International Standards

Substantial efforts have been made in recent years to harmonize accounting standards across countries. The International Accounting Standards Committee (IASC) is a major proponent of standardization. The IASC is composed of representatives of 106 professional accounting groups in 79 countries. Governed by a 14-member board of representatives from 13 countries plus a representative from the International Federation of Financial Analysts, the IASC is responsible for formulating international accounting standards (IAS). Other areas of interest to the accounting profession worldwide, including auditing, ethical, educational, and public-sector standards, are handled by the International Federation of Accountants (IFAC), which has the same membership.

The IASC was begun in 1973 as an outgrowth of an effort by Canada, the United States, and Great Britain to develop international accounting standards. The IFAC was established in 1977, when it was determined that the IASC did not have the expertise to deal with broader professional issues. The two organizations work closely, but they are operated and funded separately.

By the mid-1990s, the IASC had issued over 30 international accounting standards.¹¹ To issue a new standard, 75 percent of the 14 members of the board must agree. It can be difficult to get three-Despite this, support for the IASC and recognition of its standards is growing. Increasingly, the IASC is regarded as an effective voice for defining acceptable worldwide accounting principles. Japan, for example, began requiring financial statements to be prepared on a consolidated basis after the IASC issued its initial standards on the topic. By 1998, the IASC claimed that more than 450 companies around the world currently follow its rules, including Central African Cable from Zimbabwe, Guangshen Railway Company from China, Bayer from Germany, and Microsoft from the United States.

The impact of the IASC standards has probably been least noticeable in the United States because most of the standards issued by the IASC have been consistent with opinions already articulated by the US Financial Accounting Standards Board (FASB). The FASB writes the generally accepted accounting principles by which the financial statements of US firms must be prepared. In sharp contrast, some IASC standards have had a significant impact in many other countries because they eliminated a commonly used alternative.

Another body that promises to have substantial influence on the harmonization of accounting standards, at least within Europe, is the European Union (EU). In accordance with its plans for closer economic and political union, the EU is attempting to harmonize the accounting principles of its 15 member countries. The EU does this by issuing directives that the member states are obligated to incorporate into their own national laws. Because EU directives have the power of law, we might assume the EU has a better chance of achieving harmonization than the IASC does, but the EU is experiencing implementation difficulties. These difficulties arise from the wide variation in accounting practices among EU member countries. Accounting practices in Great Britain, for example, are closer to those of the United States than to those of France or Germany. Despite these difficulties, developments in the EU should be watched closely. If the EU achieves harmonization (in all probability, it eventually will), the accounting principles adopted in the EU could have a major influence on future IASC pronouncements.

In a move that indicates the trend toward adoption of acceptable international accounting standards is accelerating, the IASC hoped to develop by mid-1999 accounting standards for firms seeking stock listings in global markets. Also, the FASB has joined forces with accounting standard setters in Canada, Mexico, and Chile to explore areas in which the four countries can harmonize their accounting standards (Canada, Mexico, and the United States are members of NAFTA, and Chile may join in the near future). The Securities and Exchange Commission also is dropping some of its objections to international standards, which could accelerate their adoption. In 1994, the SEC for the first time accepted three international accounting standards on cash flow data, the effects of hyperinflation, and business combinations for cross-border filings.¹³ A taste of what is to come if increasing numbers of international firms jump on the bandwagon and adopt IASC principles can be found in the accompanying Management Focus, which details the impact of adopting these standards on Ciba, the Swiss pharmaceuticals and chemicals group.

Multinational Consolidation and Currency Translation

A consolidated financial statement combines the separate financial statements of two or more companies to yield a single set of financial statements as if the individual companies were really one. Most multinational firms are composed of a parent company and a number of subsidiary companies located in various other countries. Such firms typically issue consolidated financial statements, which merge the accounts of all the companies, rather than issuing individual financial statements for the parent company and each subsidiary. In this section we examine the consolidated financial statements and then look at the related issue of foreign currency translation.