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Caveat: . I am grateful to my former graduate student, Paul Pacter, for allowing me to videotape his inspiring presentation.The quotations from Dr. Pacter that appear at various points in this document have never been edited by him or modifiedfrom a transcript of a presentation that I videotaped at a conference. My videotape was transcribed by my secretary, DebbieBowling. The transcription was modified by me only when Debbie failed to understand certain terminology. I prefer tominimize changes in the transcription so that what is read remains as close as possible to what the audience listened to at theconference. None of us speak with the formalized vocabulary and grammar used in our writing. Also we cannot edit what wesaid in the same manner that we can edit what we wrote. Bob Jensen added notes in red text.

You may also want to download INTERNATIONAL ACCOUNTING STANDARD SETTING: A Vision for theFuture, 1998 Special Report of the Financial Accounting Standards Board (FASB) . At the moment one copy of theFASB's Special Report may be downloaded from http://www.rutgers.edu/Accounting/raw/fasb/

For additional copies of this Report and information on applicable prices and discount rates contact:Order Department

Financial Accounting Standards Board401 Merritt 7P.O. Box 5116Norwalk, Connecticut 06856-5116Please ask for our Product Code VFF.Trinity students may view this document at J:\courses\acct5341\fasb\intnacct.htm

Bob JensenTrinity University

International Accounting Standards CommitteeUpdate

Presenter: Paul PacterInternational Accounting Fellow

International Accounting Standards Committee

1998American Accounting Association ConferenceIn: New Orleans, Louisiana

CPE Session

Sunday, August 16, 1998

Table of Contents

Transcription Introduction

A Presentation by Paul Pacteras Videotaped by Bob Jensen

Bob Jensenat Trinity University

Page 1 of 81Bob Jensen's Transcription of a Paul Pacter Presentation

2/5/03http://www.trinity.edu/rjensen/acct5341/speakers/pacter.htm

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Overview of the IASC

l Introduction to the IASCl Structure of the Boardl New Open Meetings Policyl Consultive Group versus the Advisory Councill Steering Committeesl History of the Enforcement Power (legitimacy) of the IASCl IASs Issued in the Early Yearsl IOSCO Agreement Click here for Paul's comment on the need for even more enforcement clout)l Role of national standard setters if harmonization is achievedl Role of the IASC in Resolving Traditional Accounting Theory Disputesl SEC Support and Criteria the SEC Will Apply to IASC Standards

IASC Standards to Date

l A listing of IAS 1 through IAS 38l IOSCO Core Standardsl Important Datesl Work Planl Overview of IAS 01 Presentation of Financial Statements

(including a digression on the role of the Conceptual Framework in standardsetting)

l Overview of IAS 12 Income Taxes (includes a discussion ofIASC versus IFAC)l Overview of IAS 14 Segment Reportingl Overview of IAS 17 Leasesl Overview of IAS 19 Employee Benefitsl Overview of IAS 33 Earnings Per Sharel Overview of IAS 34 Interim Financial Reportingl

Overview of IAS 35 Discontinuing Operationsl Overview of IAS 36 Impairment of Assetsl Overview of IAS37 Provisions, Contingent Liabilities, Contingent Assets (what Paul calls the "Provisions

Standard")

Click here for the IAS 37 Examplesl Overview of IAS 38 Intangible Assets (the IASC standard that the SEC may not accept)

Current Projects at the IASC

l Current Project: Agriculturel Current Project: Events Occurring After the Balance Sheet Datel Current Project: Financial Instruments

Introduction March 1997 Discussion Paper and Public Reactions E 62 (Scope, Recognition, Measurement, Impairment, Derecognition) E 62 Hedge Accounting(including comments aboutbasis adjustment) Disclosure, Effective Date, and Transition Differences Between E 62 and SFAS 133(also discussed later on)

l Current Project: Performance Reporting (including comprehesive income, developing nationsbookkeeping, industry-specific issues, and bartering)



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l Current Project: Discounting and Use of Probabilityl Current Project: Extractive Industries

Interpretations

Major Differences: IAS-US GAAP

No Longer Differences: IAS-US GAAP

Other IAS versus FASB Issues: Conceptual Framework and Level of Detail

Strategy Working Party

Degree of Use by Nations: A Listing by Country

Stock Exchanges Allowing IAS Standards

Stock Exchanges Not Allowing IAS Standards

Significant Cross-Border Listings Table of Data

Some Nice Quotations About the IASC

Bob Jensen's SFAS 133 Glossary and Transcriptions of Experts

You may also want to download INTERNATIONAL ACCOUNTING STANDARD SETTING: A Vision for theFuture, 1998 Special Report of the Financial Accounting Standards Board (FASB) . At the moment one copy of theFASB's Special Report may be downloaded from http://www.rutgers.edu/Accounting/raw/fasb/

For additional copies of this Report and information on applicable prices and discount rates contact:Order DepartmentFinancial Accounting Standards Board401 Merritt 7P.O. Box 5116Norwalk, Connecticut 06856-5116Please ask for our Product Code VFF.Trinity students may view this document at J:\courses\acct5341\fasb\intnacct.htm

Paul Pacter's Transcription Introduction

I personally am very interested in feedback on this session and, to that end, there are some evaluationforms, which I will --- that I pass them around now so that you have them available to you.

In the late 1960s with a Ph.D. in hand, I planed on a teaching career. Instead I went into public

Bob Jensen's Home Page Bob Jensen's Helpers Mexcobre Case Table of Contents



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accounting with a medium sized firm. It was ninth largest from that followed the, then, Big Eight. I gotinvolved with the Accounting Principle's Board, because my boss in that firm was a member of theAPB. Later when the FASB started in 1973, I took a full-time position with them. And later in 1984 Idiverted dramatically for eight years in four two-year terms in local government as the Chief FinancialOfficer, with sort of Deputy Mayor kind of responsibilities of the city of Stanford, Connecticut. Thatwas the most interesting job I ever held needless to say; both the most rewarding and the most thankless--- but I loved it.

Then I said in 1990 --- I'm going to finally do what I set out to do which was to teach. I took a positionteaching in an evening MBA program of The University of Connecticut. But FASB hired me back, andI a segment reporting research study for them. And when that was finished, the International AccountingStandards Committee (IASC) approached me to do a similar study --- at the international level. What Idid for FASB was survey nearly 7,000 companies' reports. We also did a complete literature review ofthe academic research in the area of predictability of various kinds of segment information. And theinternational study was similar using about 1200 companies from 30 countries.

Once that study was done, I started going to the committee meetings on segment reporting asconsultant. Then the project manager left suddenly, and I ended up as the project manager from the

USA. And then starting in early '96 I took a full-time position with IASC. I am basically a projectmanager and did the IAS segment-reporting standard. I just finished IAS 35 on interim reporting IAS34. I'm now the project manager on financial instrument recognition and measurement. And we're goingto talk quite a bit about that today and how --- where we are on it as compared with FASB 133, 114,115, 125, etcI also do the IASC's website, I taught myself HTML and that's kind of therapy --- I loveit. I'm living in London --- that's excellent also. I've been there over two years now.

I hope this session will be as informal as possible, since I seem to be the only one with a tie here. Youall of course should have a set of these notes. These are my transparencies. I will follow this materialthrough but elaborate along the way.

001

OVERVIEW OF IASC

l Independent Private Sector Body That Began 1973 (Office in London)l Mission Improve and Harmonise Accounting Standards World-widel Members 140 Professional Accounting Bodies in 101 Countries

16 Member Board Meets for One Week Four Times Each Year

*Australia *Canada *France *Germany *Japan*India/Sri Lanka *Malasia *Mexico

*Netherlands *Nordic Federation*South Africa/Zimbabwe *Swiss Companies*United Kingdom *United States*Financial Executives *Financial Analyst

Observers

*FASB *EC *IOSCO *China

l Advisory Council (Oversight, and Funding)



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001.01If you go the IASC booth in the conference exhibitors area, you will notice a lot of silver balloons

hanging. The silver balloons represent IASCs Twenty-fifth Anniversary. IASC started almost to the daythe same time that FASB started. And IASC didn't get anywhere near the same publicity in itslaunching. Nor was it anywhere near as successful in its first ten or fifteen years. But now I think it'schucking along pretty nicely, and by the time this afternoon is finished maybe you'll agree.

Like FASB, the IASC is an independent private sector organization. It is itself not a government agencynor sponsored by any government agency. It has the same mission as FASB --- to improve accountingstandards. And I guess IASC takes on a greater role in harmonize then, to get the countries in the worldto all agree on a single set of accounting standards instead of the kind of accounting battles that we haveright now in large and small countries. We are sponsored by 140 professional accounting associations in101 countries. That is virtually every country of any size in the world with the exception of Russia, and

the reason is that we don't have any sponsor in Russia. Our sponsors are the professional accountancybodies in each country --- in the U.S. it's the American Institute of CPAs. The problem in Russia is it'shard to identify the main professional accounting body in Russia. They're several pretenders to thethrone and, until that can be sorted out, none of them are members. The Peoples Republic of China is amember of the IASC along with virtually every country in the world. Now those are members in thesense of sponsoring organizations. We have the Board, the IASC Board, that actually sets the accountingrules. That Board has sixteen members, and I've listed here the country members on the IASC Board.You'll notice that most of the larger countries in the world are represented along with only a few smallerones --- smaller countries rotate. In addition to those thirteen country seats, there are a number oforganization seats, three to be precise. Notice I say Swiss companies, there is a federation of Swissholding companies and they rather than a CPA profession hold one of our sixteen Board seats.

From industry, the Financial Executives Institute (FEI) has an international equivalent called theInternational Association of Financial Executives. IAFE is a member alonge with the Word WideAssociation of Financial Analysts that of course includes the AIMR in the U.S. and Canada and theEuropean Federation of Financial Analysts and the Asian-Pacific Federation. So the analysts are wellrepresented.

001.02Even though I've said there are sixteen seats on our Board, that's not the number of people that sitaround the Board table, because for each section there are usually two Board representatives plus atechnical advisor. So right there is three people time's sixteen "seats" giving rise to 48 people sittingaround the Board table. The United States representatives actually count for two accounting associations--- the American Institute of CPAs and the Institute of Management Accountants.

So the current American representatives are Mike Crooch from Arthur Andersen. He's another one thatstarted out to be an academic. He went to school with me at Michigan State and got diverted into public

l Consultative Group (Advisory Role)l Standing Interpretations Committee Authoritative Interpretationsl Steering Committees

USA Representatives on the IASC BoardG. Michael Crooch, Arthur Andersen LLP, Chicago

Mitchell Danaher, General Electric Company, Fairfield, CTElizabeth A. Fender*, The American Institute of Certified Public Accountants, New



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accounting. He recently finished up a five or six-year term as chairman of ACSEC --- the AICPA'ssenior accounting standards committee. Mike is only one of the two American representatives on ourBoard. The other is Mitchell Danaher from General Electric --- I think his title is Deputy Controller;He was an Industry Fellow with FASB and worked on segment reporting in fact while he was there.

And if you look at ourwebsite (by the way, in addition to being the web guy, I'm also the photographer),you'll see a few pictures on there of Board meetings with what looks like the United Nations with the

General Assembly. We have some observers; the U.S. FASB is an observer. That seat had been JimLeisenrings for about five years and then switch to Tony Cope about a year ago; and Tony has the fullright to the floor, as do all of the observers, and like Jim Leisenring, he does not hesitate to use that rightof the floor. Observers make a very effective contribution to IASC even though they do not have votingprivileges. Other observers include the European Commission. There is an EEC Director of Accountingand, as you probably know, there are several directives which are really EC Laws. The Fourth andSeventh Directives in particular focus entirely on accounting. Unfortunately, in my opinion, they havelocked accounting into law --- it backfired on them a bit. We'll talk about that later on today. I saybackfired --- once you get something into law it's very hard to change it. For example, an issue thatthey're wrestling with right at this moment is one of those directives that says you cannot put current(fair) values on the face of the balance sheet. At the moment we have a proposal (E 62) on financial

instruments that says certain financial instruments are to be marked to market. So that's already aviolation of law in the European Community. So the EEC is trying to deal with that by amending thedirectives by pulling the accounting regulations out of the directives and making them subject toregulation but note law.

Another important key group among the five observers and that's five people is IOSCO --- theInternational Organization of Securities Commissions. That is the worldwide association of securitiescommissions, including the SEC in the U.S and a hundred other commisions like the SEC. Everycountry that has a public securities market obviously has some sort of regulatory agency that overseesthat market; regulates securities dealers, regulates issuers to some extent, a big extent in the U.S. and asmall extent in Britain. Securites commisions regulate issuers and regulate exchanges and markets.And so the dealers, the markets and the issuers are all regulated by commisions that are part of IOSCO.

And the final observers go to the Peoples Republic of China. There are 1.2 billion people in china, andit's very important that China gets off on the right foot in terms of accounting. Chinese observers atIASC meetings are very enthusiastic supporters of IASC. China is busily adopting our standards for allChinese business firms. So it's a good thing I think that we got China on our Board as observers.

Our Board meets four times a year for one week each time. We just met in Canada in July, the nextmeeting will be in November. I can tell you, although you'll say I'm biased, that the quality of thediscussion is excellent. It is not word smithing or editorial stuff --- it is good high level debate onmatters of substancel. Obviously when you have representatives of sixteen different countries there arecertainly a number of schools the thought on accounting --- for example in some countries they revalue

the property equipment as a matter of course. And others like the U.S. these revaluations are absolutelyprohibited. In some nations you have companies with hidden reserves and income smoothing as amatter of tradition. In the U.S. that maybe was a tradition twenty-five years ago, but over the lasttwenty-five years the FASB weaned business away from a income smoothing. The debate may be far-reaching but it's always I think at a very high level.

001.03Question/Comment. Are IACS meetings open to the public that meeting or does it matter?

Paul Pacter.



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Well, I'm embarrassed to answer that Question/Comment. The answer is at the moment it is no --- themeetings are not open to the public. That's the bad news; the good news is by next March they will be.Our Board has approved that policy and we're studying now how best to implement the policy.Implementation is more difficult when you meet all around the world --- I mean this year London wasJanuary, Malaysia was April, Canada in May; then Zurich, Warsaw, Rome and Washington. Butmeetings will be open to the public. For the moment, however, it is a closed meeting. And we've beenoften criticized for that by the FASB in the U.S. And rightly so. I think the IASC matured to the point

where our meetings should be open. I think we have nothing to fear from that in terms of beingembarrassed about thesubstantive level of the discussion.

Please ask questions as we go along --- that would be the best way I think.

In addition to the Board, which is the key organization in the structure, we have several groups. I willgo through these slides much more quickly than we are now. I'm just setting the scene here.

001.04Like FASB, the IASC has an advisory group. The FASB's FASAC, the Financial Accounting StandardsAdvisory Council, that brings to the FASB table views of organizations that are not normallyrepresented as members of FASB. Our similar group is called the Consultative Group. That includes, forexample, people from the United Nations, from the worldwide Association of Stock Exchangers, fromthe worldwide Association of Lawyers, from the Worldwide Banking Association, and ---well I can'tquite think of them all right now. But they're many other organizations, not accounting organizationsthat have a direct interest in financial reporting. So that's the Consultative Group.

What we have misnamed as the Advisory Council is more similar to the FASB's Board of Trustees inthe Financial Accounting Foundation. The IASC's Advisory Council is compriesed of seven or eightvery high-powered people, presidents of stock exchanges and/or national accounting societies. Theirgoal is to oversee IASC structure, operations, independence, raise money for the operation --- much likethe FAF Board of Trustees with respect to FASB. We have an Interpretations Committee, kind of likeFASB's Emerging Issues Task Force. Our Interpretations Committee has been meeting about eighteen

months. It has ssuesd a series of interpretations,and we'll look at those in a few minutes.

001.05This last box on the screen is for steering committees that are quite different from the FASB's taskforces. Does not --- is quite different from FASB task forces. Our steering committees really do the legwork on our agenda projects before our Board digs into the issues. Steering committees are high-powered committees much like FASB taskforces, but their role is to oversee the staff research, to definethe boundaries of the project, to decide what research needs to be done, and either to do farm it out to bedone. These committees will often publish an "issues paper" That's a neutral document much like aFASB Discussion Memorandum. On the screen I've listed the sequence of steps in releasing an issuespaper. The most recent one we published was about a year ago on financial assets and liabilities in thefinancial instrument area. I'm just beginning work on one in extractive industries accounting. Its

Steering Committee then assesses the comments of the viewsreported in the issue paper, which is aneutral document normally. And then the Steering Committe develops what is called --- what we call ---a draft statement of principles. It looks just like an Exposure Draft, except its got a bluish cover todistinguish it as a proposal from the Steering Committee. It's actually very tentative preliminaryconclusions, not of our Board, but of the committee. And these are published for public comment. Weget letters of comment between a hundred and two hundred --- more likely closer to two hundred letters.

At that point, the Steering Committee will modify the draft statement for the comments received andwhat has learned from the SOP process draft statement of principles. The amended statement is



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eventually submitted to the Board along with a Committee recommentation to build an Exposure Draft.And then the Steering Committee moves out of the picture. Our Board then debates the principles withan eye toward all the comment letters that have come in --- our Board sees all those letters. And it's theBoard then that develops an exposure draft and approves the principles. A required vote out of oursixteen for an exposure draft is eleven votes. That's published --- public comment, comments come inmore modifications and finally the final standard, and twelve out of sixteen votes.

So our steering committees thus take the initial pass at the decision making. This is different from theFASB taskforces.

Question/Comment. Are the steering committee members representatives of the various countries?

Paul Pacter.

A steering committee chairman is always one of our Board members --- a Board representative. So atleast one of the committee members sits on those sixteen Board seats and chairs the steering committee.Other steering committee members, in most cases, are experts on the committee issue. So if it waspension accounting we'd appoint actuaries, pension accounting specialists, pension fund managers ---

that type of thing. For extractive industries issues we have mining accounting specialists, oil and gasaccounting specialists --- people from oil and gas companies, oil analysts and that kind of thing alongwith some from public accounting, some from industry analysts, some from academe.

Question/Comment. From across the world?

Paul Pacter.

Yes. These committees usually roughly eight people from most anywhere in the world.

Question/Comment. With more from London?

Paul Pacter.

Almost no one is from London. The Chair of the Segment Reporting Steering Committee was PatriciaA. McConnell from New York. The Chair of my Discontinued Operations Accounting Committeehappens to be England's Professor Chris Nobes from the University of Reading. For the InterimReporting Committe it waswas a Coopers & Lybrand partner from Stockholm. For the FinancialInstruments Recognition and Measurement Committee, it was IASCSecretary General, Bryan Carsberg.Brian is an academic by background from London School of Economics and the University ofManchester. Before that chairs of steering committes were a partner in KP&G in Paris and so on fromall over the world.

001.06


IASC's History

l ENVIRONMENT



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IASCs history is boiled down into one page here. It's a little hard to do that. The environment in whichthe IASC operates is that we've got 101 member countries, and virtually every one of those has an sometype of accounting standards board. Some of those boards are independent of the public accountingprofession. U.S. is an example, Australia is an example, and Britain is an example. These accountingstandards setting bodies not part of the CPA or chartered accounting professions. In most countries thestandard setting boards are part of the public accounting professions in those countries. In a fewcountries, the accounting standards board is actually an arm of government, Japan is an example of that.Most countries among our 101 member nations have a public securities markets. This means there issome sort of regulatory agency overseeing the market. Most of those agencies have developeddisclosure requirements, financial statement disclosure requirements, that are superimposed on top ofthe recognitiion and measurement standards arising elsewhere. For example, the SEC in the U.S. superimposes disclosure requirements on top of FASB accounting standards. On occasions the SEC alsosuperimposed something affecting recognition and measurement requirements as well. That's doneinfrequently in other countries as well, but in most cases regulatory agencies only generate disclosurerequirments.

I will acknowledge an Achilles' Heel of IASC right now --- IASC has no enforcement power! Youknow you can respond to me that the FASB also has no enforement jurisdiction. I agree, but from dayone, in early 1973, there was SEC recognition for all FASBs standards. So almost from the date thatFASB started, the Securities and Exchange Commission enforces FASB standards for every one of the13,000 public companies in this country required to register with the SEC. And the code of ethics of thepublic accounting profession and the licensing laws of every one of our fifty states in one way or anotherenforce FASB standards --- the AICPA makes an undisclosed departure from FASB standards aviolation of the code of ethics and a violation of a CPA licensing law. Unlike the FASB, the IASC, Ihave listed every country --- about 130 countries. We're in the middle of trying to figure out exactlywhere we stand in each of these countries. I've summarized some of that in your notes and we will get to

Most countries have a national accounting standards Board.Regulators also set accounting rules.IASC has no enforcement power.

l IASC FIRST 10 YEARS

Codify best practices.

Standards more descriptive than prescriptive.

l IASC SECOND 10 YEARS

Address more difficult issues.Strengthen many original standards.Eliminate alternatives.Conceptual framework.

l IASC CURRENTLY

IOSCO core standards.

Recognition in major capital markets.Interpretations programme.Working relationships with national standard-setters.



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that this afternoon.

But right now we have no enforcement authority and we need enforcement --- we need an equivalent ofan SEC recognition in every one of our countries. That's why you keep hearing about the IOSCOagreement with the IASC. The ultimate objective is. IOSCO agreement to get our standards enforcedthroughout the world.

001.07In the first ten years, the IASC's standards IASs) were short and sweet. And often they simply were alisting of accounting's best practices in the larger countries around the world. IAS 2, for example, oninventory says you can use FIFO or you can use LIFO. There weren't very many countries that usedLIFO, but those that do had a lot of clout in the world economy. IAS 2 allows a range of inventorycosting alternatives. You've got to use a cost-base method --- it can be either LIFO, FIFO, or weightedaverages. You have to write inventories down and then realizable values and so on. So IAS 2 constrainscertain practices, but in very short order in ten paragraphs that standard's [econifide--unsure of spelling]the then existing practice of accounting --- in accounting for inventories. The standards were moredescriptive than prescriptive; even the wording you don't see the words [unsure] nor should; you did notsee those words in early standards.

What it really said is in some countries they use LIFO, other countries use FIFO, or if you look at thesegment reporting standard it said in many countries revenue and result of operations is disclosed by lineof business --- by industry. Many countries use 10% as the materiality guideline. Now our new IAS 14says thou shall use 10%, thou shall disclosure revenue and result etc. etcSo the philosophy hasevolved dramatically but the first 10 years it was more descriptive that prescriptive. Also, for the mostpart the first ten years they didn't get into the tougher you know more technical issues. Well thathappened in the next years, let's say in the mid-80's to the mid-90's they took on issues like pensionaccounting, like business combinations and we have a pretty rigorous standard on goodwill --- on the ---on the poolings including a size test, etc

We went to a program of strengthening many of the earlier standards so the change --- in many of those

were changed from descriptive to more prescriptive. We eliminated alternatives but some remain. Wherealternatives remain, you'll find that we identify maybe one as a benchmark and another as an allowablealternative. It's not quite preferred and inferior, but that's the [unsure] and many alternatives have beeneliminated completely. We developed a conceptual framework I should --- I really should say theycopied a conceptual framework from the FASB, changed a few words but the principles are the same.What is very dramatic from the conceptual framework that IASC adopted which is the same as FASBsframework, is the acknowledgement that investors and creditors prevail.

Now this may seem trivial almost in the United States where since the early 19 --- mid-1930's,accounting standards and securities regulation has had an investor-creditor focus --- focus on providinginformation to people who might be buying securities for selling. Who might be lending a company

money? This is kind of unheard of in many large countries around the world, accounting is really a kindof a management report of --- a report card on how we did last year to the existing shareholders. And theconcept in many countries, and I'm talking about countries like Switzerland and Germany and a lot ofthe Scandinavian countries, is that management knows best. And we have long standing --- Japan isanother one --- long standing relationships between capital providers and companies, and we don't needto --- we don't need full disclosure. Equity markets are much less important overseas than they are in theUnited States. Most companies --- companies in this country have at least half of their capital fromequity markets, not so in many big developed countries in the world where it's more like 25%.

So by adopting the same framework, an investor/creditor objective --- a relevance objective by saying



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relevance is key. This was earth shattering around the world, it's very common place in the U.S. Nowwhat do we do --- what do we do --- doing lately? The IOSCO course standards I'm going to talk aboutprobably the next slide coming up; we have got a commitment to get a body of standards in place by theend of this year, and it's a commitment we made in 1995 to this international organization, TheSecurities Commission. This is the way we see to get that enforcement I was talking about. They in turnhave a commitment to us and the best thing could say is to consider recommending to our members totheir hundred securities commission the adoption of --- the recognition of IASC standards for cross-

border offerings.

So we are trying to seek recognition in major capital markets and little by little, one by one countries areallowing our standards. Who would've thought even two or three years ago that domestic companies inGermany and France by law, by laws enacted in 1998 may use IAS standards to report to theirstockholders domestically? I mean nobody would have expected it that the French and the Germans thelast hold-outs of sovereignty or states rights or whatever you want to call it over there, would've allowedthat; as well now Belgium and Italy allowing their own public companies. Not just across borders butI'm talking about within their countries.

Question/Comment.

May use or must use?

Paul Pacter.

May, may and only in consolidated financial statements; see now here in this country consolidated is allwe have. Maybe ten years ago the SEC parent only statements. In many --- most countries around theworld parent only are the legal official statements and there's a lot of law dividend paying issues that arevery important for parent only statements. But consolidated --- all of a sudden they are realizing theimportance of consolidated statements and most countries now require it. Japan is soon to requireconsolidated. Do you know that their shareholders haven't been getting consolidated statements, ever?Just parent company statements with all the subsidiaries carried at cost. And so basically on a cash basisfor dividends received are profits. Well that's changed --- that's beginning to change now.

We've begun our interpretations program, this is our toughest nut to crack, this last item trying todevelop working relationships with national standards setters. And toward the end of this afternoon I'mgoing to talk about that --- that's a tough one.

001.08


IOSCO AGREEMENT (July 1995)

"The [IASC] Board has developed a work plan that the Technical Committeeagrees will result, upon successful completion, in IAS comprising acomprehensive core set of standards. Completion of comprehensive corestandards that are acceptable to the [IOSCO] Technical Committee will allow theTechnical Committee to recommend endorsement of IAS for cross border capital



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you get two equally intelligent and experienced groups of people, you are going to come up with twosets of accounting standards. And so if we are going to have lots of national standards setters, I don'tknow if we can ever achieve harmonization. So my definition of harmonization would be that the majornational standard setters and IASC will have to agree on a single set of standards. Everybody else willhave to go along, we'll have no choice but to go along. And maybe even someday ten years, twentyyears down the road, you won't even need the national standards setters.

001.10Question/Comment.

I hope that I will not be aggravating you. How can you build a global set of standards on a frameworkthat only has two basic principles. Now that's the accrual principles and the going concer principle. Sowhy don't you include into your work place the research of what accounting is about or made? I amhoping all together there is a description of the monetary flow of an open tracking; nothing else. Sosomehow it seems to be pretty confusing that there is so much discussed about the financial statementsand so little discussed on the basis which they are constructed --- on the bookkeeping what are thetransactions we are keeping track of? And why don't you think first this basis and come to aconvergence what it is all about? Because otherwise it wouldn't be very logical to put together auniversal set of axioms. As you said, accounting is no natural science. It's a man-made science yousay.

So we need, we need a set of axioms we can agree upon first, then we can continue on with deriving aset of standards. So I'm hope I don't use a rough language, but I'm not very good in English.

It seems to me that the work is now down from the top of the tree toward the roots, instead of comingfrom the roots to the top of it.

Paul Pacter.

I'd like to make two comments in response. I think our basic principles are at a higher level than simply

accrual accounting and going concerne. Our most fundamental principles I would say are relevance fordecision makers and reliability of the information. I would also say that I don't see tracking the monetaryflows into and out of a business as an important part of our job to be honest with you. I see our objectiveas helping people make forward-looking decisions decide should I buy this stock today and then whatprice should I lend today and what rate of interest do I charge? And to know that, I want to know whatwould the future earnings be, what will the future cash flows be, what will the future

Question/Comment.

OK, cash flows, evaluate them.

Paul Pacter.

Wait a minute, wait a minute --- future I said future. Admittedly historical cash flows and historicalearnings, performance measures and historical asset information, are important. I don't think ourframework, the IASC framework, views tracking historical cash flows as our overriding objective as youwould have us do.

Question/Comment.



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No annual financial statement cannot be without a cash flow view of the futures.

Paul Pacter.

Exactly, I agree with you.

Question/Comment.

I'm still confused, but on a much higher level.

001.11

In addition to support from the European Commission; we have a fair degree of support from the U.S.Securities and Exchange Commission (SEC). They haven't signed on the dotted line to everything we'vedone. They've made no commitments to everything we have done or will do. But they are working very

closely with us. Either the Chief Accountant or the Deputy Chief Accountant of the Commission comesto every one of our IASC Board meetings and often to many of our steering committee meetings. And inthe slide above you can read the SEC's statement made a couple of years ago in support of what we'redoing. hey have said they are going to consider whether to allow foreign issuers to use our standardswithout reconciliation to U.S. debt. The SEC said it intended to evaluate our core body of standards, thatwe're committed to produce for IOSCO. In the slide above you can read the criteria on which the SECwill evaluate it. Does it constitute a comprehensive basis of accounting similar to the existing FASBbasis --- not identical --- but similar? The SEC wants us to provide investors with good information onwhich to make investment and credit decisions?

US SEC STATEMENT (April 1996)

"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 ofstandards by March 1998. The Commission supports the IASC's objective todevelop, as expeditiously as possible, accounting standards that could be used forpreparing financial statements used in cross-border offerings."

Criteria to Evaluate IASC Standards

l Comprehensive basis of accounting.l High quality

comparabilitytransparencyfull disclosure

l Rigorously interpreted and applied.



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Are the standards high quality, will it achieve comparability among companies, full disclosures, etcand are they rigorously interpreted and applied? And this enforceability at the moment is another --- isone of our Achilles' Heels.

Even the U.S. Congress got involved with IASC in an effort to promote U.S. capital markets. Congresssaid to the SEC, in form sense a Senate resolution, that the SEC should push for adoption ofinternational accountings standards for foreign issuers in the United States and report back to Congressabout progress being made. The SEC made such a report in this past year. All it is it's not a law, it's justa form of that Senate resolution for promotion registration of foreign securities in the American capitalmarkets.

Right now there are about one 1,000 foreign companies with equity securities trading publicly in the

U.S. --- that is out of the 13,000 possible companies. Naturally registered companies tend to be thelargest of the companies overseas, because the biggest foreign companies tend to list here first. It is saidthat there are only 200 American companies that today meet the New York Stock Exchange listingrequirements but that are not now making equity share available to the public via stock exchanges. Incontrast there are 2,000 foreign companies that meet the size criteria and the other New York StockExchange listing requirements that are not listed on the New York Stock Exchange. So you can seewhere they see the largest market opportunity over the next twenty years --- it's to try and get moreforeign companies into the U.S. capital markets fold. There's a wonderful article in a recent issue ofBusiness Week. I just read it on the plane coming over here. It deals exactly with this very issue. Irecommend it to you. And Arthur Levitt (head of the SEC) is very comes down hard on the IASC. Hesays look, the SEC has not yet signed up with IASC at all. The SEC will wait and look at forthcoming

IASC standards, and if they're not good high quality, we're not going to allow it (to take the place ofFASB standards). High quality is paramount.

Note from Jensen: A message from Arthur Levitt to the IASC is linked athttp://www.iasc.org.uk/news/cen8_129.htm It may come up faster by clicking on myversion here.

US CAPITAL MARKETS EFFICIENCY ACT (October 1996) Paraphrased

It is the sense of the Congress that:

l high-quality international accounting standards would greatly facilitate internationalfinancing and enhance the ability of foreign corporations to access US markets; and

l the SEC should enhance its vigorous support for the development of high-qualityinternational accounting standards; and

l the SEC should report to Congress on the outlook for successful completion of a setof international standards that would be acceptable to the SEC for offerings by foreigncorporations in US markets.

Bob Jensen's Home Page Bob Jensen's Helpers Mexcobre Case Table of Content



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002

IASC STANDARDS TO DATE

(Note that older numbers do not mean older dates since current revisionsand amendments take place without assigning new IAS numbers.)

IAS 01 Presentation of Financial Statements

IAS 02 Inventories

IAS 04 Depreciation

IAS 05 Financial Statement Disclosures

IAS 07 Cash Flow Statements

IAS 08 Reporting Profit And Loss

IAS 09 Research and Development Costs

IAS 10 Contingencies and Post-Year-End Events

IAS 11 Construction Contracts

IAS 12 Income Taxes

IAS 13 Current Assets and Current Liabilities

IAS 14 Segment Reporting

IAS 15 Changing Prices

IAS 16 Property, Plant and Equipment

IAS 17 Leases

IAS 18 Revenue

IAS 19 Retirement Benefit Costs

IAS 20 Government Grants and Assistance

IAS 21 Foreign Exchange Rates

IAS 22 Business Combinations



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What where we now stand --- I just put the above listing of our standards together. At our July meeting,our Board approved the last two standards on this list, provisions and accruals of provisions andaccounting for intangible assets. So we have 38 standards in place. We reuse our numbers whenrevisions and amendments are made, unlike FASB, so almost every standard on the list, certainly theolder ones from IAS 1- IAS 20, have been amended at least once. But even when taking that into accout,we still don't have near the number of standards as the FASB.

002.02

IAS 23 Borrowing Costs

IAS 24 Related Party Disclosures

IAS 25 Investments

IAS 26 Retirement Benefit Plans

IAS 27 Consolidated Financial Statements

IAS 28 Investments in Associates

IAS 29 Hyperinflationary Economies

IAS 30 Financial Statements of Banks

IAS 31 Investments in Joint Ventures

IAS 32 Financial Instruments Disclosures

IAS 33 Earnings Per Share

IAS 34 Interim Financial Reporting

IAS 35 Discontinuing Operations

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities/Assets

IAS 38 Intangible Assets




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Now, how do those 38 standards to date relate to the IOSCO core standards summarized above? BothIASC and IOSCO agreed on the list of 40 standards or forty issues that must be in place before IOSCOwill consider endorsing IASC standards for each of their member countries to adopt for cross-borderofferings. Of those 40 issues, we have finished 37 of them to date and the other three are all financialinstruments issues --- one was a derivative and hedging. one was off-balance sheet financing, and the

third one was accounting for investments. We now have a proposal, which also happens to be myproject, in exposure draft ED No. 62 on financial instruments recognition and measurement. And thecomment deadline is the end of September in 1998. We have a Board meeting in November, we haveanother Board meeting in December. Why do we have one back to back, six weeks apart? Because E 62is a make or break for us, and we want to make sure we get it done, with a thorough debate, if at allpossible in 1998. If we don't make it by the end of 1998, we don't make it. But that's our goal and ourfirm commitment.

002.03


IMPORTANT DATES

Effective Dates Beginning After

IAS 01 (revised) 15 July 1998

IAS 12 (revised) 1 January 1998

IAS 14 (revised) 15 July 1998



IAS 33 1 January 1998



IAS 36 1 July 1999

IAS 37 1 July 1999

IAS 38 1 July 1999



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I just included in your notes some important dates, in particular the above dates are the effective dates ofour most recent pronouncements. Several of them have now gone into effect, for example IAS 12 whichis our equivalent to FASB 109 on accounting for income taxes. That has now gone into effect, and youcan see there are a couple of others have gone into effect for financial years beginning mid-July.

002.04


WORK PLAN

l Agriculture

Exposure Draft 4th

quarter 1998

Final IAS to be determined

l Financial Instruments - (Interim Project)

Final IAS 4th quarter 1998

l Financial Instruments Comprehensive

Exposure Draft 1999Final IAS 2000

l Insurance Accounting (new project)

Discussion Paper 1998

l Events After the Balance Sheet

ED 1998

l Investment Properties

ED 1998

l Performance Reporting: (new project)l Extractive Industries: (new project)l Discounting: (new project)l Developing Countries: (new project)



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We are now going to get into the technical stuff on each of those. Let's look at what we're still workingon. The slide above shows a listing of the projects that are now on our agenda. Accounting in theagriculture industry --- this is accounting for crops, livestock, etc. during the growing or maturationperiod up until you have a harvest or a slaughter. And we'll talk about each of these current projects aswell as the recent standards. We have a financial instruments project, that's the ED No. 62 project, tomeet the IOSCO for standards. ED No. 62 us on recognition and measurement for financialinstruments. We also have a more comprehensive long-term project on financial instruments to try to

get an integrated standard of more of a mark-to-market approach for all financial assets and liabilities.We are doing that with a number of national standards setters, including FASB --- that's a longer-termproject.

We've begun several industry projects. We've not done industry accounting standards up to now.Obviously agriculture is an industry --- we started that one for several reasons. One is that agricultureaccounting is a great concern of developing countries, and they've encouraged us to do it. The secondreason is that the World Bank gave us $300,000 for it because it's an issue the World Bank feels isimportant in the kinds of countries that they serve. So we got into agriculture. Insurance accounting ---we're in the middle of developing an issues paper on it now. The steering committee has met severaltimes. The extractive industries project is about to get going. So for the first time, we're getting involved

in some industry-specific accounting standards.

Events after the balance sheet date --- we already have a standard. It's much like the FASB's standardwith only a little difference regarding accruals of post-balance sheet date dividends --- that's allowable,believe it or not. That's the issue we're working on at the moment. This problem is a fall out from theprovisions and contingencies' standards.

Investment properties --- this is focuses on holding real estate as an investment rather than foroperations.

Performance reporting is a project similar to FASB comprehensive income project. We're trying todecide what is meant by "performance"? How do we report it in the best set of financial statements.This may involve some historical cost accrual accounting and some fair value adjustments.

Our two newest projects, which just have not started yet at all, is the one on discounting andprobability issues and the other is on on special issues in accounting by developing countries.

002.05


New Standards: IAS 1Presentation of Financial Statements

l Four Basic Financial Statements:l Minimum structure and content. Certain information is required on the face of

financial statements:

1. Balance Sheet: major categories of assets, butcurrent/noncurrent split no longer required



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So I'm ready to take the plunge and start talking about some of the individual standards, unless there'squestions just speak up.

Question/Comment.

How often are you looking at the Conceptual Framework while developing the fairly new standards?Are you doing that more often than before or not?

Paul Pacter.

I think the Board does look to the framework. Our Conceptual Framework is really a document whosebiggest consumers are our Board members themselves. Everybody who takes a seat around our Boardtable comes with some sort of the personal pre-conceived framework regarding what accounting oughtto do or ought to be. What we say to new Board members with this framework is appreciate that thepeople who came before you, in their wisdom, said here are our objectives of accounting. Here's whatwe mean by assets, here's what we mean by performance, and here's what we mean by liabilities,revenues, expenses, gains and losses. Here are the qualities that make accounting relevant, reliable,comparable, and so on. And we're urging all Board members to buy into that framework, because if

2. Income Statement (Operating/non-operating separation):

-- revenue-- results of operating activities-- financing costs-- equity method income-- income taxes

-- profit or loss from ordinary activities-- extraordinary items-- minority interest-- net profit or loss

(earnings per share (basic and diluted, on face of income statement)

l Cash Flow Statement (IAS 7)l Statement showing Changes in Equity Various formats allowed:

1. --Show only "unrealised gains/losses" with transactions with owners in a note2. --Show both "unrealised gains/losses" and transactions with owners3. -- Show both "unrealised gains/losses" and transactions with owners AND add

"unrealised gains/losses" and net profit and loss to present a combined "comprehensiveincome."

l Notes to Financial Statements.

1. Summary of Accounting Policies.2. Disclosure of compliance with IAS.3. Very limited "True and Fair Override"4. Requires compliance with SIC Interpretations.5. Criteria for current/noncurrent.



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you bring a different set of concepts to the table, then very likely you will reach different accountingrecognition and measurement answers. So while the framework, I guess, is useful out in the real world topeople who are preparing financial statements, it is the most useful to our Board and our interpretationscommittees to guide them, to give them frame of reference in looking at individual standards.

Question/Comment.

Being the ultimate aim of the Conceptual Framework is to be so specific that any two preparers offinancial statements would be consisstent with each other even if there were no standard because theywould begin with the same set of axioms..

Paul Pacter.

I think that is is some sort of ideal goal of the framework, but in reality it's hard to look to the frameworkto get a very detailed and specific accounting answer.

Question/Comment.

The framework was not meant for specific

Paul Pacter.

That's my point, it's really at a higher level --- it's to guide our Board in it's debates. For example, weust finished a standard on provisions, and we're going to look at that in a few minutes. And important

question is should your company be allowed to accrue a provision (e.g., a liability; debit expense, creditliability) simply because your company had a good year? And you say, well, we want to squirrel thisaway in case we have a bad year needing more flow into income. Mangers know best whether this is agood year or not. The are so impacted by the accounting outcomes. But our shareholders want to see anice, smooth trend of earnings, etcIt's the same arguments we've had in the U.S. over accrual of self-

insurance reserves for example. Our Conceptual Framework says wait a minute! A liability is thatdeferred what-you-may-call-it on the right side of the balance sheet. A liability is an amount you nowowe to somebody outside the business as a result of past event or transaction. And so no --- you cannotaccrue provisions and be consistent with the Conceptual Framework at the same time. And I'm sorryGermany or Scandinavia or the Netherlands, you cannot invoke your principle of prudence to simply sayto the firm's directors that we know this was an extra good year, thereby, leading to debit expense andcredit some kind of liability. Managers are going to bury that liability in with our long-term debt, andbecause they know better than their shareholders how to measure income. And that's a big step forwardfor IASC. The Conceptual Framework helped us in the provisions standard. That is one example.

Question/Comment.

The sixteen Board members --- do these sixteen Board members to the greatest extent speak for theirown constituencies or for themselves?

Paul Pacter.

Well, it depends. You have to look country by country. In the FASB, for example, Board members mustconsider their constituencies. For example, Mike Crooch is not a member of FASB. He's arepresentative of the American Institute of CPAs.



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Question/Comment.

Is there a commonality of reference points to national standard setters?

Paul Pacter.

Yes there is. Consider our representatives from Britain, David Tweedy and Chris Nobes. David Tweedyis the Chairman of the UK Accounting Standards Board. From Australia it's Warren McGreggor who isthe Chairman under the Australian Accounting Standards Board. From South Africa it's a past Chairmanof the South African Accounting Standards Board. And the other Australian representative is KenSpencer who's the current chairman of their board. Japan no, Germany no, France, no. So some yes,some no. I mean they're asked to vote their own conscious; I suspect some do and some don't. I mean it'slike any other body whose representatives are drawn from industry. You have the same thing in FASBtoo. Naturally your background affects how you're going to vote. I would say most of the industrializednation standard setters are somehow are represented around our table.

Back to the standards. IAS 1 is a rework of the old IAS 1. It accomplishes some very importantobjectives. Number one, it says every company must present four basic financial statements with at least

one-year or comparative figures --- the balance sheet, income statement, cash flow statement and equitystatement. Number two, it spells out certain minimum line items and subtotals that must be presented onthe face of these financial statements. Cash flows actually in IAS 7, but for example on the incomestatement, companies are required to arrive at a results of operating activities to separate out financingand income taxes and the earnings of equity-method associates investees. They are required as well tohave these other line items on the face of the income statement.

The cash flow statement is very much like the FASB standard. The three main categories you can usedirect or indirect methods, etcThis equity statement is one where our Board did not make quite theprogress that FASB or the English Board has in defining exactly what do you mean by performance?What do you mean by income? IASC standards, like the FASB accounting standards, have had certainkinds of recognized gains and losses debited or credited directly to equity rather than flowing throughthe income statement. Foreign currency translation gains and loses --- we have property revaluations forfixed assets, which you don't have in the United States, but the IASC allows revaluations. And ED No.62 these are items of gain and loss that in effect use fair value accounting on the balance sheet, but wehave been unwilling to put them in the traditional income statement. The same practice exists UnitedStates --- those items I've just mentioned. other than revaluations, plus securities gains and losses in theFASB's SFAS 115.

So our Board debated whether to have an equity statement that really would combine net income for theincome statement plus these other gains and losses that are recognized through other accountingstandards but not on the income statement. And then we somehow arrive at a grand total that is a broad-based measure of performance. The UK now requires this. The U.K. requires a statement of total

unrecognized gains and losses. It is called call it theirstruggle statement. It starts with net income andthen adds in these other items and comes up with a grand total.

The FASB uses comprehensive income (see SFAS 130) as you know. Our Board came down squarelyon both sides of the issue. So in IAS 1 you can understand it's a very controversial issue to say that fairvalue adjustments are a measure of performance. Here's what our Board said with regard to this equitystatement. This is an equity statement that we are requiring for the first time. One way you can do it isust like the UKstruggle statement where you can show both the unrealized gains and losses --- well

that's the third way here. You can show the unrealized and net income from the income statement or



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show a grand total of comprehensive income or show it on a struggle statement.

You can do the equity statement and put transactions with owner's investments, treasury sharepurchases, dividends, in the notes. A second way you can do it is to show both, but not have a grandtotal. In the equity statement you would just have the unrealized gains and losses. You would havemaybe net income or it may only in the income statement but not have a grand total of comprehensiveincome. Or a third way, the more traditional what we call in the United States the statement of

stockholders' equity --- showing changes in stockholders' equity where you've got lots of columns ---including investments with new investments by owners, purchases of treasury shares, payments anddividends, and all of these unrealized gains and losses. And we allow this as long as it's all spelled outclearly. The users of financial statements can decide what measure of performance, which alternativemeasure of performance, is most useful to them.

Is that the best way to do it? No, I wish we could narrow this down to one alternative. But at least we'vegot what we think is transparency of outcomes for investors.

Question/Comment.

How come you use the expression unrealized gains and losses? Which point of the framework does itrefer to that?

Paul Pacter.

It's a very good Question/Comment. Today I've been a little loose with my use of the word "unrealized"by assuming that everybody in here knew what I'm talking about. I'm talking about mark-to-marketvalue changes that have, for whatever reason, we have said (in other accounting standards) do not godirectly to the profit and loss statement. We don't have a written concept of realization in ourframework, but we do have definitions of revenues and expense. And then we have standards; we have astandard IAS 18 on when you recognize revenues. We have various standards on when to recognize

expenses. But the notion of realization was a loose term on my part, it's not really in our literature.

We have a list of items that should be disclosed in the notes to financial statements and the summary ofaccounting policies, obviously. If your financial statements comply with international accountingsstandards, you should disclose that in fact. But more importantly, you cannot say that they complyunless they comply with every one of our standards. Before the revised IAS 1 went into effect in 1997, Isaw any number of foreign financial statements, Swiss for example, claiming that the financialstatements were prepared in conformity with international accounting standards. But then you read thenotes that the financail statements have omitted segment information or segment revenues are reportedwithout bottom line segment results. You could get away with that before 1998, because IAS 1 requiringthat all standards be me hadn't yet taken effect.

