```

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

     CURRENT ISSUES BEFORE THE FINANCIAL ACCOUNTING STANDARDS BOARD

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                COMMERCE, TRADE, AND CONSUMER PROTECTION

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 31, 2001

                               __________

                           Serial No. 107-48

                               __________

      Printed for the use of the Committee on Energy and Commerce

 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

                   U.S. GOVERNMENT PRINTING OFFICE
74-850                     WASHINGTON : 2001

_______________________________________________________________________
 For sale by the Superintendent of Documents, U.S. Government Printing 
                                 Office
Internet: bookstore.gpo.gov  Phone: (202) 512-1800  Fax: (202) 512-2250
               Mail: Stop SSOP, Washington, DC 20402-0001

                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

        Subcommittee on Commerce, Trade, and Consumer Protection

                    CLIFF STEARNS, Florida, Chairman

NATHAN DEAL, Georgia                 EDOLPHUS TOWNS, New York
  Vice Chairman                      DIANA DeGETTE, Colorado
ED WHITFIELD, Kentucky               LOIS CAPPS, California
BARBARA CUBIN, Wyoming               MICHAEL F. DOYLE, Pennsylvania
JOHN SHIMKUS, Illinois               CHRISTOPHER JOHN, Louisiana
JOHN B. SHADEGG, Arizona             JANE HARMAN, California
ED BRYANT, Tennessee                 HENRY A. WAXMAN, California
STEVE BUYER, Indiana                 EDWARD J. MARKEY, Massachusetts
GEORGE RADANOVICH, California        BART GORDON, Tennessee
CHARLES F. BASS, New Hampshire       PETER DEUTSCH, Florida
JOSEPH R. PITTS, Pennsylvania        BOBBY L. RUSH, Illinois
GREG WALDEN, Oregon                  ANNA G. ESHOO, California
LEE TERRY, Nebraska                  JOHN D. DINGELL, Michigan,
W.J. ``BILLY'' TAUZIN, Louisiana       (Ex Officio)
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Jenkins, Edmund L., Chairman, Financial Accounting Standards 
      Board......................................................    14
    Leisenring, James J., Board Member, International Accounting 
      Standards Board............................................    23
    Rogstad, Barry K., President, American Business Conference...    24

                                 (iii)

  

 
     CURRENT ISSUES BEFORE THE FINANCIAL ACCOUNTING STANDARDS BOARD

                              ----------                              

                         TUESDAY, JULY 31, 2001

              House of Representatives,    
              Committee on Energy and Commerce,    
                       Subcommittee on Commerce, Trade,    
                                   and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:06 a.m., in 
room 2123, Rayburn House Office Building, Hon. Cliff Stearns 
(chairman) presiding.
    Members present: Representatives Stearns, Shimkus, Btyant, 
Walden, Terry, Bass, Tauzin (ex officio), Towns, Harman, Rush, 
and Eshoo.
    Staff present: Ramsen Betfarhad, majority counsel; Brian 
McCullough, professional staff; Shannon Vildostegui, 
professional staff; David Cavicke, majority counsel; Will 
Carty, legislative clerk; and Consuela Washington, majority 
counsel.
    Mr. Stearns. Good morning. The subcommittee will come to 
order and I welcome our witnesses this morning.
    One of the more important areas of our committee's 
jurisdiction is over accounting standards. This is, sort of, 
something that is dry, but this is very important, as we are 
going to find out today and as we look at what has happened in 
the past.
    The general public, of course, is not excited as they might 
be, but this is our jurisdiction and it is fundamental to the 
health of our economy that we maintain the most accurate and 
transparent reporting system. The need for reliable financial 
reporting is growing more important with each passing year. 
Whether people are aware of it or not, accounting standards 
affect most of our systems and, thus, necessitate that we 
maintain the highest accounting standards practicable.
    Americans are increasingly preparing for their future 
financial needs by investing in public companies through 
retirement plans and individual accounts. More than half of all 
of Americans are now invested in the equity markets in one form 
or another. Since most Americans have a stake, directly or 
indirectly, in equity markets, reliable and accurate 
information on finance is very important on publicly traded 
companies, and the emerging global economy also dictates that 
we maintain high standards.
    Geographical boundaries are no longer a barrier to trade 
and commerce in our evolving digital world. While this has 
opened new doors for U.S.-based companies, it also means that 
our companies face increased competition in a global 
marketplace.
    While one of the benefits of this dynamic is a greater and 
more efficient flow of capital across borders, it requires us 
to constantly monitor our reporting standards to ensure our 
standards attract capital rather than present a barrier.
    And the competitive landscape is not confined to the large 
publicly traded companies. Private companies seeking capital 
are increasingly able to solicit foreign investment.
    I strongly support our structure of an independent standard 
setter. The transparency of our accounting standards and 
reporting system are primary to the decisionmaking process of 
investors and I think they would agree.
    I find the results of FASB, or the Financial Accounting 
Standards Board's business combinations project and the related 
accounting treatment for intangible assets, as outlined in 
statements 141 and 142, speak well for having a private, 
independent standards setting broad. FASB should be commended 
for an open process that included several public hearings and 
working with all parties to understand their concerns regarding 
business combinations.
    What FASB has accomplished is a tall order, considering 
that less than 2 years ago interested parties were vociferously 
debating business acquisition and we had one case where the 
acquire had reflected only 5 percent of the acquisition cost as 
expenses or costs.
    Although the resolution of the project is extremely 
important, I do have a broader question: I wonder whether our 
model or system of accounting is keeping pace with an economy 
that is rapidly changing and whether changes to the existing 
system will accurately reflect the financial position of a 
company. The question raises more serious concerns when placed 
in the context of the international standards.
    Obviously, achieving universally accepted standards that 
provide efficiency and comparability across borders has 
undeniable merit. Although I would like to think accounting 
standards and the structure of the IASB would be free from 
politicalization, we have seen some difficulties arise in many 
efforts to reach global agreements with our foreign 
counterparts.
    I support the structure and process and perhaps the fact 
that it is private will reduce potential hurdles. Nonetheless, 
I have several questions regarding the impact of international 
standards on U.S. businesses and U.S. GAAP standards. 
Transparent international standards will be an invaluable 
change but only if it is available to all businesses.
    Finally, my colleagues, I would be remiss if I did not 
raise the issue of pro forma verses GAAP, the General Accepted 
Accounting Principles, reporting of financial data by publicly 
traded companies with today's witnesses. I find value in both 
types of reporting, yet I would like to see two things 
transpire regarding pro forma reporting.
    First, some level of standardization should be applied to 
pro forma reporting so that an individual investor, such as 
myself, could make heads or tails out of that reporting system. 
I think FASB can play a constructive role in this regard. I do 
appreciate that pro forma reporting should be flexible enough 
to be responsive to a particular company's or industry's 
dynamics. However, if every company comes up with its own 
definitions, the utility of pro forma reporting is diminished 
for a small investor as he or she has no frame of reference to 
compare the pro forma results with, and this takes me to my 
second point.
    The pro forma statements, I believe, should be released 
simultaneously with a company's 10-Q filing with the SEC. The 
simultaneous release of those results will accord a small 
investor the opportunity to truly understand and appreciate the 
pro forma results.
    Furthermore, I would recommend that each company provide 
for a comprehensive reconciliation table between its pro forma 
and 10-Q reported results. I think this issue is of a 
substantial import to the small investor and I think FASB has a 
key role in adding some structure to pro forma reporting.
    In conclusion, I would add that our accounting standards 
are the best in the world and I respect FASB for their efforts 
to constantly improve them in the face of this changing world 
global economy. I look forward to our dialog with FASB and IASB 
and look forward to their testimony.
    And with that, the distinguished gentleman from New York, 
the ranking member, Mr. Towns?
    Mr. Towns. Thank you very much, Mr. Chairman, for holding 
this hearing.
    Let me begin by also commending Mr. Tauzin, the chairman of 
the full committee, for his hard work on the January 2001 
memorandum of understanding that preserves our jurisdiction 
over FASB and the setting of accounting standards and I would 
like to thank him for that as well, and you, too, Mr. Chairman.
    I welcome all the speakers and I am looking forward to 
hearing from them today. I am hopeful that we will hear an 
overview about the board's involvement in this ever-changing 
world over the next few years, for both investors and the 
private sector. The protection of the consumers of this country 
depends on the high standards the board sets for the many 
investors in the financial industry. After all, performance 
levels for the institutions governed by FASB require strong 
standards as well as leadership. That is the regulatory 
responsibility that I and the members of this subcommittee will 
expect from the board.
    I was also pleased that, under the leadership of former SEC 
Chairman Arthur Levitt, many in the accounting and consulting 
industry came to an agreement with the Securities and Exchange 
Commission last year regarding the necessary protections for 
American investors.
    Mr. Chairman, FASB affects so many investors and 
organizations in my home State of New York. I always want both 
consumers and the business community to understand the 
important responsibility the board has to the American public. 
I hope that all parties involved in setting standards will work 
together for a better future.
    I yield back the balance of my time and I look forward to 
hearing from the witnesses.
    Mr. Stearns. The gentleman yields back the balance of his 
time.
    The gentleman from Illinois?
    Mr. Shimkus. Thank you, Mr. Chairman, and I appreciate the 
hearing.
    Sometimes I wish my sister was with me. I have five of them 
so I do not wish that very often, but one is an accountant and 
these are the days that I long for her to be at my side to help 
go through some of the vocabulary.
    I appreciate the independence of both the organizations and 
I think it is critical. I also appreciate the move to increase 
transparency which I think is the ultimate goal of what we need 
to apply here, and as we change in this age, we were talking 
about the stubby pencils and erasers, and, obviously, we are in 
a different era and standards have to change to meet the new 
standards.
    I am also concerned about this linkage. We do have 
oversight. We appreciate you coming. I want to make sure that 
we are not legislating or impacting on what the independent 
organizations do. We do have a role to play in consumer 
protection, but I think good will and work done by both parties 
can assure that we can perform our role as you perform yours.
    It will be interesting to listen to the discussions on 
these two statements; the two methods of limiting pooling and 
purchasing, along with the good will and intangible assets. I 
hope to learn a little bit more about that. And I am going to 
take this great big testimony of a gazillion pages, Mr. 
Jenkins, and give it as a gift to my sister for some light 
reading in the evening.
    So with that, Mr. Chairman, I yield back my time.
    Mr. Stearns. I thank the gentleman.
    The gentleman from New Hampshire? Mr. Bass, no statement?
    Mr. Walden? No statement? All right.
    The chairman of the full committee is recognized.
    Chairman Tauzin. How is that for timing?
    Mr. Stearns. That is perfect.
    Chairman Tauzin. Let me first thank you for holding this 
important oversight hearing today.
    Although accounting remains largely in the background of 
public policymaking, it occasionally warrants the focused 
attention of Congress and, in particular, the committee that 
would raise those questions about its impact on commerce. 
Indeed, the committee has searched its jurisdiction over FASB 
precisely because this organization's role in accounting 
standards setting is extremely important to commerce, in 
general, but most importantly to the evolving new economy that 
is characterized by the high-tech sector, in particular, where 
accounting rules and accounting customs are challenged in a 
dramatic new way.
    The direct relationship between accounting and the changing 
economy is best illustrated by the issues encountered during 
FASB's recent work to revise the standards on accounting for 
business combinations. And while FASB's initial proposal last 
year had the laudable goal of improving financial transparency, 
it did not sufficiently address practical problems created by 
applying the old world brick and mortar's accounting standards 
to businesses in the digital economy, where literally eyeballs 
might be worth more than actual brick and mortar investments.
    Intellectual property and technological innovations do not 
necessarily depreciate the same way assembly line machines and 
warehouses depreciate. Thus when FASB initially proposed 
eliminating the so-called pooling accounting method for 
business combinations, often used by the rapidly growing new 
economy companies with substantial intangible assets, in favor 
of the so-called purchase method, failed to provide an adequate 
guidance for identifying and valuing those intangible assets.
    During the hearings on these standards in the last 
Congress, I asked FASB to resist eliminating pooling unless 
purchase-method accounting was improved to address the 
realities of today's economy. This included addressing the 
method of accounting for intangibles. I am pleased to see that 
FASB has made a good deal of progress since the last time Mr. 
Jenkins testified before the committee, and the recently issued 
standards attempted to address the concerns, in fact, raised by 
this committee last year.
    I would like to commend FASB for modernizing appraisals of 
intangible assets to reflect the realities of many information-
based companies. I first want to tell you that that is no easy 
task and I am cautiously optimistic, however, that the approach 
you have taken may, in fact, work for us. You clearly worked 
hard to acquire and act upon the best information before 
issuing the final standard and I appreciate that, but I have 
some remaining concerns about the application of the new 
standards.
    Are the triggering incidents accurate and precise or are 
they gray areas? Are the impairment tests too burdensome? What 
are the costs associated with the new system? In particular, 
how will small and middle-sized companies handle the cost and 
the administrative requirements associated with a new approach? 
I hope, Mr. Jenkins, you will answer some of those questions 
today in your testimony.
    In addition to the new standards for business combinations, 
we are going to hear a bit about the development of the IASB, 
the International Accounting Standards Board. With a charter to 
achieve a single set of global accounting standards, the IASB's 
mission is neither small nor easy. International consistency in 
accounting standards is becoming increasingly important in the 
global economy; Mr. Chairman, as important as the question of 
international standards on privacy that I know you have focused 
on so mightily in the last few hearings.
    However, the desire of the international harmonization must 
be balanced with our domestic need for accurate and transparent 
account as is provided by the U.S. GAAP and the need to retain 
our international competitiveness. I suggest the U.S. will not 
easily stray from GAAP unless an alternative is acceptable and 
necessary. Congress and this committee, in particular, will 
play a strong oversight role in the adopting of international 
standards by the U.S., and I hope to gain some reassurance that 
FASB will be active in pushing for strong, harmonized standards 
that will not undermine our system nor put our companies at a 
disadvantage with their international competitors.
    Again, I want to thank the chairman for this important 
hearing.
    And, again, Mr. Jenkins, I want to thank you and the board 
for listening, I think, very well and for taking very seriously 
our concerns last year and for, as I said, making, I think, 
extraordinary progress on answering those concerns.
    Thank you, Mr. Chairman.
    Mr. Stearns. Thank you.
    And I say to the chairman earlier, both Mr. Towns and I, 
had praised your leadership in that FASB jurisdiction was 
retained in our committee and we recognize that.
    The gentlelady from California, Ms. Eshoo?
    Ms. Eshoo. Thank you, Mr. Chairman.
    And good morning to our distinguished panel that are here 
with us this morning.
    While there really is not a current issue, at least in my 
view, that is created a need for the hearing, I still think 
that it is very important that we track with one another to 
hear from certainly the distinguished chairman of the FASB 
board, and it is good to see you here this morning, as well as 
our other guests.
    I also want to commend the Financial Accounting Standards 
Board for its recently completed work with regard to business 
combinations and I always look forward to working with you on 
issues that will come before you.
    When I first came to the Congress I made the assumption 
that every Member of Congress, on the other side of the Capitol 
and here, knew what FASB was, and I quickly found out that I 
was just about the only one that did. And so, I set out on a 
course where I had to educate members first, as I was trying to 
educate myself about how the Congress worked.
    It was an issue. And I introduced legislation recognizing 
that FASB was an independent body, and I still think that that 
is a very, very important element for every single Member of 
Congress to respect. But also understanding that the decisions 
that are made by this accounting standards board do have an 
effect on our national economy, and Congress certainly weighs 
in on that.
    At that time the issue was relative to stock options. And I 
worked for 2 years, and as we were just reorganizing for the 
next Congress the news came about the decision that the FASB 
board had taken. And I was delighted about the decision that 
was made then. So very early on I came to work on issues that 
FASB works on as well.
    I think that FASB and its members understand, perhaps, 
better today than when I first arrived to the Congress that, 
while the body is independent, that we do weigh in and that we 
have a keen interest in a whole number of areas.
    Why? I think the chairman of the full committee has 
delineated some of the reasons. We want companies to have the 
ability to not only retain their employees, but that it is very 
new in a knowledge-based economy. And so, in many ways we are 
partners, in other ways that may be viewed that we are 
adversarial, but always we have a, I think, responsibility, in 
terms of oversight to be tracking with one another.
    I think that our efforts have gone a long way in bringing 
about a full and public debate; most recently on the business 
combinations issue. So I think that just as there is the sand 
in the oyster, where it is aggravating, as it were, that we 
want to bring about some pearls. And I guess what we call that 
in Congress is a workable, consensus solution, whatever those 
words might mean.
    I have expressed concern about FASB's perception regarding 
its process of private sector standard setting and I have also 
been an advocate for always protecting its independence. God 
help us if the Congress gets into writing accounting standards; 
that is not what we need, and I do not think that is what our 
role is. I admire and respect the work its leadership and the 
staff devote to developing proposals and standards, and I 
applaud that commitment.
    The perspective and the education hearings such as this one 
have given us, have allowed to conduct worthwhile oversight, 
especially in the area of the new economy. And while we are 
having a somewhat tough time, the new economy is not going to 
go away; it is here to stay. So I think that the charting for 
our course together is really a very important one.
    So once again, Mr. Chairman, thank you for calling a 
hearing. And whatever may come up during it, I think we are 
going to make good use of that information.
