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INTERNATIONAL ACCOUNTING STANDARD SETTING:

A Vision for the Future

Report of the FASB

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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. Copyright  1998 by Financial Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Standards Board.

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INTERNATIONAL ACCOUNTING STANDARD SETTING: A VISION FOR THE FUTURE

CONTENTS

Acknowledgments ……………………………………………………………………………………………….X

Introduction………………………………………………………………………………………………………..X

Objective and Goals for the FASB's Participation in the International Accounting System of the Future…………………………………………………………………………………………..X Introduction…………………………………………………………………………………………………..X Objective………………………………………………………………………………………………………X Two Related Goals: High-Quality International Standards and Increased Convergence……………………………………………………………………………X Need for Both Goals……………………………………………………………………………………….X Establishment of a Quality International Accounting Standard Setter Is Key………………………………………………………………………………………………………….. The FASB’s Commitment………………………………………………………………………………..X High-Quality Accounting Standards……………………………………………………………………X A Quality International Accounting Standard Setter……………………………………………….X

Appendix A: Vision of the International Accounting System of the Future…………………………………………………………………………………………..X

Appendix B: Quality of Accounting Standards ………………………………………………………….X

Appendix C: Functions and Characteristics of a Quality International Accounting Standard Setter………………………………………………………………………………….X

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ACKNOWLEDGMENTS

The principal author of this report is Carrie Bloomer, assistant project manager. E.

Raymond Simpson, senior project manager, developed the text of Appendix B. The ideas

and conclusions expressed in this report result from extensive consultation with members of the

FASB and members of the Board of Trustees of the Financial Accounting Foundation and

from their agreement on the final content of this report.

FASB staff member Alison Miller provided valuable editorial and administrative

assistance in the preparation of this report.

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INTRODUCTION

The evolution of a global society brings many implications for what, in the past, have

been considered areas of strictly national authority or responsibility. It is increasingly difficult to

think of an aspect of business that remains untouched by some level of international influence.

As technology and the desire to tap the demands of nondomestic markets bring us closer

together, formal and informal international groups are springing up to deal with demands for

effective cooperation, for forums for national representation and input on international matters,

for efficiency of global activities, for exchanging ideas internationally, and for conflict

resolution. Existing organizations, whether national or international, are challenged to

continually assess the relevance of their objectives, structures, and processes in the context of

the international system of the future. Those that do not do so risk obsolescence in a global

society.

Financial reporting and accounting standard setting are not immune to the changing

times. We are beginning to see the emergence of a truly international accounting system—the

emergence of international-level organizations and cooperative ventures among national

organizations in the areas of accounting standard setting and financial statement preparation,

auditing, regulation, and analysis—to deal effectively with the merging of national and

international financial reporting issues. Today’s U.S. accounting standard-setting structure and

process reflects the increasingly international dimensions of the FASB’s role as a global leader

in accounting standard setting.

This report discusses how the FASB’s role may continue to evolve and how its structure

and process may change over time in the context of the FASB’s objective and goals for

participating in the international accounting system of the future. It includes a discussion of that

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objective and related goals, a vision of the international accounting system of the future, a

discussion of the characteristics of high-quality accounting standards, and a discussion of the

minimum functions and characteristics of a quality international accounting standard setter. It

was developed with a view to the future as it pertains to the FASB’s role in national and

international accounting standard setting.

Recognizing its need to be actively involved as the international accounting system

evolves and its potential to provide leadership in meeting market demands for high-quality

international accounting standards, the FASB and its oversight body, the Financial Accounting

Foundation (FAF), have expressed joint support for the content of this report. During many

months of discussions on international strategic policy, the FASB and the FAF reached

general agreement on a number of key points that underlie much of what is expressed in this

report, including the following:

• The FASB has a leadership role to play in the evolution of the international accounting system and is guided by the belief that, ideally, the ultimate outcome would be the worldwide use of a single set of high-quality accounting standards for both domestic and cross-border financial reporting.

• Until that ideal outcome is achieved, the FASB's objective for participating in the international accounting standard-setting process is to increase international comparability while maintaining high-quality accounting standards in the United States. To achieve that objective, the FASB is willing to commit the required resources to the related goals of (1) ensuring that international accounting standards are of high quality and (2) increasing the convergence and quality of the accounting standards used in different nations.

• The FASB believes that the establishment of a quality international accounting standard- setting structure and process is key to the long-term success and development of international accounting standards. The FASB will participate in establishing that structure and process. The FASB accepts that an increasing and substantial level of resources might be required to support and influence the establishment of that organization.

• The FASB acknowledges that, if a quality international accounting standard-setting structure and process emerges, the FASB's commitment and desire to participate in a meaningful way in the operations of that standard setter may ultimately lead to structural and procedural changes to the FASB as well as potential changes in its national role.

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The vision of the international accounting system of the future set forth in Appendix A is

intended to provide a context for the discussion of the FASB’s objective and goals. It is one

of many possibilities for the future and may be a useful tool with which to envision the FASB’s

future role as a result of pursuing the objectives. The FASB recognizes that it is not possible

to predict the future. Others may or may not agree on whether the vision is an accurate one or

whether different scenarios are more likely. In any scenario, however, the FASB believes that

for an international accounting system to be successful, establishment of a quality international

accounting standard setter is imperative.

Appendix B discusses the attributes of high-quality accounting standards, and Appendix

C of this report includes a description of the functions and characteristics that the FASB

believes are necessary to a quality international accounting standard setter in the future,

including an independent decision-making structure, adequate due process, and sufficient

technical capabilities to develop high-quality international standards. Some of the functions

and characteristics described in Appendix C differ from the functions and characteristics of the

existing structure of the International Accounting Standards Committee (IASC). Nevertheless,

the FASB believes that the objectives and vision in this report and the objectives for structure

reform of the IASC recently published in an IASC Discussion Paper, Shaping IASC for the

Future, are consistent. However, the FASB cannot predict whether an international

accounting standard-setting structure and process that meet those objectives will emerge from

the proposals to reorganize the IASC. Thus, the objectives and vision presented are also

consistent with other possible alternatives, including the possibility that the FASB might

reorganize itself to become an international standard setter or that an alternative international

structure and process could be established that meets the FASB’s fundamental objectives.

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U.S. capital markets are the envy of the world. They are the deepest, broadest, and

most liquid anywhere. That is in no small part because of the confidence provided by the

credibility and thoroughness of our financial accounting and reporting. Financial reporting is

credible in the United States in part because of the independence of the FASB’s accounting

standard-setting process from any special interests and the thoroughness of its due process,

which works to balance the interests of all the FASB’s constituents. The mission of the FASB

is to establish and improve standards of financial accounting and reporting for the guidance and

education of the public, including issuers, auditors, and users of financial information. In

carrying out that mission, the FASB creates accounting standards that promote transparency

with the goal of providing the consumers of financial statements—principally investors and

creditors—with the best possible financial information for making economic decisions. The

FASB believes that the substance of that mission is equally valid—even essential—in the

international arena.

This report has been published to convey the FASB’s intention to maintain its leadership

role in standard setting and to ensure that the standards used in U.S. capital markets, whether

developed by the FASB or an international standard-setting organization, are of the highest

possible quality. That can only be accomplished by a strong commitment to an active role in

the establishment of both international accounting standards and national accounting standards.

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OBJECTIVE AND GOALS FOR THE FASB'S PARTICIPATION IN THE INTERNATIONAL ACCOUNTING SYSTEM OF THE FUTURE

Introduction

Changes are taking place in the international accounting standard-setting environment at

a rapid pace. The FASB believes that it is important to ensure that those changes move

accounting standard setting at the national and international levels in a positive direction. To do

so, changes must be aligned with a set of shared objectives and guided by some vision of the

desired outcome of this evolution to more global capital markets.

The FASB has examined the issues in the current environment in great detail and

developed a vision of the future international accounting system and the objective and goals

for the FASB’s participation in that system. That vision is provided as Appendix A to this

report and represents only one of the possible scenarios for the future. However, the FASB

believes that using such a vision as a guide will tend to move the FASB toward a positive and

mutually beneficial outcome for all of the key participants in the international accounting system

of the future.

