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Acknowledgments
Introduction
Objective and Goals for the FASB's Participation in the International Accounting System of the Future

• Introduction

• Objective

• Two Related Goals: High-Quality International Standards and Increased Convergence Need for Both Goals

Establishment of a Quality International Accounting Standard Setter Is Key
The FASB’s Commitment
High-Quality Accounting Standards
A Quality International Accounting Standard Setter

Appendix A: Vision of the International Accounting System of the Future
Appendix B: Quality of Accounting Standards
Appendix C: Functions and Characteristics of a Quality International Accounting Standard Setter

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

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 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.

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.

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 interest 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.

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.

The objective and goals for the FASB’s participation in the international accounting system of the future are described below.

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.

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.

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 nations 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

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.

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. 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.

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. 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.

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 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.

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 the FASB’s standard-setting efforts in the United States and is carried forward with the extension of the FASB’s standard-setting role to the international environment.

High-quality financial reporting is financial reporting that provides decision-useful information for outside investors, creditors, and others who make similar decisions about allocation of resources in the economy. The FASB believes that sacrificing quality for convergence or focusing on arriving at consensus rather than the best possible solution in the circumstances does a disservice to the consumers of financial reporting—that is, financial statement users—and undermines the credibility and efficiency of global capital markets. While it is difficult to define "high quality," the FASB believes that there are a number of attributes of high-quality accounting standards that can be identified. Those attributes are summarized here and discussed in more detail in Appendix B.

A reasonably complete set of unbiased accounting standards that require relevant, reliable information that is decision-useful for outside investors, creditors, and others who make similar decisions would constitute a high-quality set of accounting standards. Each of those accounting standards should:

Be consistent with the guidance provided by an underlying conceptual framework.

Avoid or minimize alternative accounting procedures, explicit or implicit, because comparability and consistency enhance the usefulness of information.

Be unambiguous and comprehensible so that the standard is understandable by preparers and auditors who must apply the standard, by authorities who must enforce the standard, and by users who must deal with the information produced by the standard.

Be capable of rigorous interpretation and application so that similar events and transactions are accounted for similarly across time periods and among companies.

Overall, financial reporting under those standards should result in transparent information. Transparent information is sufficient in its content and readily comprehensible so as to provide a meaningful basis for economic decision making by financial statement users. Transparent information does not obscure information relevant to economic decision making. In that context, a set of high-quality accounting standards should result in accounting information that is:

Relevant—Relevant information is capable of making a difference in a decision by helping users to form judgments about the outcomes of past, present, and future events or to confirm or correct prior expectations.

Reliable—Reliable information faithfully represents what it purports to represent, and that quality of representational faithfulness is verifiable using independent measures.

Neutral—Neutral information is not biased toward a predetermined result.

Comparable—Comparable information can be meaningfully compared with similar information about other enterprises. Information is comparable if similar transactions and events are accounted for similarly, and different transactions and events are accounted for differently.

Consistent—Consistent information can be meaningfully compared with similar information about the same enterprise for some other period or some other point in time.

Establishing a quality international accounting standard setter is an indispensable part of the means by which the FASB’s goal of high-quality accounting standards and increased international convergence will be realized. Although a great deal of progress toward increasing international comparability and the quality of accounting standards can be made through the independent cooperative efforts of standard setters, for the international accounting system of the future to be successful and efficient, a quality international standard setter will be needed. Establishment of such an organization may occur in any number of ways. For example, a structurally changed International Accounting Standards Committee (IASC) might succeed; a successor international organization might emerge and build on what the IASC has done, perhaps based on the G4+1; or the FASB might be modified to become more acceptable internationally.

Because the world is still in transition to a fully international accounting system, there is a unique opportunity to influence the establishment of an international accounting standard-setting organization. As such, it is important to have some guidelines for moving toward that goal. The FASB believes that there are some functions and characteristics that are essential to any future international accounting standard setter if it is to attain the goal of developing high-quality international accounting standards. The FASB has identified a set of eight essential functions that should be embodied by a quality international accounting standard setter—leadership, innovation, relevance, responsiveness, objectivity, acceptability and credibility, understandability, and accountability. (Appendix C describes those functions in more detail.) It is important to note that the ideal standard setter likely will not exhibit all of those functions equally and at the same time. The challenge is in finding an appropriate balance within a structure and process that provides the opportunity for each function to be reasonably present. That is, the structure and process must be conducive to fostering an environment in which each of those interrelated functions is adequately exhibited at any given point in time.

Those functions provide the context for the minimum characteristics of an international standard-setting structure and process that must exist in order to achieve those functions. The characteristics the FASB has identified are (1) an independent decision-making body, (2) adequate due process, (3) adequate staff, (4) independent fundraising, and (5) independent oversight. (Appendix C describes those characteristics in more detail.) There are a number of possible ways to incorporate those characteristics within an organization. The FASB believes that however the international accounting standard setter is organized, its structure should facilitate the eight essential functions and incorporate the five characteristics of structure and process to be capable of success in developing high-quality international accounting standards.

This vision was developed as a statement of aspiration to assist the FASB in developing strategies for its participation in international accounting standard setting. For that reason, only the FASB's role as a national standard setter has been included; other national standard-setting authorities may define their roles differently. The vision contemplates the establishment of the following types of organizations that would participate in the international accounting system of the future:

International Standard Setter (ISS): The decision-making body that develops and promulgates international accounting standards. As an international organization, the ISS is independent of national standard setters of the major developed countries and other national standard setters, although national standard setters participate in the ISS process. The ISS embodies the functions and characteristics described in Appendix C.

International Interpretations Committee (IIC): An organization designed to address issues arising from application of international accounting standards. To achieve consistent interpretation and implementation, the IIC responds to implementation issues in circumstances in which, for example, the intent of a standard is unclear; assists those who apply and ensure application of the standards in understanding the language of the standards; and, when a large number of questions arise on the same issue, supplements the standards with additional guidance. This function permits questions and responses to be monitored and common problem areas to be detected and dealt with as early as possible.

International Professional Group (IPG): An international organization of accounting professionals comprising national professional organizations. The IPG is primarily concerned with facilitating the assurance function for the application of international standards by helping to ensure compliance with the standards, adequate dissemination of the standards to the national level, and education of assurers about the appropriate application of the accounting standards as they are set.

 

 

The FASB envisions the following possible scenario:

A set of standards issued by the International Standard Setter (ISS) has been recognized and endorsed by each national standard setter, national regulatory body, or other relevant national authority for cross-border capital-raising purposes. They have agreed that the objective of financial reporting based on international accounting standards is to produce internationally comparable general purpose financial statements that provide information useful to capital providers’ (including investors’ and creditors’) decision making in public capital markets. Accepting ISS-based financial statements in individual national markets contributes to the efficiency of market transactions through increased international comparability. Those financial statements are a primary source of information to capital providers who may have access only to publicly available information. The ultimate objective of the international accounting system is simultaneously optimizing capital market efficiency and ensuring investor protection.

In order to ensure realization of the benefits of international comparability, systems assuring enforcement of ISS standards are established in each market by relevant national authorities. Those authorities have agreed to a set of guidelines that can be used as a benchmark for enforcement of ISS standards in national markets. It is expected that the guidelines will evolve over time to deal with unforeseen issues. It is also expected that the national authorities’ shared commitment to the system's objectives will help to ensure that each country behaves within the guidelines.

The role and the level of autonomy of the national authorities are unchanged from the present. National authorities have enforcement responsibility within their respective markets, although the organization designed to fulfill that role may differ from country to country. Thus, decisions about the use of ISS standards in domestic markets are left to be made at the national level.

For example, each national authority either accepts or requires that cross-border filers use ISS standards in their individual national markets. Some also permit domestic filers to use ISS standards. Those that do may or may not require reconciliation of financial statements prepared under ISS standards to domestic generally accepted accounting principles; however, national authorities and the ISS are working toward the elimination of reconciliations in those areas covered by both domestic and international standards. The goal is that such reconciliations ultimately will be eliminated. (National authorities may continue to require financial information in addition to that provided by ISS-based financial statements, for example, additional disclosures or specialized industry information.)

National authorities further require that qualified professionals audit financial statements prepared under ISS standards. The responsibility of those professionals is to provide assurance that ISS standards are appropriately applied to the preparer's financial data. Guidelines have been developed by the International Professional Group (IPG) that identify the minimum educational and professional qualifications necessary to be recognized as a qualified assurer and that define the minimum requirements for the assurance function. In the United States, those professionals are the certified public accountants (CPAs), and similar professionals carry out that responsibility in other markets. While professional auditing standards are issued at the national level, analogous to the benchmark guidelines agreed to by national authorities, national professional member organizations have mutually committed to the IPG's international guidelines. Similarly, it is expected that the shared commitments of IPG representatives will help to ensure that each participant country will act in the spirit of cooperation. The IPG is responsible for monitoring problems related to the assurance function at the national level and making recommendations for improvement.

Although the roles and responsibilities of the groups that provide enforcement and assurance are separately defined, national authorities, the ISS, and the IPG recognize the interdependence of the enforcement and assurance functions. That interdependence is part of a system of checks and balances in the international accounting environment. The enforcement function is facilitated when the enforcers have confidence that the assurance function is independent of preparers and is carried out effectively; for example, effective assurance makes it less likely that conflicts will arise that lead to enforcement action. Conversely, the existence of a separate enforcement function reinforces the assurers’ ability to enforce application of the international accounting standards and assists in ensuring a high-quality assurance function. Thus, the ISS, national authorities, and the IPG share an open and cooperative relationship, with representatives monitoring the activities of each other’s organizations and providing input on matters that have an impact on both the assurance and enforcement functions.

In order to be readily understood by and available to the largest possible number of constituents within resource constraints, ISS standards are published simultaneously in the languages whose use is most geographically widespread. The ISS has a translation department on site, and the translation department also reviews translations of ISS standards into other languages to ensure that the requirements and objectives of the standards are preserved.

Once an ISS standard is issued, responsibility for initial education about the application of a given standard is undertaken primarily at the national level. Assurers are educated about the appropriate application of ISS standards either through independent study or through seminars and conferences sponsored by their firms, state or national professional organizations, the ISS, or the IPG. The ISS publishes educational materials or sponsors conferences in conjunction with other groups (for example, the IPG) on special topics when it becomes apparent that a large number of assurers are encountering similar problems. If questions arise in which assurers need assistance in the form of interpretations, assurers and their representative organizations have access to the ISS, the staff of which responds consistently to various inquiries, or to the ISS’s International Interpretations Committee (IIC). The IPG has a standing committee that deals specifically with education issues and that provides a close liaison between the ISS and the profession on those topics.

Similarly, financial statement preparers and users become educated about ISS standards through independent study or through seminars and conferences sponsored by their firms or state or national professional organizations. That education process is further assisted by the assurers as they deal with their preparer clients.

Preparers are responsible for maintaining awareness and understanding of the requirements of ISS standards so that they are in compliance with them. Preparers have access to information about ISS standards and their application through accounting and other professional organizations and through the ISS. To assist in ensuring that similar events and transactions are accounted for similarly around the world, national market authorities require that preparers that apply ISS standards adhere rigorously to those standards and apply them comprehensively.

The role of national standard setters in the future international accounting system differs from nation to nation because the need for accounting standards generally differs from nation to nation. Because the ISS cannot proclaim itself to be the standard setter of any single country, each nation decides the extent to which it looks to the ISS to satisfy its need for accounting standards.

For example, countries that have relatively few resources to devote to standard setting, that have a relatively simple accounting infrastructure, or that have a relatively undeveloped capital market may depend entirely on the ISS for their standard-setting needs. That is the case for a number of countries today that look to the IASC. In those cases, procedures may be set up to coordinate the acceptance and dissemination of ISS standards within that country or there may be a liaison organization between national and international professional and regulatory organizations. There may or may not be a desire in each country to participate directly in the ISS process via, for example, representation on the decision-making body of the ISS.

Other countries may have resources to devote to standard setting, have a complex accounting infrastructure, or have large, highly developed capital markets. Those countries have greater demands for accounting standards and place greater reliance on them as a mechanism for regulating behavior. They also may have special demands for accounting standards or have experiences with specialized, complex, or unique transactions that may be most efficiently met by a national-level response. The desire to participate in the ISS process is likely to be greater in those countries.

Even with appropriate dissemination, adequate education, and consistent interpretation at the front end, implementation issues may arise over time as an ISS standard is applied. Sometimes diverse practices develop. Other times practices evolve that are unacceptable to national authorities. The IIC is responsible for issuing timely guidance on emerging issues. Each enforcement jurisdiction has access to the IIC, and any group or individual may suggest issues to be resolved.

Existing ISS standards cover most of the key areas of accounting that are commonly encountered by the vast majority of nations, for example, accounting for property, plant, and equipment, accounting for intangibles, recognition and measurement of financial instruments, and accounting for leases. Many national authorities permit or require that national standards be used to account for events or transactions not covered by ISS standards. However, the ISS continues to develop new standards in those areas when the topic is a pervasive issue at the international level. Topics that are unique to a single nation or that raise issues for only a small number of enterprises are dealt with by individual nations working together when possible.

At the national level, transition to the international accounting system has brought changes to the way in which the FASB conducts its standard-setting activities. At least one FASB representative serves as a voting member on the ISS decision-making body. Although that representative votes as an individual, he or she receives input from the FASB members and staff on the various issues that come before the ISS. That input is maximized by the changes to the FASB's agenda and operations at the national level. The FASB's agenda contains three different types of projects: (1) projects that are also on the agenda of the ISS, (2) projects to converge preexisting U.S. GAAP with standards issued by the ISS and other standard setters, (3) projects that meet the specific demands of U.S. markets.

Sufficient FASB staff resources are assigned to monitor and keep the FASB up-to-date with the progress of each ISS project. That staff also serves as liaison between the FASB and the ISS project team, providing the ISS with the FASB's input and rationale for potential solutions to the issues in question on the project. The FASB itself is the lead on some ISS projects. Those projects are staffed much as FASB major agenda projects were before the FASB participated fully in the standard-setting activities of the ISS. Sufficient FASB Board meeting time is set aside to discuss and deliberate issues related to ISS projects. The FASB has agreed to use its distribution channels to distribute ISS discussion documents and standards.

The FASB also has a number of convergence projects on its agenda. The objective of convergence projects is to bring existing U.S. GAAP and ISS or other national standards as close together as possible while maintaining the highest possible quality. Often the outcome of those projects results in a joint standard. In all cases, the outcome is one or more standards that are closer than they otherwise would be if the standard setters involved had developed them independently. Teams for convergence projects are staffed jointly by the standard setters involved, much the same way that the FASB's first joint standard-setting project with Canada on segment disclosures was organized.

There continue to be a number of accounting issues that are unique to the U.S. environment, that arise from existing U.S. standards on topics not covered by the ISS, or for which timely guidance is necessary that cannot be provided immediately through the ISS. Because of the FASB's ongoing commitment to international convergence and high-quality standards, it continues to work toward resolving those types of issues, and staff resources are devoted to those kinds of projects as well.

The FASB also monitors and provides input for the issues dealt with by the IIC. Standard setting in the United States, at least in the near term, continues to provide a role for the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants and the FASB’s Emerging Issues Task Force; however, the agendas of both groups must be coordinated with those of the FASB and the ISS.

¨ ¨ ¨

The interaction of the various national and international entities that share responsibility for implementation of ISS standards creates a system of checks and balances that augments the opportunity for success. International comparability is promoted through a sufficient and common understanding of the letter and spirit of the standards on behalf of those who apply them. ISS standards are applied comprehensively and appropriately to the facts and circumstances of any given entity and are applied consistently by all entities that apply them. The assurers are independent of the preparers and have no self-interest in the financial information that results. Assurers and others have access to the ISS and the IIC to resolve pervasive issues.

National authorities ensure that preparers are applying ISS standards, that assurers are doing their job adequately, and that the resulting application of ISS standards produces reliable, high-quality financial information in conformity with the ultimate objective of investor protection. Financial statement users understand the nature, extent, and limitations of the financial information prepared under ISS standards and, thus, have confidence in the information generated as a result of their application. Comparability is also promoted through the cooperative efforts and shared objectives of national authorities.

This appendix describes the attributes of high-quality accounting standards that contribute to high-quality financial reporting. The discussion is based on the premise that high-quality financial reporting is financial reporting that provides decision-useful information for outside investors, creditors, and others who make similar decisions about allocation of resources in the economy.

A reasonably complete set of unbiased accounting standards that require relevant, reliable information that is decision useful for outside investors, creditors, and others who make similar decisions would constitute a high-quality set of accounting standards. Each of those accounting standards should:

a. Be consistent with the guidance provided by an underlying conceptual framework.

b. Avoid or minimize alternative accounting procedures, explicit or implicit, because comparability and consistency enhance the usefulness of information.

c. Be unambiguous and comprehensible so that the standard is understandable by preparers and auditors who must apply the standard, by authorities who must enforce the standard, and by users who must deal with the information produced by the standard.

Overall, financial reporting under those standards should result in transparent information. Transparent information is sufficient in its content and readily comprehensible so as to provide a meaningful basis for economic decision making by financial statement users. Transparent information does not obscure information relevant to economic decision making.

This appendix begins with a discussion of the reasons for a conceptual framework (item (a) above) and addresses the objectives of financial reporting and the qualitative characteristics of accounting information that make it useful including:

Relevance. Relevant information is capable of making a difference in a decision by helping users to form judgments about the outcomes of past, present, and future events or to confirm or correct prior expectations.

