Latin American Capital Markets

222 PIETRO MASCI AND IVAN SOTOMAYORIn testimony before the U.S. Congress in March 2002, the SEC chairman supportedstandards based on principles (Pitt 2002).This indicated that the SEC woulduse its power as regulator to insure that FASB, as the standard setter in the UnitedStates, would start using the methodology based on principles instead of the complexand detailed methodology based on rules.In some instances, elimination of the differences between U.S. GAAP and IASwould require replacing some of the existing standards with completely new standards.Both FASB and IASB are focused on issuing quality standards and not just attemptingto converge the standards. For example, both bodies allow the use of smoothing todetermine the value of pension plan assets. This technique allows smoothing out thepeaks and valleys of the securities market in recognizing the value of the investments.It was impossible to decide which was the appropriate methodology allowed underboth standards IAS 19 and FAS 87, and the replacement of both standards seems theright course of action. 10In other circumstances, the cooperation and influence of one standardsettingbody could favor the standard-setting process of the other; as was the case inthe treatment of stock options. IASB has taken the position that stock options mustbe recorded as an expense. In 1993, FASB took the same initial position while draftingFAS / 23 Accounting for Stock Based Compensation, but in its final version, the standardwas changed due to lobbying by business interests and politicians.The standardended up in a compromise, which opted for a disclosure in the footnotes of the financialstatement rather than the recognition of stock options as an expense as suggestedby FASB's initial position.IASB likewise is under pressure by political and business interests that mayundermine its capability as an independent standard-setting body. In the process ofconvergence, it is essential that the accounting standard-setting bodies, national andinternational, build in mechanisms that assure independence in the face of pressuresexercised by various interest groups. This is crucial for ensuring that the capital marketagents and operators have confidence in the pronouncements of the standardsettingbody.10 Both standards allow the use of the asset-smoothing method as an alternative means by which a defined-benefitpension plan measures its assets for funding and expense purposes. It spreads the impact of investment gains andlosses over several years rather than incurring the impact in a single year as in the case of the market asset method.The resulting smoothed asset value must be within plus or minus 20 percent of market assets.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub