, you shouldn't be owning it. [TI 3/17, p. 57]
Participant I-7
I think it's easier getting what you want over a period of time by having the existing process rather than asking for it to be legislated. You can see that offshore companies are doing more and more conforming to our GAAP. [TI 3/17, p. 57]
Committee/Staff/Observer
I think the one conclusion we can make is that you were clear in saying that we should not change U.S. standards if it means lessening in any way to ease international harmonization. Do you agree? [TI 3/17, p. 58]
Group
Correct. [TI 3/17, p. 58]
[Context] Meeting of the Creditor Discussion Group on March 11, 1993. Part of the meeting was devoted to the topic of OCBOA statements. During the discussion, comments were made on international harmonization of standards.
Committee/Staff/Observer
If you lend to a foreign company or evaluate a foreign company, will you feel the need for reconciliation to U.S. GAAP? [Also included in 14] [TC 3/11, p. 37]
Participant C-13
That comes later but the answer is yes. [Also included in 14] [TC 3/11, p. 37]
Participant C-5
On the issue of foreign corporates, we do a significant business with U.S. domiciled subsidiaries of foreign corporates and they prepare consolidated reporting in their home country, and we have typically accepted, for competitive reasons, management information using our own internal audit of that management information. We're using management-prepared information and doing our own audit standards against that. Also, we will accept tax returns. We weight them differently than we would a GAAP prepared statement but on the small end they are a workable document. Cash flow is a big component of it and a tax statement in many cases gives me more on cash flow than some of the GAAP reported statements do at the lower end. [Also included in 14] [TC 3/11, p. 38]
[Context] Meeting of the Creditor Discussion Group on March 11, 1993. Part of the meeting was devoted to the topic of international harmonization of standards.
Committee/Staff/Observer
Question 14. To what extent do you use the financial statements of entities that are based on some foreign basis of accounting and what do you do when you run into that? And secondly, if there were a push to make that a more unified approach, where countries would essentially buy into a common set of standards, how would you view that if to do that U.S. GAAP was not the standard? And recognize that probably means since U.S. GAAP is one of the more stringent tests, that you would have to be seeing something less stringent in the future. So how would you feel about a common standard that would not necessarily be U.S. GAAP? [TC 3/11, p. 57]
Participant C-14
We have a couple of joint venture credit rating agencies in Mexico and Chile and Argentina. So we do some of this because we've been rating some companies like a [names deleted]. The problem was they've got some very important principles that we've viewed in the U.S. as not necessary with regard to inflation accounting. If we were going to go to a global set of principles, they'd have to incorporate inflation accounting which is something that doesn't necessarily have a big impact on the numbers here in the U.S. But generally speaking, when we do look at the companies in those countries, we like to evaluate them according to the accounting conventions that are practiced in that country because we compare them against other companies in that country to get a handle on their competitiveness. And then we do also compare them on a global basis in terms of how well they compete and then it's a matter of trying to make adjustments to make the numbers comparable. But we don't recast a Mexican company's numbers to be directly comparable with its U.S. competitors because there's too many aspects. There's foreign exchange issues, there's interest expense because of the high inflation. So I don't have the answers but I think that inflation is going to be one of the biggest issues we're going to face on this. [TC 3/11, p. 57]
Participant C-15
We also do a fair amount of business outside the U.S. What we try and do is to put companies on a comparable basis and not necessarily on a GAAP basis. For example, looking at non-U.S. financial institutions, a number of banks in the UK are able to revalue their fixed assets every five years to the current market value. And in the past it's been upwards. So when we're comparing [names deleted] to a U.S. bank, we would back that out. We would have comparable numbers. Internally we call it sort of [our company] GAAP. So it's not local accounting practices and it's not GAAP but it's something in the middle to at least make the comparisons meaningful. Because once you start to do cross-border type of analysis, you have to make some kinds of adjustments, otherwise because of the different accounting systems there's real big differences. [TC 3/11, p. 58]
Committee/Staff/Observer
Relate for me the cost benefits. I accept the idea that inflation may be an added chunk that we don't see right now in our accounting standards but if it was proposed that we have kind of common based accounting but the method by which you did that would depart from U.S. GAAP, how would you feel about that? [TC 3/11, p. 58]
Participant C-15
I could sort of live with it because I was in the international department, I dealt with that for fifteen years. I wouldn't have a problem with it. But having done that for fifteen years I also know it's never going to happen. [TC 3/11, p. 58]
Participant C-14
We've got to be moving in that direction over the longer term. It's probably not something that will result out of these meetings but it's all becoming globalized, the capital markets, and we have to start addressing those kinds of issues. The accounting's got to go to more global standardization. If that means we've got to introduce inflation accounting and change the way we account for goodwill to be more consistent with other countries or to make them more consistent with us, I think we have to go that way or at least maybe as a starting point introduce supplemental accounting disclosures for companies that have large international presence. There's a lot of big U.S. companies that derive more than 50% of their earnings from abroad. So maybe we start to develop some small supplemental disclosures that helps us compare [one company] to [other companies] so that we can start to see some consistency in the numbers. [TC 3/11, p. 58-59]
Participant C-5
Probably 20% of our exposures are international. We use mostly local analysts as far as the work that goes into those. Decisions are made up to a certain dollar level locally. I sit on the committee that reviews all the large dollar exposures. We do not make an attempt to create a [name deleted] GAAP or any conversion of GAAP. We take them as done and we are expected to understand the differences in basic accounting practices between countries. Our country exposure committee would review and one of our items is to discuss accounting differences. But by using local analysts who start the initiation and really propose the credit, they've already somewhat summarized those in that local context. I wouldn't say the benefit is that tremendous to go to standardization over time. We're going to be there. It's a question whether it's 10 years or it's 40 years. [TC 3/11, p. 59]
Participant C-11
I just would agree with everything that's been said so far and amplify it by a comment on the IASC procedures as I have seen them so far. In many cases, they are accepting alternative methods so that I don't think we can say up to this point that real standards are yet emerging that are comparable or consistent. And to your question about what if we had something international that was different than GAAP, I think you have to ask questions about which aspects are different and in some cases, to use an extreme example such as the German approach of hiding everything, I don't think we could accept it. [TC 3/11, p. 59]
Participant C-13
There are two separate issues here. One is investors making investments in local currencies in foreign markets and there it seems to me what we do is we don't make any attempt to adjust those earnings to generally accepted accounting principles. We take them at face value. But then we look at how the local market, which is where the price is set, makes judgments about the values of those securities. The other aspect is a very different matter when foreign companies want to sell securities in the U.S. to U.S. investors. And our market is clearly attractive to them because a lot of them want to do it. I feel very strongly that the reason why it's attractive to them is that we've got the deepest and the fairest and the broadest markets in which investors have confidence in the integrity and the completeness and the accuracy of financial statements, i.e. U.S. GAAP. And I don't think that foreign companies should sell securities to U.S. investors in the U.S. without adjusting their numbers to U.S. GAAP for that reason. [TC 3/11, p. 60]
Participant C-14
That seems kind of myopic to me, though. [TC 3/11, p. 60]
Committee/Staff/Observer
For those who serve the mid-market, low market, if I were to tell you that we would start changing U.S. accounting principles because we need to harmonize them with foreign principles, does that bother you or not? [TC 3/11, p. 60]
Participant C-2
Assuming that it lowered the quality of information instead of raised it? [TC 3/11, p. 60]
Participant C-17
You'd have to retrain the entire organization. You've taken everybody away from their comfort level, from what they understand and know how to deal with; they are very provincial issues but they exist. [TC 3/11, p. 60]
Participant C-2
It depends on the perception of what it would do to the quality of the statements we receive. If the perception is that it would be lower quality, then you would have a big outcry. If the perception is it would improve the quality, then you would probably have small institutions lending into mid-market not concerned. And probably could be retrained without a lot of cost or disruption. [TC 3/11, p. 61]
[Context] Responses to the postmeeting questionnaire to the March 17, 1993 Investor Discussion Group meeting.
QUESTION 18
a. Do you currently have to rely on financial reports prepared under accounting rules other than U.S. rules to make investment decisions?
YES 3 NO 2
If YES, please answer the following:
YES NO
1. Do you convert (at least 1 2
partially) the non-U.S. accounting
to U.S. GAAP if the investment is
made via a foreign local market?
Participant I-9: I don't do this
but we do not buy foreign stocks
unless somebody has made this
conversion (i.e. underwriters, CPA,
etc.)
YES NO
2. Do you convert (at least 1 2
partially) the non-U.S. accounting
to U.S. GAAP if the investment is
made via U.S. markets?
3. Would you favor the use of one 2
set of accounting standards by all
foreign companies wishing to raise
capital in the U.S?
4. If one international set of 3
accounting rules was established,
would it be acceptable if those
rules required less disclosure than
current U.S. GAAP requires?
5. Would you accept a universal 2
set of accounting rules if those
rules changed the way U.S.
accounting measures balance sheet
and income statement accounts?
Participant I-9: Only if U.S.
standards are improved, not
lowered.
6. If one international set of 3
accounting rules cannot be
established, as a user would you
find a reconciliation of certain
foreign measurements, such as net
earnings, to those measured under
U.S. GAAP helpful?
Participant I-9: U.S. GAAP is a
must.
Participant I-16: I would oppose any change which reduced the disclosure by U.S. companies. I hesitate to require foreign companies to use U.S. GAAP to participate in U.S. markets. They should be encouraged to do so, but banning foreign companies from U.S. markets will encourage U.S. investors to invest in foreign markets.
[PMQI 3/17, p. 32-33]
[Context] Responses to the postmeeting questionnaire of the March 11, 1993 Creditor Discussion Group meeting.
QUESTION 18
a. Do you currently have to rely on financial reports prepared under accounting rules other than U.S. rules to make lending and credit decisions?
9 YES 4 NO
Participant C-4: But rarely.
If YES, please answer the following:
YES NO
4 3 1. Do you convert (at least partially) the non-U.S. accounting to U.S. GAAP if the loan will be extended by a local lender and denominated in the local currency?
8 1 2. Do you convert (at least partially) the non-U.S. accounting to U.S. GAAP if the loan will be extended by a U. S. lender and denominated in U. S. dollars?
Participant C-4: Do a cash flow statement - FASB 95.
7 6 3. Would you favor the use of one set of accounting standards by all foreign companies wishing to raise capital in the U.S?
Participant C-15: No one would comply!
3 6 4. If one international set of accounting rules was established, would it be acceptable if those rules required less disclosure than current U.S. GAAP requires?
Participant C-14: Depends on the area of reporting.
Participant C-11: Depends on standards.
6 2 5. Would you accept a universal set of accounting rules if those rules changed the way U.S. accounting measures balance sheet and income statement accounts?
Participant C-11: Depends on standards.
Participant C-5: Depends how.
9 6. If one international set of accounting rules cannot be established, as a user would you find a reconciliation of certain foreign measurements, such as net earnings, to those measured under U. S. GAAP helpful?
COMMENTS:
Participant C-14: This issue is much more important than the proportionate amount of time we have spend on it. There could be a special committee just on this.
Participant C-12: U.S. disclosure is the best in the world, and is a critical support for our large, successful capital markets. It would be a mistake to reduce our standards to accommodate foreign issuers, who come to our markets in part because their own markets are smaller - a logical result of their weaker disclosure.
Participant C-17: Time to time have to review foreign statements usually in conjunction with the extension of credit to a US subsidiary - often hard to evaluate.
Participant C-9: 4 - Assumes in U.S. we would still enjoy GAAP disclosures.
[PMQC 3/11, p. 30-31]
__________
[The AIMR Corporate Information] Committee [CIC] would like to see foreign-based companies adopt those disclosure standards expected of U.S. firms. [AIMR/CIC92, p. 1]