Step toward Globalization: The Move for International Accounting Standards, A


A STEP TOWARD GLOBALIZATION:
THE MOVE FOR INTERNATIONAL ACCOUNTING

STANDARDS

I. INTRODUCTION

This note addresses the difficulties faced by foreign companies who
make public offerings of stock in the United States.I Specifically, this note
addresses the problem caused by the Securities and Exchange Commission's
(SEC) requirement that all issuers of foreign stock file financial statements
prepared in accordance with U.S. Generally Accepted Accounting Principles
(U.S. GAAP).

The United States possesses the world's largest and most prestigious
capital markets.2 Foreign companies want access to U.S. capital markets but
are unwilling to incur the substantial costs of reconciling their financial
statements from their "home" accounting standards to U.S. GAAP.3

Consequently, U.S. investors are denied convenient access to foreign
investment opportunities through U.S. capital markets. In order to gain
access to these foreign investment opportunities, U.S. investors are forced
into foreign capital markets. 4 As American capital flows into foreign
markets, the dominant status of U.S. capital markets is weakened. 5 Although
U.S. capital markets are not currently in jeopardy of losing their dominant
status,6 the SEC should take preemptive steps to ensure that U.S. capital
markets remain the world's leaders.

The best way for the SEC to protect the dominant status of U.S. capital
markets is to allow foreign companies to use international accounting
standards (IAS) as a substitute for U.S. GAAP. The SEC should accept IAS
as a substitute for U.S. GAAP for several reasons. First, acceptance of IAS
would allow foreign companies greater access to U.S. capital markets and
help ensure that the capital markets of the United States do not lose their
dominant status. Second, the amount of value investors place on the value
of U.S. GAAP disclosures is in doubt. Third, and most important, the
SEC's acceptance of IAS would be a large step towards worldwide

1. For a discussion of the other, more limited ways in which a foreign company can
enter the U.S. markets, including private placements, see William E. Decker, The Attractions
of the U.S. Securities Markets to Foreign Issuers and the Alternative Methods of Accessing the
U.S. Markets: From the Issuer's Perspective, 17 FORDHAM INT'L L.J. S10 (1994).

2. See Nicholas G. Demmo, U.S. Securities Regulation: The Need for Modification
to Keep Pace with Globalization, 17 U. PA. J. INT'L ECON. L. 691 (1996).

3. Eric M. Sherbet, Bridging the GAAP: Accounting Standards for Foreign SEC
Registrants, 29 INT'L LAW. 875, 876 (1995).

4. See id. at 887.
5. See id.
6. See Demmo, supra note 2, at 692.



IND. INT'L & COMP. L. REV.

harmonization of accounting standards. Worldwide harmonization of
accounting standards would greatly benefit both issuers of public stock and
investors.

Section II of this note provides background information on the legal
issues the SEC faces with respect to cross-border offerings of stock. Section
III provides a comparison of some of the major differences between U.S.
GAAP and IAS. Section IV reviews the alternatives available to the SEC
with respect to foreign issuers and proposes that the SEC accept IAS as a
substitute for U.S. GAAP.

II. OPENING U.S. CAPITAL MARKETS TO FOREIGN COMPANIES

In response to financial crises and stock market crashes of 1929-1932,
Congress passed the Securities Act of 1933 and the Securities Exchange Act
of 1934.7 The 1934 Act created the SEC.' One of the functions of the SEC
was to ensure that potential investors have information, in the form of
financial statements, upon which to base intelligent investment decisions.'
Congress gave the SEC the authority to establish the accounting standards
used in financial statements by companies under its jurisdiction.'"
Accounting standards are the rules that companies use in preparing their
financial statements. In 1939, the SEC delegated its authority to establish
accounting procedures to the American Institute of Certified Public
Accountants (AICPA), a nongovernmental entity.I The AICPA established
the Financial Accounting Standards Board (FASB), which now has the
responsibility for establishing the appropriate accounting procedures for use
in financial statements by companies making public offerings of stock. 2

Foreign companies desperately want access to large U.S. capital
markets. 13 However, the SEC currently requires foreign companies making

7. See KENNETH S. MOST, THE FUTURE OF THE ACCOUNTING PROFESSION: A

GLOBAL PERSPECTIVE 52 (1993).
8. See id.
9. See id. at 52-53.

10. See JAMIE PRATT, FINANCIAL ACCOUNTING 23 (2d ed. 1994). Defining the word
accounting is a difficult undertaking. One definition is "the process of identifying, measuring,
and communicating economic information to permit informed judgments and decisions by
users of the information." MOST, supra note 7, at 5 (quoting AMERICAN ACCOUNTING
ASSOCIATION, A STATEMENT OF BASIC ACCOUNTING THEORY (1966)).

11. See PRATT, supra note 10, at 23.
12. See id. The FASB has had several predecessors. The Committee on Accounting

Procedures governed from 1939-1959, and the Accounting Principles Board from 1959-1971.
See id. The FASB was established in 1973. See id. For more on the FASB's standard setting
process, see infra part I.

13. The combined volume of the New York Stock Exchange, American Stock Exchange,
and the NASDAQ reaches close to $4 trillion dollars annually. See Stephen J. Choi & Andrew
T. Guzman, The Dangerous Extraterritoriality of American Securities Law, 17 Nw. J. INT'L

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1998] INTERNATIONAL ACCOUNTING STANDARDS

public offerings of stock in the United States to file financial statements1 4

prepared in accordance with U.S. GAAP or to reconcile their financial
statements to U.S. GAAP.' 5 In order to comply with SEC regulations, a
foreign company must provide audited balance sheets for the two most recent
fiscal years. 6 In addition, the company must provide audited statements of
income and cash flows for each of the past three fiscal years.'" Most foreign
companies prepare their financial statements in accordance with either
international accounting standards or the accounting standards of the
company's home country.' 8 In other words, foreign companies use different
rules when preparing their financial statements than do their U.S.
counterparts. Thus, in order to make a public offering of stock in the United
States, a foreign company must first prepare its financial statements using its
"home" accounting standards. The company must then prepare the financial
statements again in accordance with U.S. GAAP. U.S. GAAP tends to be
more complicated and requires more disclosures than most other

L. & Bus. 207 (1996).
14. Jamie Pratt explains the four basic financial statements as:

(1) the balance sheet, (2) the income statement, (3) the statement of retained
earnings, and (4) the statement of cash flows. The balance sheet lists the assets,
liabilities, and stockholder's equity of a company at a given point in time. The
income statement contains the revenues earned and expenses incurred by a
company over a period of time. . . . The statement of retained earnings
reconciles the retained earnings amount from one period to the next. The
statement of cash flows reconciles the cash amount from one period to the next.

PRATT, supra note 10, at 28.
15. 17 C.F.R. § 210.4-01(a)(2) (1997). For the exact forms a foreign registrant must

file, as well as other general filing requirements, see M. Elizabeth Rader, Accounting Issues
in Cross-Border Securities Offerings, 17 FORDHAM INT'L L.J. S129 (1994).

16. 17 C.F.R. § 210.3-19(a)(1).
17. 17 C.F.R. § 210.3-19(a)(2).
18. Aside from IAS, the accounting standards for the countries of the world can be

divided into four particular factions based on the similarities of their accounting practices.
First, the British-American model, which includes the United Kingdom, the United States, and
the Netherlands, focuses its accounting procedures on the needs of investors and creditors.
See MUELLER ET AL., ACCOUNTING: AN INTERNATIONAL PERSPECrIvE 8, 11 (1994). Second,
there is the Continental model which is used by most of Europe and Japan. See id. at 11.
Accounting procedures in the Continental model are legalistic in nature and are designed to
satisfy government imposed regulations. See id. The third model is the South American
model. This faction, which includes nearly all of South America, is characterized by its
persistent use of accounting adjustments for inflation. See id. The final model is the mixed-
economy model. The mixed-economy model is used by many countries of the former USSR
and .Yugoslavia. See id. Countries under the mixed-economy model operate "dual accounting
systems" which were formed in the wake of the political upheavals in the early 1990s. Id.
In the mixed economy system, accounting information is used in aiding the transition from a
command to a market economy. See id. at 11-12. For a listing of countries comprising each
model, see id. at 9.



IND. INT'L & COMP. L. REV.

comprehensive sets of accounting standards.' 9 This second preparation of
financial statements results in additional costs and can be very time
consuming.2' In most cases, foreign companies have been unwilling to bear
these additional costs.2' Consequently, foreign companies have avoided U.S.
markets.

The differences between U.S. GAAP and other foreign sets of
accounting standards can result in considerable differences in a company's
net income. For example, in 1993, the German company Daimler-Benz
needed to make a public offering of stock in the United States in order to
raise capital. Daimler was forced to reconcile its financial statements with
U.S. GAAP. Under German accounting procedures, Daimler-Benz showed
a profit of over 300 million U.S. dollars.22 However, once the more
stringent U.S. accounting procedures were applied, Daimler-Benz's income
statement revealed a one billion U.S. dollar annual loss.2 The company's
true financial position had not changed. The difference was mere
"accounting fiction." The change related specifically to the different
accounting procedures applied to the exact same financial data. 4 This
bottom line difference can make foreign companies hesitant to reconcile their
financial statements with U.S. GAAP. 25

As the world's economic markets move toward globalization, it will
become increasingly important that foreign companies have access to U.S.
capital markets. At present, the United States' capital markets are the largest
and most efficient in the world.26 However, representatives of the major
U.S. stock exchanges, such as the New York Stock Exchange (NYSE), have
expressed concern that if the barriers to foreign companies are not relaxed,
investors will turn to other capital markets to obtain potentially fruitful

19. See Rader, supra note 15, at S135.
20. See Demmo, supra note 2, at 703. The exact amount of these costs is difficult to

estimate, and varies from company to company. See Todd Cohen, The Regulation of Foreign
Securities: A Proposal to Amend the Reconciliation Requirement and Increase the Strength
of Domestic Markets, 1994 ANN. SURV. AM. L. 491, 519 (1995). For domestic companies,
an initial public offering can cost hundreds of thousands of dollars in legal and accounting
fees. See id. Due to the complex nature of the GAAP reconciliation, the costs to foreign
companies are even greater. See id. Maybe the best evidence that issuing costs are too high
is that foreign companies cite them as the primary obstacle to entering U.S. capital markets.
See id.

21. See Sherbet, supra note 3, 886.
22. See id. at 885.
23. See id.
24. A study performed by two college professors of a computer-generated hypothetical

company showed a net profit of $34,600 in the United States, $260,600 in Britain and
$240,600 in Australia. See Lee Berton, All Accountants Soon May Speak the Same Language,
WALL ST. J., Aug. 29, 1995, at A15.

25. See Cohen, supra note 20, at 494.
26. See Sherbet, supra note 3, at 875.

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INTERNATIONAL ACCOUNTING STANDARDS

foreign investment opportunities.27 As American capital flows into other
markets, the dominant position of the U.S. capital markets is weakened.28

At present, there are approximately 200 foreign companies trading on the
NYSE.29 That number is minute when one considers that there are in excess
of 2000 foreign companies that could potentially qualify for listing on the
Exchange.30 Moreover, most of the foreign companies currently listed on
the NYSE come from either Western Europe or Canada. 31 U.S. investors
want access to companies from growing markets, such as Eastern Europe
and Asia.32

The SEC has expressed concern about relaxing disclosure requirements
for foreign companies. The SEC is concerned that if fewer disclosures are
required, investors will have less information upon which to make intelligent
investment decisions.33 A conflict exists between the SEC's priority of
protecting investors and the needs of the U.S. capital markets to have foreign
companies listed on their exchanges.

To address the U.S. GAAP reconciliation problem, Congress passed
the Capital Markets Efficiency Act of 1996.14 Under the Act, Congress
recognized the increasing globalization of security markets 35 and the
accounting difficulties foreign issuers face.36 Congress recognized that the
establishment of a high quality set of international accounting standards
would greatly enhance the ability of foreign companies to make stock
offerings in the United States.37 Congress then ordered the SEC to increase
its efforts toward developing a high-quality set of international accounting

27. See David S. Ruder, Reconciling U.S. Disclosure Policy with International
Accounting and Disclosure Standards, 17 Nw. J. INT'L. L. & Bus. 1, 4 (1996).

28. See id.
29. Berton, supra note 24, at A15.
30. Id. See also James L. Cochrane, Are U.S. Regulatory Requirements for Foreign

Firms Appropriate?, 17 FORDHAM INT'L L.J. S58 (1994). One study found that only 5% of
the companies on the New York or American stock exchanges were foreign. See MosT, supra
note 7, at 86. By comparison, 58% of the listings on the Zurich stock exchange were foreign,
50% on Amsterdam, 28% on Paris, 27% on Frankfurt, and 22% on London. See id.

31. See Cohen, supra note 20, at 492.
32. See id.
33. See Michael A. Schneider, Foreign Listings and the Preeminence of U.S. Securities

Exchanges: Should the SEC Recognize Foreign Accounting Standards ?, 3 MINN. J. GLOBAL
TRADE 301, 307 (1994). All financial statements not prepared in accordance with generally
accepted accounting principles are presumed to be misleading or inaccurate. 17 C.F.R.
§210.4-01(a)(1) (1997).

34. Capital Markets Efficiency Act of 1996, Pub. L. No. 104-290, 110 Stat. 3416, 3449
[hereinafter Capital Markets Efficiency Act].

35. See id. § 509(2).
36. See id.
37. See id. § 509(3).

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IND. INT'L & COMP. L. REV.

standards as soon as would be "practicable. " 38 Finally, the SEC was to
report back to Congress one year after enactment of the Act with an update
on the progress made on a set of international accounting standards that
would be acceptable for foreign companies making public offerings of stock
through U.S. capital markets. 9

To remedy this problem, the International Accounting Standards
Committee (IASC)l is developing a new, revised set of international
accounting standards due for completion in March 1998. 4" The IASC plans
to submit the new standards to the SEC in hopes that the Commission will
recognize the standards as a substitute for U.S. GAAP. The existing set of
international accounting standards is already accepted by many foreign stock
exchanges for use in cross-border listings.42 The IASC estimates that
hundreds of multinational43 and international companies prepare their
financial statements in accordance with existing international accounting
standards.' The IASC is preparing the new set of international accounting
standards with the intent that these new standards will be universally
accepted for cross-border listings.4 It is the conclusion of this note that the
SEC should accept the IASC's new set of core accounting standards as a
substitute for U.S. GAAP in order to facilitate cross-border offerings of
stock and preserve the status of the United States as the world's dominant
capital market.

38. Id. § 509(4).
39. See id. § 509(5).
40. The IASC was founded in 1973 by accounting representatives from Australia,

Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom, and the
United States. IASC, About IASC (visited Nov. 1, 1997) <http://www.iasc.org.uk/frame/
cenll.htm>. The IASC presently includes representatives from 85 countries. Id. The
IASC has two broad objectives. The first is to develop accounting standards to be observed
in the preparation of financial statements and to encourage their worldwide acceptance. See
BARRY J. EPSTEIN & ABBAS ALl MIRZA, INTERPRETATION AND APPLICATION OF

INTERNATIONAL ACCOUNTING STANDARDS 1997, at 9 (1997). The second is to work
generally for the improvement and global harmonization of accounting standards. See id.

41. The standards were originally to be completed in mid-1999. See EPSTEIN & MIRZA,
supra note 40, at 13. However, due to pressure from the international community, the
completion date "was ... accelerated to early 1998." Id.

42. See IASC, About JASC (visited Nov. 1, 1997) <http://www.iasc.org.uk/
framelcenl_5.htm >.

43. However, Microsoft is the only major American company to refer to International
Accounting Standards in its financial statements. See IASC, About IASC (visited Nov. 1,
1997) <http:/www.iasc.org.uklframe/cenl.7.htm>.

44. See id.
45. See Sir Bryan Carsberg, Foreword to BARRY J. EPSTEIN & ABBAS ALI MIRZA,

INTERPRETATION AND APPLICATION OF INTERNATIONAL ACCOUNTING STANDARDS 1997
(1997).

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INTERNATIONAL ACCOUNTING STANDARDS

III. COMPARISON OF U.S. GAAP AND CURRENT INTERNATIONAL
ACCOUNTING STANDARDS

This section begins with a comparison of the standard-setting processes
of the FASB and the IASC. The remainder of this section emphasizes some
of the major differences between U.S. GAAP, established by the FASB, and
the current set of international accounting standards, established by the
IASC. This listing is by no means all-inclusive. However, this list should
help highlight some of the discrepancies the IASC hopes to resolve when it
issues its new set of core standards.

A. Comparison of Standard-setting Procedures of the JASC and the FASB

In the United States, accounting standards are developed by the
FASB. 6 The Board determines standards by way of a political process. 47

All groups with an interest in accounting standards, including Congress and
government agencies, lobby before the Board.48 The Board also holds public
hearings on issues regarding the setting of accounting standards.49 The
process of issuing a new accounting standard begins with the identification
of a problem area, and the appointment of a task force.50 After input from
the public, the FASB issues an exposure draft of the proposed standard. 51

The Board then allows sixty days for further discussion of the issue, at which
time the Board votes on whether to adopt the new standard."2

The standard setting process for the IASC is similar to that of the
FASB.53 After an international financial reporting issue is placed on the
board agenda, a steering committee of four representatives is appointed.54

The steering committee receives input and comments from the IASC board.5

Based on these comments, the steering committee writes an exposure draft,
which, on approval of the board, is circulated among the public for six

46. The FASB consists of seven full-time members who are independent from private
industry. See PRATT, supra note 10, at 23. The FASB has issued in excess of 100 statements
of financial accounting standards. See id. See also PAUL B. MILLER & RODNEY J. REDDING,
THE FASB: THE PEOPLE, THE PROCESS, AND THE POLITICS (1986).

47. See PRATr, supra note 10, at 23.
48. See id. at 24.
49. See id.
50. See MOST, supra note 7, at 56.
51. See id.
52. See id. For a new standard to be adopted, a majority vote of five to two is required.

See id.
53. See JAMES R. BOATSMAN ET AL., ADVANCED ACCOUNTING 644 (7th ed. 1994).
54. See id.
55. See id. at 645.

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IND. INT'L & COMP. L. REv.

months.56 After reviewing public comments and suggestions, the steering
committee revises the draft and submits it to the IASC board for final
approval. 57 If the draft is deemed acceptable, a new international accounting
standard pronouncement is issued.58 The process of issuing a new
pronouncement is slow and tedious. It often takes three to four years for a
new pronouncement to be issued.59

B. Accounting for Research and Development

The United States is virtually alone in its accounting treatment of
research and development (R&D) costs.' Research and development costs
are those incurred in hopes of creating future revenues through the
development of new products.6 In the United States, under U.S. GAAP, all
R&D costs are simply expensed as they are incurred.62 Thus, all R&D costs
result in a direct, immediate reduction in net income.

Under international accounting standards, however, research costs are
distinguished from development costs. According to international accounting
standards, research is defined as "original and planned investigation
undertaken with the prospect of gaining new scientific or technical
knowledge and understanding." 63 Development, on the other hand, is
defined as "the application of research findings or other knowledge to a plan
or design for the production of new or substantially improved materials,
devices, products, processes, systems or services prior to commencement of
commercial production or use."'

Although the line between research and development seems blurred,
the distinction is important because the accounting treatment is different for
the two segments.' Research costs are treated much the same as R&D costs
in the United States, expensed as incurred.6 However, development costs

56. See id.
57. See id.
58. See id. A new standard requires a vote of three-fourths of the IASC board for

approval. See id.
59. See John L. Kirkpatrick, The Role of the International Accounting Standards

Committee, in HARMONIZATION OF ACCOUNTING STANDARDS: ACHIEVEMENTS AND
PROSPECTS 87, 89 (1986).

60. See DHIA D. ALHASHIM & JEFFREY S. ARPAN, INTERNATIONAL DIMENSIONS OF
ACCOUNTING 85 (3d ed. 1992).

61. See PRATT, supra note 10, at 411. R&D costs can be a substantial outlay for
companies. For example, in 1990 IBM and DuPont invested $6.5 billion and $1.4 billion
respectively in R&D. See id.

62. See ALHASHIM & ARPAN, supra note 60, at 85.
63. EPSTEIN & MIRZA, supra note 40, at 247.
64. Id.
65. See id.
66. See id. at 248.

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may be capitalized and expensed over time.67 Consequently, foreign
companies using international accounting standards recognize less expense
than U.S. companies. This results in higher net income for foreign
companies who use IAS.

C. Accounting for Goodwill

Goodwill may be recognized when one corporation purchases the assets
of another. The amount of goodwill recognized by purchasing a company
will equal the excess of the purchase price over the fair market value of the
assets acquired.6" In the United States, goodwill is recognized as an
intangible asset and amortized over the useful life of the acquired asset in a
period not exceeding forty years.69 International accounting standards also
allow for goodwill to be amortized over the useful life of the asset.
However, amortization under international accounting standards is limited
to a period not exceeding five years, unless a longer life can be
demonstrated. Under no circumstance may the amortization period exceed
twenty years.7

This appears to be an instance where U.S. GAAP results in a more
favorable bottom line than international accounting standards. Given equal
amounts of goodwill, U.S. companies will recognize an amount of expense
over forty years equal to the amount that foreign companies will recognize
over a period not exceeding twenty years. Consequently, U.S. companies

67. The distinction between "expensed as incurred" and "capitalization and
amortization" is best demonstrated through an oversimplified example. Suppose XYZ, an
American company, incurred $2000 in research and development costs over the course of one
year. The accounting treatment is simple, XYZ expenses $2000 through the income statement.
Suppose ABC, a foreign company using international accounting standards, also incurs $2000
in total research and development costs. Further suppose that ABC's costs can be divided into
$500 for research and $1500 for development. With U.S. GAAP, the $500 is immediately
expensed through the income statement. The $1500, however, is "capitalized and amortized"
over the asset's useful life, say 15 years. Instead of recognizing $1500 of expense this year,
ABC will recognize $100 of expense in each of the next 15 years. The net result is that this
year XYZ, the American company, recognizes $2000 in R&D expense, while ABC, the
foreign company, recognizes only $600 ($500 research expense plus $100 amortization of
development costs).

68. See MUELLER ET AL., supra note 18, at 23.
69. Business combinations can result in extremely large amounts of goodwill. For

example, in 1990, when Philip Morris acquired the assets of Kraft, Inc., it recognized $11
billion U.S. dollars in goodwill. See PRATT, supra note 10, at 342. Consequently, Philip
Morris must recognize approximately $275 million in goodwill amortization expense each
year. See id.

70. See EPSTEIN & MIRZA, supra note 40, at 330. For a comparison of accounting
treatment of goodwill in various countries, see MUELLER ET AL., supra note 18, at 24.

71. See EPSTEIN & MIRZA, supra note 40, at 330.

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IND. INT'L & COMP. L. REV.

recognize a lesser amount of goodwill expense on a year-by-year basis,
which results in higher net income.'

D. Accounting for Business Combinations

There are also significant differences between U.S. GAAP and IAS
when accounting for business combinations. When a business combination,
such as a merger, takes place, it can be accounted for as either a "pooling
of interests" or a "purchase." 73 Under a pooling of interests, the assets of
the acquired company are not revalued at the date of acquisition.7' The
assets are simply transferred from the subsidiary's books onto the books of
the parent. In a business combination treated as a pooling, no goodwill is
recognized.75 However, under a business combination accounted for as a
purchase, the assets of the acquired company are revalued at their fair
market values.76 Any difference between the fair values of the assets and the
purchase price is then attributed to goodwill. 77 Consequently, as the
goodwill is amortized in subsequent years, the purchase method will result
in lower net income for the acquiring entity .7

In general, managers would prefer to treat business combinations as a

72. Although goodwill accounting under U.S. GAAP results in higher net income for
accounting purposes, it has been observed that goodwill accounting harms U.S. companies
with respect to tax law. See PRATT, supra note 10, at 342. Since goodwill is an intangible
asset, amortization is not recognized for tax purposes. See id. Therefore, although Philip
Morris recognizes $275 million a year in goodwill expense, it receives no corresponding tax
deduction. See id. This runs contrary to countries, such as Japan, where a tax deduction is
allowed for amortization of goodwill. See id. This tax disadvantage may place U.S.
companies at a disadvantage when competing with foreign companies. See id.

73. BOATSMAN ET AL., supra note 53, at 8. International accounting standards use
different terminology to desribe a business combination. Under IAS the business combination
is called either a "uniting of interests" (instead of a pooling of interests) or an "acquisition"
(instead of a purchase). EPSTEIN & MIRZA, supra note 40, at 309-10.

74. See BoATsMAN ET AL., supra note 53, at 9.
75. See id. at 9-10.
76. See id. at 10.
77. See id. at 9.
78. See id. at 10-11. Again, perhaps an oversimplified example would help illustrate

the difference between a business combination accounted for as a pooling versus a purchase.
Suppose XYZ acquires the net assets of ABC for $1 million. Further suppose that the net
assets of ABC had a book value of $500,000 and a fair market value of $750,000. If the
business combination is accounted for as a pooling, the net assets of ABC appear on the books
of XYZ at $500,000. No goodwill will be recognized. If the business combination is
accounted for as a purchase, the net assets of ABC will appear on XYZ's books at their fair
market value of $750,000. The difference between the price XYZ paid for the assets and the
fair market value of the assets ($250,000) is recognized as goodwill on the books of XYZ.
XYZ would then have to amortize the goodwill (recognizing an expense) over a period not
exceeding 40 years. See id. at 9-10.

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pooling so that no goodwill (and the corresponding expense) will have to be
recognized.7 9 The distinction between IAS and U.S. GAAP comes in the
criteria for determining whether a business combination is eligible to be
treated as a pooling. Under U.S. GAAP, a set of twelve conditions must be
met in order for the business combination to be treated as a pooling.80 By
contrast, IAS has only three criteria."'

The U.S. GAAP criteria for a pooling have been described as complex
and difficult to apply.' The twelve criteria are divided into segments based
on the characteristics of the entity, the nature of the exchange transaction,
and post-combination transactions.13 This is compared to the three direct,
relatively simple criteria of IAS. The result is that foreign companies using
IAS are more often able to take advantage of pooling accounting treatment
and the corresponding net income advantages.'

IV. PROPOSAL AND RECOMMENDATION

In order to increase foreign access to U.S. capital markets, the SEC
should accept the IASC's new set of core accounting standards as a substitute
for U.S. GAAP. One NYSE official has commented that foreign companies
will be "knocking down our door" if the IASC's proposal is accepted as a
substitute for U.S. GAAP.86 This solution results in benefits that are two-

79. See id. at 10-11.
80. See id. at 11-14.
8 1. The three tests under IAS are:

(1) The shareholders of the combining enterprises must achieve a continuing
mutual sharing of the risks and benefits attaching to the combined enterprise;
(2) The basis of the transaction must be principally an exchange of voting
common shares of the enterprises involved; and
(3) The whole of the net assets and operations of the combining enterprises are
combined into one entity.

EPSTEIN & MIRZA, supra note 40, at 309-10. Each test must be met for the business
combination to be considered a purchase. See id.

82. See id. at 309.
83. See id. at 309. See dso BOATSMAN ET AL., supra note 53, at 11-13.
84. See EPSTEIN & MIRZA, supra note 40, at 309-10.
85. There are also significant accounting differences between U.S. GAAP and IAS with

respect to leases, pensions and foreign currency translation. These subject areas involve
complex accounting procedures which are beyond the scope of this note. For information
regarding international accounting procedures in these areas, see David Mercado, Evolving
Accounting Standards in the International Markets, in INTERNATIONAL SECURITIES MARKETS
1996, at 343 (PLI Corp. L. & Practice Handbook Series No. B4-7166, 1996). See generally
EPSTEIN & MIRZA, supra note 40.

86. Cochrane, supra note 30, at S65. Mr. Cochrane has been an avid supporter of the
IASC and its principles. On separate occasions, Mr. Cochrane has stated his belief that the
NYSE would "blow London off the map" if the SEC were to relax its disclosure requirements
for foreign companies. Berton, supra note 24, at AI5.

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IND. INT'L & COMP. L. REV.

fold: (1) It gives the foreign companies access to the capital they desperately
want, and (2) it helps insure that the United States will remain the world's
dominant capital market place.

A. Recent Developments

Recent developments suggest that both the SEC and the FASB are
willing to take a more conciliatory stance towards IAS. As noted earlier, in
October of 1996, Congress passed the Capital Markets Efficiency Act. In
this Act, Congress ordered the SEC to begin developing alternatives to U.S.
GAAP for foreign companies.' The Capital Markets Efficiency Act is a
sign that Congress understands the importance of giving foreign companies
easier access to our capital markets. Under the Act, the SEC is to formulate
a set of suitable international accounting standards as soon as would be
"practicable.""8 The IASC's proposal would seem an obvious and
convenient way of satisfying the congressional demand. The SEC has
already pledged its support for the IASC in a press release issued in the
spring of 1996, stating:

The Commission is pleased that the IASC has undertaken a plan
to accelerate its development efforts with a view toward
completion of the requisite core set of standards by March 1998.
The Commission supports the IASC's objective to develop, as
expeditiously as possible, accounting standards that could be
used for preparing financial statements in cross-border
offerings. 89

The SEC has also taken the time to set out the criteria the new
standards must meet in order to be considered a substitute for U.S. GAAP.
The standards must:

[1] include a core set of accounting pronouncements that
constitutes a comprehensive, generally accepted basis of
accounting;
[2] .. .be of high quality[,] . . . result in comparability and

87. Capital Markets Efficiency Act of 1996, Pub. L. No. 104-290, § 509 (4), 110 Stat.
3416, 3449.

88. Id.
89. Paul Pacter, Evolving Accounting Standards in the International Markets: The

Perspective of the International Accounting Standards Committee, in INTERNATIONAL
SECuRmES MARKETs 1996, at 430 (PLI Corp. L. & Practice Handbook Series No. B4-7166,
1996).

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INTERNATIONAL ACCOUNTING STANDARDS

transparency, and provide for full disclosure;
[3] . . . be rigorously interpreted and applied. 90

Although it is uncertain whether the IASC's standards will meet these
criteria, the SEC's efforts at least indicate that it is willing to listen to new
proposals and ideas.9'

The FASB has also been receptive to international accounting
standards. Recently, Ed Jenkins replaced Dennis Beresford as FASB
chairman. 2  This change in leadership has been positively viewed by
proponents of IAS.93 Mr. Beresford was seen by some as a barrier to IAS,
intent on preserving U.S. GAAP as the world's dominant set of accounting
standards.9" By contrast, Jenkins is seen as more flexible and open to IAS. 95

With Jenkins' leadership, the growing trend toward IAS can only be
expected to continue.

Even before Mr. Beresford's exit, the FASB took steps to
accommodate foreign issuers. In 1992, the FASB announced that it would
take a more active and supportive role in the international accounting
standard-setting process. 9 The FASB proclaimed that it would intensify
consideration of IAS in domestic projects and collaborate with the IASC on
projects of mutual interest. 7  The FASB also announced that it would
consider adopting portions of IAS, or other foreign standards, that are judged
superior to U.S. GAAP.98

More recently, in February 1997 the FASB changed the U.S. GAAP

90. See Michael H. Sutton, Developing International Accounting Standards, in
INTERNATIONAL SECURITIES MARKETS 1996, at 328 (PLI Corp. L. & Practice Handbook
Series No. B4-7166, 1996). However, SEC chairman Arthur Levitt has warned that the SEC-
acceptance of the IASC's new standards "should not be seen as a 'foregone conclusion'." SEC
Chief Cautions IASC on New Core Rules, ACCT., June 1, 1997, available in 1997 WL
12699341. Levitt has warned that efforts to develop a comprehensive set of global accounting
standards will fail if it becomes "merely a search for the lowest common denominator, or an
excuse to weaken effective national standards." Id.

91. The SEC has already made several limited concessions to foreign companies. For
a discussion of these concessions, including rule 144A, and form 20F, see Ruder, supra note
27, at 1, 6-9.

92. See James R. Peterson, Walking the Tightrope, ACCT., July 1, 1997, available in
1997 WL 12699375.

93. See id.
94. See id.
95. See id.
96. See MOST, supra note 7, at 85.
97. See id.
98. See id. However, it is also important to note that the FASB affirmed its commitment

to persuading the IASC and foreign countries to adopt U.S. GAAP in areas where U.S.
standards are deemed superior. See id. Considering that the FASB set U.S. standards in the
first place, one must wonder in how many instances the FASB will be willing to admit that
U.S. GAAP is inferior to IASC or foreign accounting standards.

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IND. INT'L & COMP. L. REv.

method of accounting for a significant financial statement item, earnings-per-
share (EPS). 99 Previously, the U.S. GAAP method of calculating EPS
differed significantly from that of other countries and IAS.Ic The new
accounting method for EPS brings the United States more in line with the
rest of the world.'' The substantive content of the accounting change is
unimportant. What is important is that this change in accounting standards
demonstrates a new attitude on the part of the FASB to work with the
international community to resolve accounting differences. Whether the
FASB will be willing to alter any other of its standards to match the rest of
the world remains to be seen. However, this is at least an indication that the
FASB understands the international implications of its standards. This is one
instance where the FASB has made good on its pledge to resolve weaknesses
within the U.S. GAAP framework. In issuing the new EPS pronouncement,
one FASB board member commented that in this case, "[tihe IASC standard
was superior [to U.S. GAAP], so we followed their lead." 1'

All of these recent developments seem to indicate that the movement
towards U.S. acceptance of international accounting standards is
strengthening. Through the Capital Market Efficiency Act, Congress has
recognized the importance of making accounting allowances for foreign
companies. The SEC has pledged its support for IAS and even set out the
criteria the new standards must meet in order to be considered a substitute
for U.S. GAAP. The FASB has begun to recognize that there are flaws in
U.S. GAAP and has increased its efforts to reconcile accounting
discrepancies. The SEC should now take the next logical step and accept the
IASC's new set of international accounting standards as a substitute for U.S.
GAAP.

B. Illusion of Comparability

One argument that has been advanced in favor of relaxing SEC
disclosure requirements is that forced reconciliation of foreign financial
statements to U.S. GAAP may convey to investors "an illusion of
comparability that does not exist." 0 3 Although U.S. GAAP is the most
stringent of the world's accounting standards, there are still many gray areas
where estimates must be made. For example, to avoid large fluctuations in

99. See Glenn Cheney, FASB and IASC Harmonize with New Standards on EPS, AcCr.
TODAY, Apr. 7, 1997, available in 1997 WL 9510261.

100. See id.
101. See id.
102. See id. For more information on the new EPS calculation, see Michael G. Stevens,

Earnings Per Share Made Easier, Relatively Speaking, PRAC. ACer., May 19, 1997, available
in 1997 WL 8955018.

103. Cochrane, supra note 30, at S66. See also Demmo, supra note 2, at 714-15.

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income levels, managers sometimes use permissible "creative" accounting
techniques to lower net income in exceptionally good years and to raise net
income in poor years. The net income of the company over time then
appears to be a nice, even upward slope, instead of a jagged up-and-down
line.1°4 The point is that there is considerable room to maneuver, even
within the confines of U.S. GAAP.1°5 The financial statements of two U.S.
companies may not be comparable without some close scrutiny and analysis
of accounting estimates. °6

The problem of estimation is exaggerated even further when dealing
with foreign companies. It has been noted that a mechanical reconciliation
to U.S. GAAP may lead investors to believe that financial statements of a
U.S. and a foreign company are comparable simply because both companies
use U.S. GAAP.' In fact, to understand the true financial picture of a
company, an investor must consider the legal and regulatory environment of
the company's home country in addition to the accounting procedures used
in preparing the financial statements. 0 In this way, forced reconciliation to
U.S. GAAP may actually mislead investors in foreign stock. If U.S. GAAP
reconciliation is misleading investors, the SEC's stringent reporting
requirements serve no purpose.

C. The Value of U.S. GAAP to Investors is Questionable

The amount of value investors place on U.S. GAAP is questionable.
If investors truly valued the additional information contained within U.S.
GAAP, they should be willing to pay a premium for stocks issued in
conformity with U.S. GAAP. Suppose the existence of a share of stock from
two identical companies. Further assume that one company uses IAS and the
other uses U.S. GAAP. If investors place more value on U.S. GAAP than
IAS, we would expect that the share of stock from the company using U.S.
GAAP would sell at a higher price than the company using IAS. However,
there is no evidence that the additional disclosures required under U.S.
GAAP have any effect on the value (i.e., the price) of the stock."° If the
stock price does not increase with the additional disclosures required under
U.S. GAAP, perhaps this suggests that investors do not value the additional

104. See Randall Smith et al., How General Electric Damps Fluctuations in Its Annual
Earning, WALLST. J., Nov. 3, 1994, at Al.

105. See Cochrane, supra note 30, at S65-66.
106. See id.
107. See id. at S66. Demmo, supra note 2, at 714-715.
108. See Cochrane, supra note 30, at S66.
109. See id. at S62. See also Edward F. Greene et al., Hegemony or Deference: U.S.

Disclosure Requirements in the International Capital Markets, 50 Bus. LAw. 413, 432 (1995).

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IND. INT'L & COMP. L. REv.

disclosures." 0 In fact, U.S. investment analysts who follow foreign
companies rely mostly on the financial statements prepared under the
company's home country accounting.' If the investors and analysts do not
value the additional disclosures, then it seems useless to require companies
to reconcile with U.S. GAAP. Because investors do not value U.S. GAAP
disclosures, the SEC should allow foreign companies to prepare financial
statements using IAS.

U.S. investors have also demonstrated apathy towards U.S. GAAP by
purchasing foreign stocks through other exchanges. In fact, Americans are
turning in record numbers to foreign markets for investment opportunities. 2

During the mid-1980s, American investors purchased approximately two
billion dollars of foreign securities a year." 3 By contrast, American
investors now purchase in excess of two billion dollars of foreign stocks a
week." 4 This suggests that Americans are willing to forgo the extra
"protections" of U.S. GAAP to gain access to stocks of foreign
companies." 5 Thus, the SEC's attempts to protect U.S. investors through the
disclosures of U.S. GAAP can best be described as a "victory of theory over
practice."" 6 In this regard, the SEC's stringent reporting requirements
actually harm U.S. investors. In order to gain access to foreign stocks, U.S.
investors are forced into foreign markets and denied the lower transaction
costs and greater liquidity of the U.S. markets.' Philip R. Lochner Jr.,
former commissioner of the SEC, has admitted that "many SEC rules are
arbitrary and were written in an era when U.S. securities markets could exist
in splendid isolation. . . . The fact is that U.S. citizens buy foreign stocks
anyway, they just do so . . .at greater cost than if those foreign securities
could be bought here.""' If Americans are purchasing foreign stocks
through overseas markets anyway, why not simply make accommodations
to allow them to purchase these same stocks through U.S. markets? If the
SEC fails to recognize IAS as a substitute for U.S. GAAP, American capital
will continue to flow into foreign capital markets. Meanwhile, U.S. stock
exchanges will be prevented from competing in a service where their
competitive advantage is undisputed." 9

110. See Greene et al., supra note 109, at 432.
111. See Cochrane, supra note 30, at S62.
112. See Schneider, supra note 33, at 327-29.
113. See Cohen, supra note 20, at 491.
114. See id.
115. William C. Freund, That Trade Obstacle, WALL ST. J., Aug. 27, 1993, at A6,

available in 1993 WL-WSJ681776.
116. Id.
117. See id. See also Demmo, supra note 2, at 713.
118. Freund, supra note 115, at A6 (quoting former SEC Commissioner Philip R.

Lochner, Jr.).
119. See id.

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D. Other Alternatives

The SEC may choose from several other alternatives to solve the cross-
border offering dilemma. Aside from the adoption of the IASC's proposals,
stock exchange officials have suggested another, more limited alternative
which would allow foreign companies increased access to U.S. capital
markets. The first of these options is to exempt special "world class"
companies.120 These companies would need to meet certain guidelines in
order to be exempt from the requirement that they reconcile their financial
statements to U.S. GAAP. These companies would still be required to
provide an explanation of the differences between U.S. GAAP and the
accounting standards used in their financial statements.121 For example, the
NYSE has proposed that companies with revenues in excess of five billion
dollars be exempt from the U.S. GAAP reconciliation requirement.' m A
second alternative would be to exempt all companies with weekly trading
volumes of at least one million dollars or 200,000 shares. 23

In order to protect investors, companies that qualify for world-class
status would either be listed on a separate table apart from other companies
or marked with an asterisk."2 This separate listing would alert investors that
world-class companies use different accounting standards."2 The world-class
proposal would at least give some of the larger, more prestigious foreign
companies easier access to U.S. capital markets.

However, the world-class proposal is too limited in scope to effectively
allow foreign companies to access U.S. capital markets. Currently, only
about 200 foreign companies would qualify for world-class status.' 1 Even
if the world-class proposal is accepted, there are still in excess of 1800
foreign companies who will continue to be denied access to U.S. capital
markets. The world-class company proposal does little to allow smaller
foreign companies increased access to U.S. capital markets. It would seem
that smaller companies would have at least as great a need for U.S. capital
in order to increase their prospects for growth.

Another alternative available to the SEC is to simply maintain the status
quo and continue to force foreign issuers to reconcile their financial
statements to U.S. GAAP. This viewpoint is founded, at least partially, on
the notion that the allure of the U.S. capital markets is so great that foreign

120. Cochrane, supra note 30, at S63.
121. See id.
122. See id.
123. See id.
124. See Freund, supra note 115, at A6.
125. See id.
126. See Sherbet, supra note 3, at 888.

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IND. INT'L & COMP. L. REV.

companies will eventually give in and comply with U.S. securities
regulations. 27 This perspective seems unnecessarily rigid, as well as
shortsighted.'28 It may appear that the SEC is simply playing the role of a
schoolyard bully. 9 Essentially, the SEC is saying to the rest of the world,
if you want to play in our capital markets, you will play by our rules. 30 In
the future, the SEC may need the cooperation of foreign countries. 3 ' If the
SEC maintains its current hard-line stance toward foreign issuers, it may
come back to haunt the SEC later. 32 Although the U.S. capital markets are
not currently in jeopardy of losing their dominant status, the SEC should not
wait for that day to come before it acts.133 Instead, the SEC should take steps
to solidify the United States' position as the world's leader. ' 34

At least one commentator has proposed that the SEC consider
arranging "mutual recognition" agreements with certain foreign countries. 35

Under such an agreement, the United States would agree to recognize the
accounting standards of a foreign country for use in cross-border security
offerings. 136 In return, that foreign country would agree to recognize U.S.
GAAP as appropriate for use on its stock exchanges. 37

In order to qualify for mutual recognition, a foreign country would
have to meet four criteria.138 First, the country's home markets must be
highly regulated in order to protect U.S. investors from potential securities
fraud. 39 Second, the accounting standards of the foreign country must be
similar to those of U.S. GAAP. 1' Third, the foreign country must have an
established capital market, complete with sophisticated analysts to provide
information to investors.1 41 Finally, the candidate country would have to be
historically, politically, geographically, culturally, or economically linked to
the United States in some substantial way. 42

The concept of "mutual recognition" is flawed in several ways.

127. See generally Richard C. Breeden, Foreign Companies and U.S. Securities Markets
in a Time of Economic Transformation, 17 FORDHAM INT'L L.J. S77 (1994).

128. See Cohen, supra note 20, at 538.
129. See id.
130. See id.
131. See id.
132. See id.
133. See id. at 538-39.
134. See id. at 538.
135. Id. at 533-34.
136. See id. at 526.
137. See id. The United States entered into one such agreement with Canada in 1991.

See id. at 527.
138. See id. at 534-36.
139. See id. at 534.
140. See id.
141. See id.
142. See id.

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Because U.S. GAAP is already recognized as appropriate on most major
stock exchanges, this alternative would seem to hold little benefit for U.S.
companies. One must also question how many foreign countries will meet
the four above-stated criteria. These criteria seem to allow for mutual
recognition only in situations where the country's accounting and regulatory
environments are comparable to those of the United States. In this regard,
mutual recognition does not appear to be much of an improvement over
forced reconciliation to U.S. GAAP. Finally, mutual recognition forces
investors to become familiar with the accounting rules of each country
approved for mutual recognition. By contrast, if the SEC simply recognized
JAS as an appropriate substitute for U.S. GAAP, investors would only have
to become familiar with one new set of accounting standards.

E. Worldwide Harmonization of Accounting Standards

In a perfect world all foreign and domestic companies would prepare
their financial statements using the same accounting principles. If all of the
companies in the world used the same accounting standards, investors would
only have to become familiar with one set of accounting rules. The
acceptance of IAS as a substitute for U.S. GAAP would be a large step
toward worldwide "harmonization" of accounting standards. 43 Until
recently, worldwide harmonization of accounting principles was thought to
be an "ideal" not realistically attainable.'"4 Today, however, the movement
towards harmonization of accounting standards is growing.145 In the past,
there were many political and social limitations that prohibited the companies
of the world from using the same accounting standards.' Although these
differences will never be fully eliminated, the main deterrent to one
comprehensive set of accounting standards remains the SEC's insistence that
foreign issuers prepare their financial statements in accordance with U.S.
GAAP. 147 As noted earlier, the current version of IAS is already acceptable
on a number of foreign stock exchanges, including London and Hong

143. EPSTEIN & MIRZA, supra note 40, at 13. There are three basic concepts of
harmonization. In absolute harmonization, "one set of accounting standards applies,
irrespective of the circumstances leading to the production of the accounting information."
BOATSMAN Er AL., supra note 53, at 646. In circumstantial harmonization, "the same set of
accounting standards applies when the underlying conditions... [of respective countries] are
similar." Id. In purposive harmonization, the same set of accounting standards is applied in
situations where the purposes of the accounting information are similar. See id. The IASC
and the FASB have primarily been working towards circumstantial harmonization. See id.

144. Greene et al., supra note 109, at 436.
145. See MUELLER ET AL., supra note 18, at 38.
146. See EPSTEIN & MIRZA, supra note 40, at 15.
147. See Cohen, supra note 20, at 522.

