ity of IASC standards for cross-border securities listings and other purposes are
mixed and often are supported by fragmentary evidence.” The FASB points out that
in particular, there are few studies that have focused on comparability among the fi-
nancial statements of enterprises following IASC standards (i.e., whether the finan-
cial statements of a French company following IASs are comparable to those of a
Japanese company following IASs). The FASB report is over 500 pages long and its
discussion is objective rather than judgmental. It does, however, identify some sig-
nificant differences between IAS and U.S. GAAP. While some differences are merely
differences rather than shortcomings, there are other areas identified that the SEC
may be expected to have reservations about. One such area is permitting alternative
treatments. Comparability is harmed if issuers are able to choose among accounting
treatments, and the SEC cares very much about comparability.
The SEC received numerous comments, ranging from enthusiastic acceptance of
IASs to total rejection of the idea. In general, however, comments were supportive of
the concept but uncertain as to whether IASs would be capable of the rigorous en-
forcement the SEC sought.
When the SEC considers changes to its accounting and disclosure requirements, it
must evaluate the impact of potential changes on capital formation, including the
possible impact on the cost of capital for domestic companies, and the impact on in-
vestor protection, the SEC’s prime directive. In 1996, the SEC set out the criteria that
must be met if it were ever to accept financial statements prepared under standards
other than U.S. GAAP. The standards must:
- Constitute a comprehensive basis of accounting
- Be of a high quality, that is, result in transparency and comparability and pro-
vide for full disclosure - Be capable of being, and actually be, rigorously interpreted and applied
The SEC is concerned that there should be a body with sufficient power to inter-
pret international standards and enforce those interpretations. Consistency of inter-
pretations is very important if investors are to be able to make informed investment
decisions on the basis of comparable financial statements. If there are no mechanisms
or structures in place promoting consistent interpretations of the IASC standards,
then national regulators may develop interpretations that are inconsistent with each
other.
Before the SEC could reduce or remove the current reconciliation requirement,
several things would need to happen. First, the SEC staff would need to conclude,
after assessment of the IASC core standards (which includes evaluating comments
received on the concept release), that the standards are of a sufficiently high quality,
and will be rigorously enforced. The other members of IOSCO would have to come
to the same conclusion. (The SEC would never accept standards rejected by other
regulators and would presumably make changes only within the context of the
IOSCO International Disclosure Standards project.) The SEC would then propose
rule changes for public comment. The SEC staff would then analyze the comments
received on the proposals and develop final recommendations, which, if approved by
the SEC’s Commissioners, would be issued in a final release.
Assuming the SEC even gets to the rule proposal stage, it is not clear what form
the proposals would take. Since this initiative is related to the IOSCO International
14.5 RESPONSE TO GLOBALIZATION 14 • 21