Starting in 1998, you cannot pick and choose. It's all or nothing --- if you don't comply with every IASCstandard you've got to point out the exceptions. Secondly, we require compliance with interpretations. Inthe United States there is a hierarchy of authoritativeness with the FASB standards being the top andthere's level A, B, C, and D or level 1, 2, 3, 4 for authoritativeness. In our little world, we havestatements and interpretations and there is no such hierarchy. Now "true and fair" criteria override ---true and fair is shorthand for saying a company may in its judgement determine that following aparticular international accounting standard produces misleading results. If managers do make that

udgement in their heart of hearts, then they do not have to follow that standard. But they must alsowaive the red flag and disclose why they did not comply with a standard. The true and fair overrides



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are possible United States as well. There's Rule 203 of the Code of Ethics of the CPA profession thatsays in a rare circumstance that you can depart as long as you disclose. And with respect to publiccompanies I think, since 1973, there have been maybe two cases that that has been done. Out of 13,000that are public, and considering both annual and quarterly reporting over more than 20 years being ableto override with true and fair criteria, two instances are very, very rare.

Unfortunately, in the real world of accounting in 101 countries around the world true and fair overrides

are not quite as rare. They are not very common, but we have left the door open in this standard thetiniest little bit. We are waiting to see what happens. Our Board were quite divided on this issue, and theway we've ended up with the wording, the override. Actually the exposure draft leading up to IAS 1permitted no exceptions. If you did not follow our standards, you could not say you follow IAS even ifyou felt that the standard didn't do your financial statements justice that you feel that it was misleading.We backed off on that when IAS 1 was eventually issued.

002.06

IAS 12 on income taxes is quite similar to FASB's SFAS 109 on income taxes. It does away with the oldincome statement approach of timing differences and instead looks at balance sheet approach oftemporary differences. If there's a difference between an asset's tax base versus its booked carryingamount, you must provide for deferred taxes on thedifference. Our old standard had allowed partialprovision, and this is still true in the UK today, where you don't accrue deferred taxes unless the reversalwill take place within the next three years. We've said sorry! You accrue all deferred taxes. IAS 12 isvirtually identical to SFAS 109.


New Standard: IAS 12, Income Taxes

l Temporary difference = difference between tax base and carrying amount. Will resultin tax or deduction when sold or settled.

l Accrue deferred tax liability for nearly all taxable temporary differences. (Partialprovision and deferral method prohibited.)

l Accrue deferred tax asset for nearly all deductible temporary differences if it isprobable a tax benefit will be realised.

Note: Tax assets will be recognised more often than before.

l Accrue unused tax losses and tax credits if it is probable that they will be realised.Review and reduce if appropriate.

l Use tax rates expected at settlement.l Non-deductible goodwill: no deferred tax.l Unremitted earnings of subsidiaries and associates: Do not accrue tax.l Capital gains: Accrue tax at expected rate.l Do not "gross up" government grants or other assets or liabilities whose initial

recognition differs from initial tax base.l Disclosures: components of tax expense, tax on equity items, reconciliation of tax

expense and tax paid; balance sheet items.



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We also have a "more likely than not test" --- do you know what I'm talking about? Under FASB 109,you will accrue a deferred tax asset if it's more likely than not that you would realize that asset throughfuture taxable income. We say if it's probable that the tax would be realized but it's the same point; morelikely it's not. I'm not going to read all this stuff. The important issue is IAS 12 and FASB 109 are quitesimilar.

Question/Comment.

What kind of safeguard do you have on the "true and fair override?'

Paul Pacter.

I must tell you we're nervous on the issue of true and fair override because we think its been abused overthe last ten to twenty years. We tried to get a IAS 1 without itm but we failed. The standard places aburden on company and their auditors to reach a conclusion that following the IAS 1 would misleadinvestors. That's a pretty harsh conclusion, you really have to --- you've got to think long and hardbefore you're going to say that following of a recognized standard will mislead people.

Secondly, the safe --- we now have the safeguard of litigation, which is one of the exports from theUnited States, that's quickly finding its way all around the world. And following a standard is a safehaven in a litigious environment to the point where there is a strong incentive for companies to stick tothe standard rather than try to do an end run. And thirdly, probably most importantly from our point ofview, we have all sorts of disclosure including disclosure of the effect of the departure from any IASCstandard. So if somebody disagrees with you that it would be misleading, it is possible to go anotherroute and reconcile the departure with our standard. And that's the best we were able to accomplish inthis version of IAS 1. A few years down the road probably we'll take a look at that issue again.

Question/Comment.

Does this reconciliation have to be in the auditor's report?

Paul Pacter.

We do not set auditing standards. There is an international auditing standards committee called the IFAInternational Federation of Accountants Committee. Our IAS 1 does not tell the auditors what to putin their repors. IAS 1 does say that if you want to use this true and fair override, you've got this, that,and the other disclosure to make and we want that in the notes to financial statements. It's up to theauditing standards setters, either at the international level or country by country, to decide whether thatshould also appear in the auditor's report.

Question/Comment.

Would you please comment on the relationship between IASC and IFAC.

Paul Pacter.

Yes, it's a good Question/Comment. I said earlier that we have 140 IASC members in 101 countries.Those people are also IFAC members. You cannot be our member unless you're a member of IFAC.Once you've become a part of IFAC, you are automatically a member of IASC. IFAC is an associateorganization. If you look at the IFAC organization chart, they view us as one of their committees or



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something like that. I don't recall exactly how that works --- but we have a very close workingrelationship with IFAC. They have appointment power over the thirteen people filling country seats onour Board. The IFAC Council approves those members; that's about their only responsibility for theIASC. IFAC has a public sector committee, a public sector accounting standards committee, dealingwith government standards and non-profits accountancy. Somebody from that committee attends all ofour Board meetings. I did not list them as an official observer, but they are allowed to attend. We have avery good working relationship with IFAC.

002.07

Our new and revised SFAS 14 on segment reporting this was my project. And by the way, I wrote theoriginal FASB 14 on the same subject back in 1975/76, along with its Discussion Memorandum, itsExposure Draft. I've sort of made a career out of segment reporting. Obviously, I'm not doing well,because it keeps getting revised everywhere. But where we are now at the international level is --- well I

should say that where we were before this past year --- is that we had a five-paragraph standard, fiveparagraphs. I mentioned that before that many countries use a 10% guideline; many countries reportrevenue and results of operations, many countries report both industry and geographical --- that's theway it was.

Now we've added a lot of "thou shall" and "though shall nots" in more rigorous guidelines. We say thatall public companies must report both product information and geographic information. One of thosetwo bases is primary, whichever one is the predominate source of the company's risks and prospects, andthe other is secondary. And for the primary source you must disclose an awful lot of information for


New Standard: IAS 14, Segment Reporting

l Public companies must report information along product and service lines and alonggeographical lines

l One basis of segmentation is primary, the other secondary (dominant source of risksand returns)

l For primary segments, disclose revenue; operating result; segment assets; segmentliabilities; cost to acquire PP&E and intangibles; depreciation; non-cash expensesother than depreciation; and equity method and joint venture income.

l For each secondary segment, disclose revenue, assets, and cost to acquire property.l Organisational units for which information is reported to the Board and CEO.l If those organisational units arent along product/service or geographical lines, use

the next lower level of internal segmentation that reports product and geographicalinformation.

l Never construct segments solely for external reporting purposes.

1. 10% materiality to report individually.2. Segments must equal at least 75% of consolidated.

l All of above, essentially same as FASB



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secondary three items of information and I've listed here in these bullets, the specific items ofinformation that must be disclosed by segments.

Question/Comment.

So companies have separate domestic from foreign revenues, does that also mean country by country?

Paul Pacter.

For defining their geographical segments I pushed as hard as I could for country by country, any countrymore than 10%, because I think the risks there usually are political --- that is political boundaries meansomething. We in the steering committee bought off on that and so our draft statements of principlessaid country by country. The Exposure Draft backed off that a little bit, and the final standard does notsay one way or another. It says "you define it." It gives a list of factors to differentiate geographicalareas. But --- and now your question was if you isolated domestic versus all others. Would that qualify?I can't answer that until I know a lot more about the circumstances for a specific country. I can honestlysay I am not sure today what the value would be of co-mingling Indonesia and Singapore if you claimedthat's our entire overseas operations. Because the states in the economies in those two countries are so

different, the co-mingling may not reveal the risks appropriately. Certainly said all Pacific Rim oryou took Australia and co-mingled Indonesia with it and said that is the Pacific Rim segment. What inthe world would that mean in 1998? I don't know.

So we know that if you look at the academic research, which is considerable over the last twenty yearson both industry and geographical disclosures that have often been domestic and joined nations in majorcontinents. One of the things we discovered is that the predictability of industry information, such asndustry sales, line of business and profits and assets, is much stronger to by industry segments earningsin stock prices than is the geographic segment reporting, But none the less, even with what we've had iscontinent-typed disclosure, almost every research study on geographical information finds a positivecorrelation, even with the old geographic disclosures. So I think while it's not ideal to still havecontinents or maybe even something broader, it's seems to have been useful. So that's where we are atthe moment.

Our segment definition takes a management approach just like FASB. We began working on therevision to IAS 14 the same time FASB began working with FASB 14 hand in hand with theCanadians. After moving to England in 1996, I found myself commuting to Toronto and Norwalkgetting battle scars in the process of going back --- trying to battle out, to minimize the conflicts in ourstandards. IAS 14 has a very precise objective. Our objective is to report information about the lines ofbusiness in which a company operates and the geographical edges. It deals with risks and returnsassociated with the lines of business and the geographical areas a compnay operates in. Once you acceptthat objective, you can see how our standards fell into place.

The FASB's objective is to report, to shareholders, the breakdown of the company --- the segmentationof the company that is reported to management for whatever reason. The FASB's statement of theobjective of the new standard is blah, blah, blah. It is to report to shareholders the same segmentedinformation that reported internally. The North Americans have taken a "management approach," andyou've heard that term it means looking to management information, not just for segment definition, butalso to decide what information should be presented and how to measure it. We couldn't swallow it.What we swallowed is the management approach for segment definition. We say OK, but there areconstraints. If your management segments co-mingle product lines of diverse risks, you must look atyour next lower level of internal management reporting and see if that breaks those apart. And if it



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doesn't, look at the next lower level. Somewhere in you internal structure you must be reporting whereyou differentiate these risks.

But we take a management approach to segment definitions, but unlike the FASB, we stop there. Wethen say we want standards as to which information should be presented and how to measure it. We'vegot the same 10% test for materiality, and we've got the same requirement that segment informationmust represent 75% of consolidated as in the new FASB standards.

Question/Comment.

Assume that I am reporting on a SBU basis internally? And let's assume that I've run in six products.Do I go to a second bullet? Am I required to report on a product basis criterion regarding diverse risks Iheard you say?

Paul Pacter.

It is and it is product orientated. So if you are managed by business unit internally, that co-mingles let'ssay your bank subsidiary or insurance company subsidiary with a hi-tech subsidiary together under one

manager

Question/Comment.

Five or six products I --- am I right to assume that they are all same risk? I don't have to go to the secondline item?

Paul Pacter.

If you end up with product line information; we have some guidelines as to what constitutes productlines. They are broad guidelines but if you have six very diverse products, if you co-mingle chocolate

bars and wheels --- tires for automobiles you would have to break that out even if you contend thediverse product lines are their equally risky.

.New Standard: IAS 14 (Continued)

Segment ReportingDifferences With New FASB 131 and CICA Standard:

l IASC: Consolidated GAAP and allocations;

FASB/CICA: Internal accounting measures.

l IASC: Symmetry of expenses and assets;FASB/CICA: Symmetry is not required.

l IASC: Standardised measure of segment result;FASB/CICA: Whatever is reported internally.

l IASC: Vertically integrated not segments;



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Now here's a list of the five big differences between IAS 14 and FASB's SFAS 131 that replaced SFAS

14. IAS 14 says you must in your segment information must use the same accounting principles as inyour consolidated financial statements. FASB's new SFAS 131 wants the same basis for measurementsthat were reppoted internally. These may not all be on the same underlying principles. For example, acompany internally may only allocate cash pension contributions by segment when accrual of theunfunded pension liability reported at the corporate level --- for whatever reason. FASB would say thatyou would have cash basis pension expense in your segment information even though you had accrual inconsolidated financial statements. If you make your LIFO adjustment at the corporate level somehow,and you judge your managers of your segments on the basis of FIFO, then your consolidated financialstatements will be on LIFO but your segment data FIFO.

Or maybe if you impute a cost of capital which many companies will to each segment and say this isyour hurdle rate --- you're going to be charged 14% cost of capital. That's not an expense that's on the

income statement. We say you can't do that. We want consolidated GAAP to control the segmentreporting. The FASB says that's the way you report internally, that's the way you report externally. Wehave a symmetry requirement for assets and expenses and they don't have this requirement. So if forsome reason under FASB rule, a company allocates an asset to a segment but does not charge thesegment with the depreciation expense, that's OK for to leave out depreciation in the segment reportingunder the new FASB SFAS 131. We say wait a minute! To get a some sort of return on investmentmeasure if you're allocating the asset, we want to expense the depreciation at the segment level as well.

We have a standardized measure of segment results. This means every company and every segment willbe essentially operating profit before interest, taxes, minority interest equity, extraordinary items, therbyisolating operating pre-tax, pre-interest operating profit. The FASB says you report to your shareholders

the level of profit that you report internally. So for some companies reported segment profit might be agross profit number, just cost of goods sold subtracted from revenue. Other companies might go all theway down to net income. For some companies I think it's certainly possible, and I know it's true fortaxes, that you'll have different levels of profitability for different segments. Some companies willallocate some income taxes to a segment where there's some abnormality or somewhere a segment has aspecial tax effect.

The IASC permits, but does not require companies, to treat vertically integrated activities as segments.We say a reportable segment must have at least half of its revenue from outside customers. This is notso under FASB's SFAS 131. It says that, if it's reported internally, it's a segment even if when it's apossibility your bank's computer department where bills out for two lines of business --- commerciallending and the trust department or something like that. So you've got one segment of business, acomputer center, that bills itself out to the two internal lines of business, I'm exaggerating this example.But for the FASB, you might be report three lines of business if that's the way you report internally. Forthe IASC could only have two lines of business.

Question/Comment.

Can a company were to design its internal reporting system in such a way to comply with both IAS 14and SFAS 131?

l FASB/CICA: Requires these to be segments.



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Paul Pacter.

Definitely! That was where we, the FASB and the IASC, finally agreed. We agreed to disagree on thisstuff, we did everything in our power to make that possible. And when I say "we" I mean a staff ofFASB, CICA, and me from IASC along with our respective steering committee chairmen. We actuallyhad a conference committee, like you'd have in the U.S. Congress, laboring to insure that a companycould comply with both standards in a single report. For example, if company only reported gross profit

by segments internally, that becomes the segment basis for SFAS 131. We would say, all right nowyou've got to allocate other operating expenses for purposes of IAS 14. So you would have --- youwould arrive at a gross profit number in your FASB accounting, and then you'd additionally derive apre-tax, pre-interest operating profit number for IASC accounting..

We believe that in nearly all cases the segment definition would be simila. We even developed,internally, some schemes the layouts of how you could do this reconciliation. There are going to besome oddball cases where you cannot; where they'll be forced to make two separate segment accountingpresentations. I think these will be few and far between --- that's our hope.

002.08

Disclosures in the old IAS 17 were limited, particularly for operating leases. And what we just did wasreview the old IAS 17 and beef up the disclosure side of that standard. And that was the primary

objective of that project was to enable investors who felt that more leases should be capitalized to havethe information that they could use to do that.

We changed a little bit of lessor accounting. Personally I'm not sure that was for the better, but wechanged it none the less. It was for the better in the sense that we eliminated an alternative that wasallowed under the old IAS 17. That alternative was in determining whether the lessor has made a saleand whether you discount the cash flows on the net of tax basis or pre-tax basis? We all know that someleasing transactions are only economically viable because as a result their tax impacts. And so there wasa school of thought that said you really, in measuring your cash flows, should do it on a net of taxbasis. There was another school of thought that said that we don't do any other accounting


New Standard: IAS 17, Leases

l Distinction between finance lease and operating lease has not changed.Essentially the same as FASB.

l Lessee accounting has not changed.

l Lessor accounting changed a bit: Lessor must use the net investmentmethod to allocate finance income (the net cash investment method,which takes income taxes into account, would no longer be permitted).

l Substantially enhanced disclosures both lessee and lessor.


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