    And once again welcome to Chairman Jenkins and the others 
that are here today. I appreciate that and I always look 
forward to working with you.
    Thank you.
    Mr. Stearns. I thank the gentlelady.
    The gentlelady from California, Ms. Harman?
    Ms. Harman. Thank you, Mr. Chairman.
    I want to congratulate you, again, for holding another 
oversight hearing. It is very useful, especially for the 
rookies on this committee, to have the chance to learn about 
some of these things before we have to deal with all of the 
various disasters that befall us and them.
    I want to point out to my friend and colleague, Ms. Eshoo, 
that I did know what FASB stands for before I came to Congress. 
I was a corporate lawyer in my last life. Some wish that I 
would return to that very quickly, but I am, at least, intent 
on trying to add what I can here.
    I would just say to FASB that the recent changes were 
enormously welcome to the business world and to us in Congress; 
very helpful.
    In the future, I think, FASB will be challenged again in 
several respects. One is internationally. I think it is very 
important to make certain that the rules we have domestically 
fit appropriately in the international marketplace.
    And in that regard, I know that there is another 
organization, but I do not know how to pronounce its acronym, 
the International Accounting Standards Board. Is that IASB? No. 
I-A-S-B, all right. Well, shows what I know. But anyway, that 
is one board, I just coined a new phrase. That is another area 
that will constantly require attention and perhaps change.
    And finally, I would make a comment about the digital 
economy. I am not sure it is new anymore. I think it is getting 
old; certainly, those of us trying to figure out what it does 
are getting old.
    But the way I would see this is, it is constantly required 
of those of us in government or in independent agencies to 
figure out digital solutions to the issues that the digital 
economy faces. We were all trained in the analog world, or 
those of us slightly older than our children were trained in 
the analog world. And it is often hard for us to think about 
how a proposed solution can work in a digital economy.
    So I see two new challenges for FASB. One is constantly to 
reassess its role in the international economy. And the second 
is to think digitally and think about how accounting solutions 
work with those in an economy that interacts with them on a 
digital basis.
    Thank you, Mr. Chairman. I look forward to learning more 
under your tutelage. I yield back.
    [The prepared statement of Hon. Jane Harman follows:]
 Prepared Statement of Hon. Jane Harman, a Representative in Congress 
                      from the State of California
    Mr. Chairman, it is clear that the Financial Accounting Services 
Board, which has the responsibility to set and improve accounting and 
reporting standards for all private and public companies funded by the 
private sector, serves an important purpose.
    With an increasing number of Americans becoming equity owners in 
American businesses, the FASB's role in providing clear and accurate 
information for consumers has become even more relevant to the average 
American than it was in the past.
    Therefore, because Congress has oversight authority over FASB, we 
must take the necessary steps to ensure the effectiveness of the FASB 
for consumers and other users of financial information.
    One of the primary issues for this hearing- the recently issued 
standard on business combinations holds special significance because it 
affects methods of accounting for mergers and acquisitions. With an 
increasing number of mergers and acquisitions, consumers and others 
need accurate information to make investment decisions and to track 
future returns on their investments.
    I am looking forward to hearing the testimony from our panel of 
witnesses today and to learn more about why the FASB decided to require 
all business combinations initiated after June 30 to be accounted for 
with the purchase method as opposed to the pooling of interests method.
    I am also interested in other efforts by the FASB to improve 
accounting and reporting standards to benefit consumers.
    Finally, our world has become much smaller and other markets 
clearly have an effect on our own. The same attention which is given to 
our own markets should be applied on an international level, and I know 
that the FASB has been a proponent of developing high quality 
international accounting standards. Congress also has a responsibility 
to insure that the FASB is taking the proper steps to influence the 
policy and standards of the International Accounting Standards Board 
(IASB).
    Mr. Chairman, thank you for holding this important hearing and 
these are issues, which we must continue to monitor to insure that 
consumers receive the information they need to make the best decisions 
possible regarding their investments. Ultimately, this will be good for 
the American public and the American economy.

    Mr. Stearns. Thank you, gentlelady.
    And I believe those are all the opening statements for 
members.
    [Additional statement submitted for the record follows:]

    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan

    Due to the press of other House business, including work on the 
patients' rights legislation and the Rules Committee hearing on pending 
energy legislation, I was unable to attend yesterday's hearing. I thank 
the distinguished Ranking Member of the Subcommittee, Mr. Towns, for 
extending my regrets and I also thank the distinguished Subcommittee 
Chairman, Mr. Stearns, for granting my request to submit a statement 
for the hearing record. I appreciate the opportunity to work with both 
of my colleagues on this and other issues.
