Latin American Capital Markets

ACCOUNTING AND AUDITING STANDARDS 221In March 2002, the European Parliament ruled that all companies listed onthe European exchanges, approximately 7,000, must present their financial statementsusing IAS no later than December 31,2005. Currently, the U.S. SEC—which has a crucialinterest in the process of disclosure and in the integrity of the accounting system—doesnot accept the presentation of financial statements using IAS and requiresconversion to U.S. GAAR 7 Approximately 50 foreign issuers listed on the U.S. exchangesmust present such reconciliation.The new requirement of the European Parliamentwill affect approximately 600 European companies listed on the U.S. exchanges,which will have to file according to U.S. GAAP as required by the SEC. It isclear that the new ruling will put pressure on both standard setters to converge theirsystems as soon as possible.Differences between U.S. and International Accounting StandardsResolution of the differences between the two sets of standards is complicated byphilosophical, cultural, and political factors, such as the debate involving the fact thatFASB uses a methodology based on rules, while IASB uses a methodology based onprinciples. 8 Some proponents argue about the superiority of U.S. GAAP as a standarddue to the fact that IAS allows much more room for interpretation. However, opponentspoint out that the voluminous and detailed FASB guides were not enough toprevent the Enron disaster The debate on whether Enron violated the 3 percentguideline of EITF 90-15, which defines control of special-purpose entities (SPEs) andthe consolidation requirement, is regarded as meaningless. 9 In fact, under IAS, controlis not defined quantitatively, but rather looks at the ability to exercise operating control,execution, and decisionmaking over the SPE.7 In February 2000, the U.S. SEC issued a Concept Release (the first stage in a proposed change in its Rules), whichdiscussed the use of IAS in U.S. capital markets.The release solicited comments regarding the quality of IAS and raisedquestions regarding what supporting infrastructure would be necessary in an environment where issuers and auditorsoften are multinational organizations, providing financial information in many countries. The release sought toidentify what important concerns would be raised by acceptance of IAS standards; it asked for comments on whetherthe Commission should modify its current requirement that all financial statements be reconciled to U.S. GAAR8 Standards based on principles would require more flexibility, but a much stronger audit function.9 The guidelines require that only up to 3 percent of the SPE be owned by an outside investor to avoid classificationof the SPE as a subsidiary, thus, forcing the entity to include the SPE's financial position and results of operationsin its financial statement The Emerging Issues Task Force (EITF) was formed in 1984 in response to the recommendationsof FASB's task force for timely financial reporting guidelines and FASB's invitation to comment on thoserecommendations.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub