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This was a nice change of pace—getting a presentation from a true expert in his field who has nothing to do with either translation or Japan. A partner at the Dublin office of Deloitte & Touche, Brendan Sheridan gave an informative briefing on trends in the globalization of financial reporting. The audience was small, however, due in part I believe to the small number of financial translators willing or able to pull themselves away from results season to attend IJET (which is always held in May, peak time for Japanese companies to announce their year-end results). Very little of the information presented was specific to Japan, but it was helpful, nonetheless, for translators who water at the trough of the financial and accounting world. Following is a summary of the information presented.
A move is under way to create global standards for financial reporting, under the auspices of the International Accounting Standards Board (IASB). The process will be one of convergence, where the accounting standards applied in the US, the EC and elsewhere in the world will be gradually adjusted to a common standard. This change is being driven by growth in capital markets, the increasing sophistication of financial instruments and other mechanisms, the need for greater transparency and comparability, and the high-profile corporate failures and financial reporting scandals that we all hear about.
Mr. Sheridan was not very familiar with Japanese accounting practices (and why should he be—this was Dublin), but did offer some perspectives on Japan of interest. For example, he noted that Japan is seen by the Europeans as sticking very closely with the US approach, and that in general, most of the differences between US and European GAAP (generally accepted accounting principles) hold for the Europe-Japan comparison, as well. These differences are not that significant, as the lions share of modern accounting standards have been driven by US leadership. One particular difference the speaker pointed out was that in the US (and by extension, in Japan) the emphasis has been on following the letter of the law, rather than the intent, which is where the Europeans are placing the emphasis. This lack of emphasis on ensuring that financial reports fairly reflect underlying economic reality has been cited as one reason for Enron, Worldcomm and other accounting scandals—they were engineered by professionals very adept at finding ways around specific rules while completely abusing the spirit of the law.
The chairman of the IASB, Paul A. Volcker (himself an American) described reliable and effective financial reporting as follows. 1) Accounting standards that are consistent, comprehensive, and based on clear principles, fairly reflecting underlying economic reality; 2) Accounting and auditing practices, which translate standards for individual companies to provide understandable and timely reports; and 3) A legislative and regulatory structure to assure discipline and consistency in applying standards.
There is of course the usual politicking taking place during the give and take—primarily between the EC and the US—that determines the exact direction and extent of compromises that must occur to achieve convergence, but it appears that convergence is eventually is going to happen on terms that satisfy the major players. Knowing Americans were present in the audience, Mr. Sheridan was polite in describing the power struggle, but there seems to be a feeling on the European side that the US does not like the idea of changing its approach. So what else is new?
The initial drawing up of standards occurred in 1999/2000 as a joint effort between the International Organization of Securities Commission (IOSCO) and the IASB, and the amendment process is still going on. The IOSCO resolved in May 2000 to permit incoming multinational issuers to use IAS supplemented by reconciliation (to show the effect of applying a different accounting method), additional disclosures, and interpretation.
The IASB staff identify and review issues of importance, get advice from the steering committee or advisory groups, draft statements of principles on major projects, collect comments on initial discussion document, reflect these in writing in the Exposure Draft, again receive comments, and finally issue the Standard. The process can also use public hearings for discussion as well as field tests to assess practicability.
Current projects that are particularly hot issues are how to account for stock options given to executives for compensation, whether to abolish merger accounting and goodwill amortisation as proposed, the treatment of special purpose entities (these figured prominently in the Enron scandal), fair value accounting for derivatives and other financial instruments, the use of an asset/liability approach at insurance companies, and the use of a single performance statement called the comprehensive income statement. Other hot topics include revenue recognition and accounting for leases in a consistent manner.
International Financial Reporting Standards (IFRS) are to be applied retrospectively with limited exemptions for first-time adoption. The EU has mandated that all listed companies in Europe apply IAS to consolidated accounts by January 1, 2005. The US has committed to transition under the Norwalk agreement and will produce an Exposure Draft sometime in 2003 to propose changes in US GAAP and IAS to reflect common solutions. In Japan, the 30 top companies registered with the US FCC can use US GAAP for consolidated financial statements for Japanese reporting, according to an April 2002 regulation. Otherwise, Japanese companies must use Japanese GAAP. In July 2001 a consortium of ten private-sector organizations was formally created, including the Accounting Standards Board of Japan (ASBJ) (which is the IASM liaison) and the Financial Accounting Standards Foundation (FASF). The Business Accounting Deliberation Council (BADC) continues to be operational. Japan has made convergence with IFRS an objective, and its biggest stumbling blocks in this regard are impairment accounting and fair value accounting.
All in all, the additional paperwork generated by this convergence of standards should keep accountants like Mr. Sheridan as well as financial translators fairly busy over the next five years.