Reliability. Reliable information faithfully represents what it purports to represent, coupled with verifiability by consensus of independent measures that it does have that representational quality.

Neutrality. Neutral information is not biased toward a predetermined result.

Comparability. Comparable information can be compared with similar information about other enterprises.

Consistency. Consistent information can be compared with similar information about the same enterprise for some other period or some other point in time.

It then discusses accounting alternatives (item (b) above) and the need for unambiguous accounting standards (item (c) above). Finally, this appendix discusses the standard-setting process and the need for a body of accounting standards to be reasonably complete.

In the United States, FASB Concepts Statements provide a framework that guides decisions about recognition, measurement, and display of economic events in financial statements. A conceptual framework should guide a standard setter in developing sound accounting standards and provide the standard setter and its constituents with an understanding of the appropriate content and inherent limitations of financial reporting. That framework provides the guidance for developing accounting standards that require decision-useful financial information that, together with information from other sources, facilitates the efficient allocation of scarce resources in the economy.

As stated earlier, high-quality accounting standards should be consistent with the guidance provided by an underlying conceptual framework. For example, in terms of the FASB’s conceptual framework, high-quality accounting standards are standards that require information that meets (a) the objectives of financial reporting and (b) the qualitative characteristics that make accounting information useful. Other standard setters obviously do not have to adopt the FASB’s conceptual framework. However, the success of their accounting standards directed to external financial reporting will necessarily be determined to a great extent by how well their standards measure up against the substance of the objectives and qualitative characteristics that are relevant to financial reporting that provides decision-useful information. Those objectives and characteristics are discussed in the FASB’s conceptual framework.

Financial reporting is not an end in itself but is intended to provide information that is useful in making business and economic decisions—for making reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities. High-quality accounting standards are essential to the efficient functioning of the economy because decisions about the allocation of resources rely heavily on credible and understandable financial information.

In the United States, objectives of financial reporting stem primarily from the information needs of external users (investors and creditors and their advisors) who lack the authority to prescribe the financial information they want from an enterprise and therefore must use the information that management communicates to them.

The objectives of financial reporting are:

To provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.

To provide information to help present and potential investors and creditors and other users assess the amounts, timing, and uncertainty of prospective net cash inflows to an enterprise and, based in part thereon, ultimately, cash flows to themselves.

To provide information about the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change its resources and claims to those resources.

The objectives of financial reporting focus on the use of accounting information in making investment, credit, and similar decisions. Thus, the quality of accounting standards must be judged based on whether their application produces information that is useful in economic decision making.

Relevance and reliability are the two primary qualities that make accounting information useful for decision making. To be relevant, information must be timely, and it must have predictive value, feedback value, or both. To be reliable, information must have representational faithfulness, and it must be verifiable and neutral. Increased relevance and increased reliability are the characteristics that make information a more desirable commodity—that is, one useful in making decisions. If either of those qualities is missing, the information will not be useful. Comparability, which includes consistency, is a secondary quality that interacts with relevance and reliability to contribute to the usefulness of information.

A high-quality accounting standard requires relevant accounting information, that is, information that is capable of making a difference in a decision by helping investors, creditors, or other users to form judgments about the outcomes of past, present, and future events or to confirm or correct prior expectations. The past often is prologue for the future. Knowledge about the outcomes of past actions generally will improve decision makers’ abilities to predict the results of similar future actions.

To be useful, information must be reliable as well as relevant. The reliability of the information required by an accounting standard rests on the faithfulness with which it represents what it purports to represent, coupled with an assurance for the users, which comes through verification, that it has that representational quality. Thus, reliability rests upon the extent to which an accounting description or measurement is verifiable and representationally faithful. Neutrality of information also interacts with those two components of reliability to affect the usefulness of the information required by an accounting standard.

Verifiability means that several measurers are likely to obtain the same measure of events and transactions given the same circumstances. Representational faithfulness, on the other hand, refers to the correspondence or agreement between the accounting numbers and the resources or events those numbers purport to represent.

A standard setter should strive to be objective in its decision making and to ensure, insofar as possible, the neutrality of information resulting from its standards. To be neutral, an accounting standard must require information that reports economic activity as faithfully as possible without coloring the image it communicates for the purpose of influencing behavior in any particular direction. In formulating standards, the primary concern is the relevance and reliability of the information required by the standard, not the effect the new rule may have on a particular interest. The requirements of an accounting standard must be free from bias toward a predetermined result. The objectives of financial reporting serve many different information users who have diverse interests, and no predetermined result is likely to suit the needs of all interests.

A primary reason for having accounting standards is to promote comparability and consistency. Information about a particular enterprise gains greatly in usefulness if it can be compared with similar information about other enterprises and with similar information about the same enterprise for some other period or some other point in time.

The purpose of comparison is to detect and explain both similarities and differences. Comparability should not be confused with sameness—sometimes more can be learned from differences than from similarities. Greater comparability of accounting information is not to be attained by making unlike things look similar any more than by making like things look different. A high-quality accounting standard requires accounting for similar transactions and circumstances similarly and accounting for different transactions and circumstances differently.

Accounting standards that specifically allow alternatives are counterproductive in meeting the goal of enhancing comparability. Nevertheless, accounting alternatives now exist in the accounting standards of all regimes. For example, the IASC-U.S. comparison project found 27 instances in which explicit alternative methods of accounting are permitted. The breakdown is as follows:

In 19 cases, only the IASC standard permits alternative approaches.

In 4 cases, only the U.S. standard permits alternative approaches.

In 4 cases, both U.S. GAAP and the IASC standard permit similar alternative approaches.

Explicit accounting alternatives create noncomparability. Financial statement users who try to adjust for noncomparability have varying degrees of success. Implicit accounting alternatives that result from accounting standards that have imprecise or ambiguous requirements or that provide inadequate guidance are even more troublesome. Financial statement users cannot even attempt to adjust for noncomparability of which they are unaware.

Accounting standards cannot help to meet the objectives of financial reporting if those standards are not understandable. Preparers need to know what is expected of them.

Auditors need to know what is required before they can decide whether financial reporting is in accordance with generally accepted accounting principles. Securities regulators need standards that are sufficiently unambiguous to facilitate enforcement. Unambiguous accounting standards increase the likelihood that preparers, auditors, and regulators reach similar conclusions about what is required.

An accounting standard should not be subject to multiple interpretations or to avoidance through misunderstanding or misinterpretation. The amount of specificity that is needed in order to have an unambiguous accounting standard requires judgment. A so-called "cookbook" full of "bright line" rules may in some instances be counterproductive. But silence about how to perform important procedures that are required by a standard or a one-sentence, vague description of a necessary procedure followed by "or other method that achieves a more appropriate result in the circumstances" is obviously insufficient. Imprecise language of this type inevitably produces implicit accounting alternatives and therefore noncomparability of information that users will be unaware of.

Users need to be confident that application of an accounting standard is comparable between enterprises and consistent by each enterprise. Clarity of language is crucial for internationally accepted standards because an accounting standard that is applied by enterprises in different countries must be sufficiently clear and unambiguous to overcome cultural differences between, for example, preparers in France and Australia, or auditors in Japan and the United Kingdom. An ambiguous standard will not be consistently interpreted and applied by enterprises in different countries and is unlikely to be applied consistently even within the boundaries of a single country.

The development of accounting standards based on a conceptual framework cannot be done in isolation. Accounting standards have an impact on many organizations within a standard setter’s large and diverse constituency. Accounting standards in their formative stage must be subjected to rigorous procedures that encourage all interest groups to communicate their views to the standard setter. Similarly, the deliberative process of the standard setter should be open to observation by all interests groups so that the public is informed on a timely basis about important developments pertaining to the standard setter’s project. A standard setter’s consideration of the diverse views and concerns of its constituents enhances the overall quality of a final accounting standard by improving the standard setter’s judgment about matters such as, to cite just two examples, why certain information is or is not relevant in particular circumstances and why certain information is or is not reliable if provided by a particular method or procedure.

Individual accounting standards cannot be judged in isolation because each individual standard should be part of an integrated, consistent set of standards. That set of accounting standards must be sufficiently complete to cover the full range of transactions and events that need to be included in financial reporting. If the set of accounting standards is incomplete or inconsistent, the financial information produced by it will not meet the objectives of financial reporting.

A sound underlying conceptual framework will guide a standard setter in developing high-quality accounting standards. Evidence that an accounting standard will produce decision-useful information that meets the objectives of financial reporting is provided if the information required by the standard is relevant, reliable, neutral, comparable, and consistent.

Accounting standards that permit explicit accounting alternatives create noncomparability and should be avoided. Users are ill-equipped to make adjustments for that lack of comparability. Implicit accounting alternatives that result from standards that have imprecise or ambiguous requirements or that provide inadequate guidance create noncomparability that users are not even aware of. A high-quality accounting standard requires accounting for similar transactions and circumstances similarly and accounting for different transactions and circumstances differently.

Accounting standards need to be unambiguous so that preparers, auditors, securities regulators, and users reach similar conclusions about what is required by the standards. Vague, imprecise, or cursory language inevitably produces the implicit accounting alternatives discussed above. Clarity is particularly critical for international accounting standards, which must overcome language and cultural barriers to be applied in many different countries.

Finally, a standard setter’s accounting standards taken as a whole should represent an integrated, consistent, and reasonably complete body of accounting standards. Otherwise, the financial information produced by that body of standards will not meet the objectives of financial reporting.

This appendix elaborates on the eight essential functions and five essential characteristics that the FASB has identified as necessary to a quality international accounting standard setter of the future.

Leadership. The standard setter should be able to lead in the development and improvement of standards, not just follow in the wake of other standard setters or codify the status quo. That leadership function should include working jointly with others to develop accounting standards.

Innovation. The standard setter should be at the forefront of advanced thinking and research on accounting issues. It should encourage solutions to accounting issues of worldwide importance that make the best use of the latest ideas and technology.

Relevance. The standard setter and the standards it produces should meet the identified needs in the capital markets they serve. That is, the standard setter's process and structure should be designed to be proactive in understanding and meeting capital market demands. Its product should be effective in achieving the desired objective or objectives, that is, standards should result in improvements in financial reporting.

Responsiveness. The standard setter should be able to respond to capital market developments and demands in a timely manner and to move expeditiously to deal with urgent problems.

Objectivity. The standard setter should be seen as serving the public interest, with minimal susceptibility to the self-serving objectives of private-interest groups.

Acceptability and Credibility. The quality of the standard setter should be recognized and respected by others, and its structure and process should be endorsed through a broad base of support from constituents and others.

Understandability. The standards developed by the standard setter should be broadly understood by constituents (and should provide guidance that results in reported information that is generally understood) to facilitate consistent interpretation and application.

Accountability. The standard setter should be accountable to the public interest. That is, interested parties should have the ability to be heard, to provide feedback to the decision-making body on the impact of its decisions, and to challenge the standard setter on important issues. There should be some form of oversight to provide both a mechanism and a catalyst to enact necessary changes. Further, there should be adequate checks and balances in the structure and process to prevent breakdowns in the system and to provide for appeal in the rare circumstances in which that may be necessary to serve the public interest.

The following are essential characteristics of a standard setter that are conducive to the functions described above.

An independent decision-making body primarily supports the function of objectivity in standard setting: serving the public interest rather than serving the objectives of private-interest groups. However, it also should assist in securing an ability to innovate, ensuring that standards are relevant to the needs of capital markets, and achieving acceptability and credibility of the standard setter and resulting standards. To meet those objectives, independence of the standard-setting decision-making body might be characterized in the following way:

a. There is a balanced representation of interests with decision-making authority such that no particular interest has the power to overrule that of another.

b. The foremost role and responsibility of representatives on the decision-making body is that of a standard setter serving the public interest.

c. Members of the decision-making body vote as individuals rather than as spokespersons elected to express the views of the interest groups they represent.

d. The decision-making body has full authority to set standards. That is, it is independent from other decision-making bodies, it has the power to innovate, and its decisions are not subject to the approval of another body that could veto decisions based on self-interested objectives.

e. The decision-making body should not be involved in fundraising for the standard-setting organization. That is, it should be removed from the possibility or perception that votes or membership can be bought.

The details of how those five criteria are achieved are subject to debate. For example, some might say that to meet those criteria, some or all of the members of the decision-making body would have to be full-time employees of the standard-setting body with no existing or prospective outside affiliations, reducing the possibility of pursuing self-interested objectives. However, others might say that balanced representation and the process by which members are selected can overcome the need for such complete independence or that if the representatives are national standard setters, they represent the public interest and need not sever ties to the national standard-setting organization. Individual perspectives on those kinds of details, therefore, are likely to vary, depending upon the checks and balances perceived within the standard-setting structure and process as a whole. That, however, does not preclude agreement that the decision-making body of an international standard-setting structure must, at a minimum, meet the five criteria listed above through some combination of characteristics in order to be considered a quality standard setter.

The nature and extent of due process is perhaps the most efficient device for providing the opportunity to achieve the functions of innovation, relevance, responsiveness, objectivity, acceptability and credibility, understandability, and accountability. Due process is the means by which the decision-making body interrelates with parties external to it in whose interests it serves. That is, it is a way to ensure that standards are not set in a vacuum by decision makers that are insulated from the public interest. Combining adequate due process with an independent decision-making body results in a powerful synergy and creates a system of checks and balances that lends credibility to the entire system.

The following characteristics of any due process would help to ensure that there is opportunity for the standard setter to achieve the functions of innovation, relevance, responsiveness, objectivity, acceptability and credibility, understandability, and accountability:

a. The standard setter communicates with external experts on the various topics on its agenda so that the issues are clearly understood and all viable potential alternatives are identified or developed.

b. The standard setter communicates with external parties about current issues and problems so that capital market needs are well understood and addressed in a timely manner.

c. All interested parties are provided the opportunity to express their views as individuals at various stages of the process so that the standard setter is able to discern what potential alternatives best serve the public interest.

d. Key constituent groups are identified whose representative views are sought by the standard setter prior to finalizing decisions. Those key groups are provided equal opportunity to be heard so that the standard setter is able to weigh those views equally.

e. The process permits opportunities for the standard setter to educate external parties about its activities and tentative conclusions in order to foster acceptability and understanding of its views.

f. The process provides a mechanism for feedback on how successful the standard setter is in achieving its objectives.

g. The standard setter's decisions are made in meetings that are open to the public.

There are different ways by which the above criteria can be met in a due process system. In the United States, they are met by project task forces, liaison meetings, comment letter solicitation and public hearings, field testing, the existence of the Financial Accounting Standards Advisory Council, open Board meetings and public announcement and availability of documents, as well as other aspects of due process. As with the creation of an independent decision-making body described in the previous section, there may be alternative procedures that are part of an international due process that would achieve the desired functions. For example, there may be no need for a formal advisory group if key constituents feel that they have adequate representation through other means, such as membership on the decision-making body, frequent liaison meetings, and specific solicitation of their comments.

As all independent national standard setters have found, it is necessary to have a core group of qualified individuals whose time is devoted fully to the standard-setting process and to supporting the needs of the decision-making body. The necessary size of that core group will vary depending upon the number of topics on the agenda, the nature of the decision-making process (for example, deciding issue-by-issue as at the FASB versus voting on a fairly comprehensive package of tentative conclusions as at many other standard-setting organizations), the amount of research needed, and the complexity of the topics addressed, among other things.

To exhibit leadership, innovation, and responsiveness (essential functions identified above), the size of the staff would need to be sufficient to undertake the following responsibilities:

a. Conduct research essential to full understanding of the issues involved and sufficient to identifying potential alternative solutions for resolving those issues in a timely manner.

b. Develop potential alternative solutions and make recommendations to the decision-making body.

c. Explore additional specific areas on an ad hoc basis as requested by the decision-making body.

d. Be available to interact with constituents to receive and understand their input, help them understand the positions taken, and respond to inquiries about the progress of projects and the implementation of existing standards.

e. Interact and communicate on an ongoing basis with the decision-making body to ensure that body is fully informed about the issues and on matters needing attention.

f. Administer and coordinate due process procedures, such as meetings, hearings, solicitation of comments, drafting of documents, and so forth.

Staffing of the international standard setter may be supported, at least partly, by national standard setters. The role of members of the decision-making body could include some of the items above if they also undertook some of the activities related to research and development of standards. In any case, the number of full-time staff people should be sufficient that each of those responsibilities is carried out for each standard-setting or research topic on the decision-making body’s agenda.

Separation of fundraising from recommendations and voting responsibilities helps to preserve the independence and objectivity of the decision-making body. The following characteristic would be part of a quality international standard-setting structure:

a. Fundraising activities should be undertaken by individuals or a group of individuals independent of those directly involved in standard setting (namely, members of the decision-making body and its staff).

b. Funds should be solicited from a wide variety of sources that include all interest groups.

In the United States, the FASB does not participate in the fundraising activities of the Financial Accounting Foundation (FAF).

Oversight helps to ensure that the standard setter maintains its credibility, responsiveness, objectivity, and efficiency in the formulation of accounting standards. That responsibility should fall to an independent group of individuals that has the ability to ensure, as far as possible, that changes are made as necessary, even when they may upset the status quo or vested interests.

a. The decision-making body, its activities, policies, and procedures, but not its standard-setting conclusions, should be subject to ongoing oversight and periodic evaluation by a group independent of the decision-making body itself.

b. Oversight should be broadly representative of constituent groups and the public interest to balance interests.

The Trustees of the FAF continue to provide independent oversight of the FASB in the United States.