The objective and goals developed by the FASB are compatible with that vision as well

as with the following key considerations:

• The FASB should retain a worldwide leadership role in standard setting. • The FASB should do as much as it can to participate in the development of internationally

recognized standards to ensure that they are of the highest possible quality. • Worldwide acceptance of internationally recognized standards and a global standard-

setting process is impossible without U.S. acceptance and participation. As the largest capital market, the United States is the primary target in the drive for internationally recognized standards. U.S. support is necessary to the legitimacy of any set of international standards, and the United States has much to contribute to ensuring those standards are of high quality.

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The objective and goals for the FASB’s participation in the international accounting

system of the future are described below.

Objective

The FASB's commitment to the development of international accounting standards is

guided by the belief that, ideally, that process ultimately will lead to the worldwide use of a

single set of high-quality accounting standards for both domestic and cross-border financial

reporting. The demand for those standards is driven by the desire for high-quality,

internationally comparable financial information that capital providers find useful for decision

making in global public capital markets. The FASB believes that progress toward the ideal

outcome will result from pursuing the overall objective of increasing international comparability

while maintaining the highest quality accounting standards in the United States.

Two Related Goals: High-Quality International Standards and Increased Convergence

As the world moves toward that overall objective, the FASB is a leader, sharing

influence with other standard setters, in determining the international standard-setting structure

and process of the future. In fulfilling that role, the FASB has two related goals: (1) to ensure

that international accounting standards are of the highest quality and (2) to accelerate

convergence of the accounting standards used in different nations. Those goals are pursued

within the context of the FASB's ongoing commitment to establish and improve standards of

financial accounting and reporting in the United States. The FASB believes that developing

accounting standards that increase international comparability is a key element of that

commitment.

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The FASB has reached consensus that a set of high-quality international standards is

desirable because their use would improve international comparability; reduce costs to

financial statement users, preparers, auditors, and others; and, ultimately, optimize the

efficiency of capital markets. In the long run, the FASB believes that the global costs to

implement and maintain standards also will be lower. Further, a set of high-quality

international standards is increasingly demanded by existing market forces. The FASB

describes international standards as a set of accounting standards that are internationally

recognized as acceptable through, for example, endorsement by the relevant capital market

authorities of individual nations1 and through acceptance by financial statement users.

Convergence is both a goal and a process. The FASB describes the goal of

convergence as different standard setters arriving at high-quality national or international

standards on the same topic that are as similar as possible. The process of convergence

includes using all reasonable efforts to arrive at consensus, recognizing that it may be beneficial

to arrive at very similar higher quality national standards when consensus on a single

international standard is not possible. Convergence would result simultaneously in a reduction

of differences between existing standards and an increase in their quality. Further, in some

cases and among some standard setters, the process of convergence may

1The relevant national authority is that organization (or those organizations) that has the authority to make decisions about accounting requirements for capital markets and to enforce those requirements. The relevant national authority in a given nation may differ; for example, in the United States it would be the Securities and Exchange Commission (SEC), whereas in other countries it may be a stock exchange, a government body, or some other organization.

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lead to identical new standards. In other cases, resulting standards may differ in some

aspects. In all cases, participating in a process to achieve convergence should result in higher

quality standards that are more similar than they otherwise would be were each of the

standard setters to develop a standard in isolation. That is, the expected result of pursuing the

goal of convergence is to minimize differences while improving the quality of accounting

standards worldwide and, thus, maximize the potential for international comparability.2

Need for Both Goals

Convergence and development of high-quality international standards are interrelated

goals. Convergence that leads to agreement on a single solution among standard setters in

different countries can result in an international standard. Conversely, participating in the

development of international standards is one way to facilitate the convergence process and to

achieve the goal of convergence among nations.3 The FASB considered stating either the goal

of increased convergence or the goal of ensuring that international standards are of high quality

as the singular goal for its international activities. In arriving at its consensus to pursue

convergence and high-quality international standards simultaneously, the FASB considered a

number of factors, such as the extent to which international standards would be used in the

future and the feasibility of uniformity in accounting requirements among all nations.

2It should be noted that the International Accounting Standards Committee (IASC) recently has begun using the term convergence. However, the IASC uses convergence to mean national standards moving toward higher quality IASC standards. As described above, the FASB uses the term convergence to mean national accounting standards moving toward each other with the objective of increasing quality. 3Perhaps the best example of the contrast between achieving convergence and agreeing on an identical standard is the FASB's project on segment reporting. The FASB and the Canadian Institute of Chartered Accountants (CICA) worked jointly to develop a standard on that topic while the IASC worked concurrently on its own standard. Every effort was made to reach the same conclusions in both projects. As a result of those efforts, convergence was achieved with the IASC while the FASB and the CICA issued virtually identical standards. The IASC standard, while much more similar to the CICA-FASB standard than it otherwise would have been, is different in some important respects.

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Many questions remain as to what ultimate function a set of high-quality international

accounting standards will serve. On one end of the spectrum, they might be acceptable only

for cross-border filers in some or all countries. At the other end of the spectrum, international

standards might eventually replace all national standards, resulting in a single set of standards

for all countries.4 The FASB has concluded that whatever the ultimate function of international

standards, their use will affect financial reporting in the United States, and, therefore, the

FASB must participate in the process that leads to their development. The FASB believes that

its meaningful participation in the development of international standards is necessary in order

to ensure that future international standards are of sufficient quality to be acceptable in the

United States.

However, the FASB believes that it is fruitful in the near term to pursue both high-quality

international standards and increased convergence, rather than pursuing the singular goal of

ensuring high-quality international standards. Based on the FASB's experience working with

other standard setters, it is clear that, in some circumstances, standard setters will be unable to

agree that a single solution is appropriate for all national environments. Because achieving

either increased convergence or high-quality international standards would result in higher

quality standards and increased comparability of financial reporting worldwide, the FASB

supports both goals.

4The IASC, for example, has recently completed a set of core standards, which, at the moment, are intended to be used as a basis for financial reporting by cross-border filers in any and all capital markets. However, it is not clear that financial statements based on those standards will be acceptable for cross- border filings in the United States. While the FASB recognizes that use of IASC standards results in an improvement in financial reporting in some countries, the FASB is not convinced that their use in their present form would improve financial reporting in the United States relative to what U.S. investors presently receive. At least within the FASB's current planning horizon, it seems unlikely that the IASC's core standards (or any other international standards, for that matter) will be accepted in the United States without requiring reconciliation of some of those standards expected to be presented by the IASC. Those factors were important considerations in the development of the FASB's objective and goals described in this report.

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Establishment of a Quality International Accounting Standard Setter Is Key

A great deal of progress has been and continues to be made in the areas of convergence

and development of high-quality international accounting standards through the commitments

and cooperative efforts of national standard setters and others acting independently. However,

the FASB believes that, for the long term, if the future international accounting system is to

succeed and, ultimately, result in the use of a single set of high-quality accounting standards

worldwide for both domestic and cross-border financial reporting, the establishment of a

quality international accounting standard setter to coordinate and direct the process is key.

The FASB’s Commitment

The FASB believes it has a leadership role to play in the evolution of the international

accounting system. That will require that a high and increasing level of resources be devoted

to positioning the FASB as a strong influence on the establishment of a quality international

accounting standard-setting organization. If a quality international accounting standard-setting

structure and process emerges, the FASB's commitment and desire to participate in a

meaningful way in the operations of that standard-setting organization may ultimately lead to

structural and procedural changes to the FASB, a shift in the FASB's national role, and a

substantial contribution of resources to the international standard-setting process. At the same

time, the FASB believes it is important to maintain its program of improving U.S. national

standards in order to meet the objective of high-quality accounting standards (whether national

or international standards) in the United States.

Two notions fundamental to the FASB’s objective and goals require elaboration. The

first is what is meant by “high quality” accounting standards, and the second is what are the

functions and characteristics of a quality international standard setter.

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High-Quality Accounting Standards

The fundamental underpinning of the FASB’s objective and goals for participation in the

international accounting system of the future (a vision of that system is described in Appendix

A) is a belief that the ongoing evolution of accounting standards should result in continual

improvements to the quality of those standards and, as a result, the quality of financial

reporting worldwide. That belief has guided

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