    The work of the Financial Accounting Standards Board (FASB), though 
obscure by many standards, is vital to the fair and efficient operation 
of our capital markets and the conduct of commerce and trade.
    The Securities Act of 1933 and the Securities Exchange Act of 1934 
established a system of fair, honest, reliable, and transparent 
disclosure as the keystone of our markets. The Securities and Exchange 
Commission (SEC) was given responsibility for administering those 
statutes for the protection of investors and the public interest. The 
SEC has always looked to the private sector for leadership in 
establishing and improving financial accounting and reporting standards 
for publicly held companies, and in 1973, formally gave that 
responsibility to FASB.
    It's a tough job but one that FASB has performed admirably and in 
the public interest. In the process, FASB has had several near-death 
experiences. For example, the banks tried to have FASB abolished for 
suggesting that banks should mark certain financial assets to market 
just like everybody else. Then the bankers tried to rein in the SEC and 
FASB efforts to improve accounting for derivatives and hedging and the 
disclosure of registrants' derivatives and market risks.
    More broadly, Corporate America has tried to have FASB abolished 
for suggesting that stock options are an expense that should be 
reflected on balance sheets. Yet in a speech two summers ago, Alan 
Greenspan, the Federal Reserve Board chairman, said stock options 
helped ``impede judgments about prospective earnings'' and, over the 
last five years, had caused companies to overstate profit growth by one 
to two percentage points each year. Moreover, an article in the Sunday, 
July 29, 2001, New York Times, ``Disposing the Myth That Options Help 
Shareholders,'' reports on research showing stock options repricings to 
be an egregious transfer of wealth from shareholders to managements.
    We expect FASB to tackle these difficult issues in an open and 
deliberate manner that provides extensive due process. We do not expect 
FASB to duck issues because they are controversial or because there is 
no industry consensus on the subject. Sometimes the industry consensus 
is to do the wrong thing. We expect FASB to listen to all of its 
constituents and work with them; consensus will follow. We expect FASB 
to exercise strong leadership in these matters.
    In that regard, I appreciate the contributions made by the 
witnesses. I agree with the outcome on business combinations although I 
have some reservations about the ability to game the impairment test. 
This matter merits close scrutiny by FASB and by the regulators.
    Former Secretary of the Treasury Lawrence H. Summers once observed: 
``The single most important innovation shaping the [American capital] 
market was the idea of generally accepted accounting principles. We 
need something similar internationally.'' I agree. Therefore, I look 
forward to hearing more in the future about the work of the 
International Accounting Standards Board (IASB) toward establishing 
high quality standards to govern global transactions. Such efforts have 
fizzled in the past. I hope that the IASB can succeed where others have 
failed.
    In June, the Wall Street Journal reported that the SEC was 
investigating whether a handful of companies may have announced 
deceptive financial results to the public by touting misleading ``pro 
forma'' earnings in their quarterly news releases. It appears as if 
some companies are intentionally trying to deceive investors by issuing 
news releases highlighting pro forma earnings, which conveniently omit 
items that would reduce earnings. The real results are then filed weeks 
later with the SEC in the company's quarterly or annual earnings 
report. Sounds like fraud to me. I urge the SEC to take appropriate 
action promptly to curb this abuse. I associate myself with the 
concerns expressed by Chairman Stearns at the hearing and would be 
pleased to work with him to solve this problem.
    I also want to work with Chairman Stearns and Ranking Member Towns, 
as well as the Financial Services Committee, on accounting fraud. I am 
inserting in the hearing record with my statement a recent press 
report, ``SEC List of Accounting-Fraud Probes Grows,'' Wall Street 
Journal, Friday, July 6, 2001, indicating that the SEC has a record 
nearly 260 accounting investigations under way. This suggests that 
companies and accountants are subverting GAAP and the rules laid down 
by FASB and the SEC. At my request, the General Accounting Office has 
agreed to examine the governance system of the accounting profession 
and the issues raised by the outbreak of record levels of accounting 
fraud. (I am enclosing copies of those two letters for the record.)
    Lastly, I commend full Committee Chairman Tauzin for his 
negotiations on the memorandum of understanding that preserved this 
Committee's jurisdiction over accounting standards. This Committee, 
particularly its Subcommittee on Oversight and Investigations which I 
chaired, has a long and distinguished history on accounting matters. 