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IND. INT'L & COMP. L. REv.

Kong. 14s The question remains, if IAS is acceptable to the rest of the world,
why is it not acceptable in the United States?

Opponents of IAS argue that allowing foreign companies to use IAS in
cross-border listings in the United States will place U.S. companies at a
competitive disadvantage.' 49 These opponents rightly point out that domestic
companies would spend additional time and resources in complying with the
more detailed and complicated disclosures of U.S. GAAP. 5 However, this
argument against IAS may actually be an argument in favor of
harmonization. If the SEC allows foreign companies to use IAS as a
substitute for U.S. GAAP, U.S. companies may indeed have a legitimate
complaint that they would bear unnecessary, extra costs complying with U.S.
GAAP. The solution to this problem is to simply allow domestic companies
to also use IAS in preparation of their financial statements. After all, if the
SEC deems that IAS is not misleading to investors and is appropriate for
foreign companies, why would it not be appropriate for domestic companies?
If U.S. and foreign companies are both using IAS, the world would be one
step closer to a single set of comprehensive accounting standards.

There are several reasons why the world's accounting bodies should
pursue harmonization of accounting standards as a goal. As all companies
would use the same set of standards, harmonization would increase
comparability of financial statements for domestic and foreign companies.' 5'
This would help investors make intelligent investment decisions.

If only one set of accounting standards is used, investors will become
"intimately familiar" with these standards, which will help them more easily
understand financial statements.5 2 Harmonization would also result in cost
savings for U.S. companies. Although U.S. companies use U.S. GAAP in
preparing their financial statements, these U.S. companies often own foreign
subsidiaries. The financial statements of these foreign subsidiaries must be

148. See id. at 510-11.
149. See Breeden, supra note 127, at S87-88. Mr. Breeden's attitude typifies hard-line

"pro U.S." feelings. While admitting that U.S. GAAP has serious flaws and that the world
would benefit from greater harmonization, Breeden, a former SEC commissioner, still refuses
to support relaxing standards for foreign issuers. See id. at S87-88, S95-96. Although
admitting to the benefits of harmonization, Breeden colorfully states his belief that the day the
world's accountants will agree on one set of principles will be just after "all the world's
lawyers get together and agree on a single tax law, a single antitrust law, and a uniform legal
code for other issues." Id. at S96. Shortly after leaving office at the SEC, Mr. Breeden
commented that "[h]ell will freeze over before the U.S. changes its [accounting disclosure]
standards." Cohen, supra note 20, at 523. This type of attitude on the part of U.S. officials
is offensive to foreign regulators and has impeded harmonization efforts. See id. at 522.
Fortunately, current SEC chairman Arthur Levitt is seen as more flexible and open to
international accounting standards. See id. at 523.

150. See Breeden, supra note 127, at 588.
151. See ALHASHIM & ARPAN, supra note 60, at 48-49.
152. See Mercado, supra note 85, at 348.

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INTERNATIONAL ACCOUNTING STANDARDS

reconciled to U.S. GAAP for presentation in the domestic companies'
consolidated financial statements. 5 3 These costs could be avoided if all
companies simply used IAS. "4

Harmonization would also facilitate economic activity. Harmonization
makes firms easier to value and thus facilitates business combinations. 15 5 It
has also been noted that harmonization eliminates unjustified financial
statement differences, which in turn leads to more efficient markets. 56 Since
a comprehensive set of accounting standards would already exist,
harmonization also reduces the costs to developing countries of generating
their own new set of accounting standards.5 7

The prospect of harmonization raises an interesting question. If U.S.
companies begin using IAS, and the IASC becomes the world's accounting
authority, does that then render the FASB obsolete? 58 In this regard, the
FASB has at least some interest in ensuring that IAS does not become a
complete substitute for U.S. GAAP.

One factor weighing against harmonization is that international
accounting bodies have no authority to enforce their standards. For
example, in the United States, the FASB draws its power from the fact that
the SEC will only accept the FASB-created U.S. GAAP standards.
Standard-setting bodies, such as the FASB and the IASC, have no
independent power to enforce standards."' In this regard, a major
regulatory organization, such as the SEC, may hold a "veto power" over any
international accounting body. If the SEC were to disagree with the IASC
standards, it could simply decide that IAS are no longer a suitable means for
preparing accounting standards. Thus, efforts to harmonize accounting
principles must be made by way of political agreement between nations. 1°

In the past, harmonization was thought to be an unattainable goal.
However, with the passage of the Capital Markets Efficiency Act and the
new conciliatory stance of the SEC, the world is moving towards the goal of
accounting standard harmonization. The acceptance of the IASC's new set
of core standards as a substitute for U.S. GAAP would be a large step
toward achieving that goal.

153. See, e.g., ALHASHIM & ARPAN, supra note 60, at 49; EPSTEIN & MIRZA, supra note
40, at 15.

154. Other arguments in favor of harmonization include improving the allocation of
resources in global financial markets, reducing the cost of capital for all enterprises, and
facilitating social control over the global corporation. See MOST, supra note 7, at 79. See
also BOATSMAN ET AL., supra note 53, at 646.

155. See BOATSMAN ET AL., supra note 53, at 647.
156. See id.
157. See id. at 647. See also EPSTEIN & MIRZA, supra note 40, at 18.
158. See Cheney, supra note 99, at 3.
159. See id.
160. See MUELLER ET AL., supra note 18, at 47.

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V. CONCLUSION

The United States possesses the world's most dominant capital markets.
If the SEC maintains its U.S. GAAP reconciliation requirement, foreign
companies will continue to avoid U.S. markets. Consequently, Americans
will be forced to seek out overseas markets to obtain foreign investment
opportunities. As American capital flows into foreign markets, U.S. capital
markets are weakened. The SEC should not wait until U.S. markets are in
jeopardy to act, but instead, should take steps now to protect U.S. capital
markets.

The IASC is developing a new set of international accounting standards
that will be appropriate for all cross-border listings. When the IASC
completes the new set of standards in March of 1998, the SEC should accept
IAS as a substitute for U.S. GAAP. SEC acceptance of IAS is the best way
to ensure that U.S. capital markets remain the world's leaders. IAS is
already recognized on several foreign stock exchanges. It is time for the
SEC and the United States to follow suit. IAS will give foreign companies
greater access to U.S. capital markets. In turn, U.S. investors will have
opportunities to invest in foreign companies without leaving U.S. markets.
Perhaps, most importantly, acceptance of IAS by the SEC would be a major
step toward the long-term goal of global harmonization of accounting
standards.

Scott B. Novak*

* J.D. candidate, 1999, Indiana University School of Law - Indianapolis; B.S.,

Accounting, 1996, Indiana University - Bloomington. The author would like to thank his
family for their unending love and support and for their immeasurable contribution to his
success.

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