Under our stewardship, the quality of information we receive from U.S. 
companies exceeds that of almost any other nation. We can be proud of 
that.
                                 ______
                                 

            [Friday, July 6, 2001--The Wall Street Journal]

               SEC List of Accounting-Fraud Probes Grows
    By Michael Schroeder, Staff Reporter of The Wall Street Journal

    WASHINGTON--The Securities and Exchange Commission's list of 
companies under investigation for possible accounting fraud is growing 
longer, just as the agency's limited resources are being stretched more 
than ever before.
    SEC officials say they have nearly 260 accounting investigations 
under way, a big jump from recent years. They aren't just small firms--
the chief focus of the SEC's enforcement actions historically. Some 15% 
of the probes, or about 40, are focusing on companies that are among, 
the nation's 500 biggest.
    ``If we had nothing else to do, the accounting investigations alone 
could keep us busy for the next five or 10 years,'' Richard Walker, the 
SEC's enforcement chief, said in an interview. ``The size and magnitude 
are crushing.''
    The drumbeat of headline-grabbing accounting scandals, at firms led 
by Cendant Corp., Sunbeam Corp. and Rite Aid Corp., is also getting 
attention on Capitol Hill. Lawmakers are beginning to call for more SEC 
resources to combat fraud. The SEC's division of corporation finance 
has the staffing to review only a tiny fraction of earnings statements 
filed by public companies, and until this year it has been swamped by 
the huge crush of technology initial public offerings of stock.The 
current crackdown on accounting misdeeds began in mid-1998. The SEC's 
then-chairman, Arthur Levitt, beefed up policing efforts, approved new 
auditor-independence rules and issued new accounting guidance to curb 
bookkeeping practices used to inflate revenue. Last year, the regulator 
brought 100 financial-fraud actions, and there has been a 28% increase 
in accounting-related cases in the past three years.
    The most visible indicator of improper accounting--and source of 
new investigations--is the growing number of restated financial 
reports. Restatements ballooned to 233 last year, twice the number in 
1997, according to a recent study by Arthur Andersen LLP. Of those, 
only 9% resulted from new accounting methods required by the SEC.
    Xerox Corp. is an example of the major companies being scrutinized. 
In recently' restating its results for the past three years, Xerox 
conceded it had ``misapplied'' a range of accepted accounting rules in 
a variety of Ways, including improperly using a $100 million reserve to 
offset unrelated expenses. To correct the reserve error, Xerox cut its 
1998 and 1999 pretax profit by $100 million, while adding $6 million to 
2000's pretax figure. Xerox's acknowledgment of problems hasn't 
dissuaded the SEC from conducting a broad inquiry into its accounting 
practices.
    Recently, ConAgra Foods Inc. said its restatement is the subject of 
an SEC investigation. ConAgra announced that a subsidiary, which sells 
seed, fertilizer and chemicals, recorded fictitious sales, among other, 
accounting possible violations. The company said the revisions would 
reduce pretax earnings for fiscal 1998, 1999 and 2000 by a total of 
about $123 million. For fiscal 2001, the company said its revenue will 
rise $350 million.
    The pressure to assure maximum compensation, which is tied to share 
price, is tempting more financial executives to play games to manage 
earnings--such as recognizing revenue too early or improperly setting 
up reserves, SEC officials say. Companies fear that missing Wall 
Street's quarterly earnings targets even by a few pennies can send a 
stock price tumbling.
    The accounting industry argues that the number of restatements and 
accounting-fraud cases is minuscule as a percentage of the 13,000 
public companies that file annual financial reports. But regulators 
believe the accounting violations may be even more pervasive than the 
statistics suggest.
    ``Is it an ice cube or an iceberg?'' said Lynn Turner, the SEC's 
chief accountant. ``There's definitely something there below the water 
line.''
    The SEC relies on the press, company whistleblowers and its 
investigators for leads. While the regulator investigates most alleged 
frauds after word of a company's accounting problems has leaked and 
battered its stock price, SEC accountants are focusing on ferreting out 
questionable accounting in financial statements earlier.
    With the cooling of the IPO market, the SEC is using its freed-up 
resources to ramp up its review of annual financial reports. During the 
fiscal year ended Sept. 30, 2000, the SEC reviewed about 1,100 of the 
13,000 annual reports filed on form 10K with the agency, or about eight 
of every 100. This year's goal: one of every four annual reports.
    ``The commission's resources have been absorbed during the last two 
years by the hot IPO market, leaving little time for more random 
selection of annual reports and other filings,'' said Robert Bayless, 
the division's chief accountant.
    Accounting-fraud cases, which typically take at least a couple of 
years to prepare, often rest on complicated and hard-to-prove 
allegations. The largest cases are handled by the SEC's special 
accounting-fraud unit staffed by eight attorneys and seven forensic 
accountants. An additional 60 accountants in Washington and the 
regional offices also work on cases. Because of limited resources, the 
SEC doesn't pursue scores of less-egregious cases involving violations 
caused by negligence.
    Rep. John LaFalce (D., N.Y.), ranking member of the House 
financial-services committee, said recently that his panel will look 
into the accounting-fraud issue and has called for a 200% to 300% 
increase in the SEC's enforcement staff to bolster oversight. Such an 
increase would boost the SEC's total $423 million annual budget this 
year by as much as $400 million.
    Critics also complain that the SEC would also be less burdened if 
the accounting industry did a better job of policing auditors, 
ostensibly the first line of defense in the fight against fraud. Last 
year, the SEC worked with industry groups to improve self-regulation 
and the disciplinary peer-review process, but progress has been slow.
    At the request of Rep. John Dingell, (D., Mich.) the General 
Accounting Office, an independent research arm of Congress, has agreed 
to study whether the various accounting regulatory groups should be 
replaced by one full-time self-regulatory organization.

                         Jonathan Weil contributed to this article.
                                 ______
                                 
                      Congress of the United States
                                   House of Representatives
                                                   January 17, 2001
The Honorable David M. Walker
Comptroller General
U.S. General Accounting Office
441 G Street, N.W.
Washington, D.C. 20548
    Dear Mr. Walker: In September 1996, the General Accounting Office 
(GAO) released a seminal two-volume report, The Accounting Profession--
Major Issues: Progress and Concerns (GAO/AIMD-96-98), in response to my 
request concerning the status of recommendations made to the accounting 
profession over the prior two decades by major study groups to improve 
accounting and auditing standards and the performance of independent 
audits under the federal securities laws. GAO's principal finding was 
that, while the accounting profession had been responsive in making 
changes to improve financial reporting and auditing of public 
companies, the actions of the profession had not been totally 
effective. The most significant weaknesses were found in the areas of 
auditor independence, auditor responsibility for detecting fraud and 
reporting on internal controls, public participation in standard 
setting, the timeliness and relevancy of accounting standards, and 
maintaining the independence of FASB.
    Recent events, in particular last year's bitter fight over 
maintaining auditor independence, suggest that GAO needs to take 
another look at the accounting profession. The AICPA's move to block 
funding for the Public Oversight Board (POB) to conduct the special 
reviews requested by the Securities and Exchange Commission raises a 
number of troubling questions about the integrity and effectiveness of 
the profession's current governance system. Critics also contend that 
the peer review process is too clubby and too slow and that 
disciplinary actions are inadequate and ineffective. This is difficult 
to judge since the process is not transparent, thereby compounding the 
growing suspicions about ineptitude and collusion.
    In 1998, the POB appointed a panel of eight members, charging it to 
thoroughly examine the audit model. In his remarks to the panel at its 
public hearings, SEC Chairman Levitt asked: ``has the accounting 
profession become so big and complex that perhaps we need a full-time 
SRO [self-regulatory organization]? Are the alphabet of regulatory 
bodies . . . really workable?'' The Panel on Audit Effectiveness (the 
so-called O'Malley Panel) submitted its report and recommendations on 
August 31, 2000. I am transmitting Chapter 6--Governance of the 
Auditing Profession, and requesting that GAO answer Chairman Levitt's 
question by reviewing the current governance structure, the Panel's 
proposed system of governance (which appears to call for retention of 
the current list of entities reporting to an enhanced POB), the status 
of the profession's response to the Panel's recommendations, and the 
likelihood that the reforms, if implemented, will be effective.
    This is a matter of great importance affecting the reliability of 
financial statements, and I thank you for your prompt attention to my 
request.
            Sincerely,
                                            John D. Dingell
                                                     Ranking Member
Enclosure

cc: The Honorable W. J. ``Billy'' Tauzin, Chairman
   Committee on Energy and Commerce
                                 ______
                                 
                                  General Accounting Office
                                                       May 23, 2001
The Honorable John D. Dingell
Ranking Member
Committee on Energy and Commerce
United States House of Representatives

Subject: Auditing Profession's Governance System

    Dear Mr. Dingell: We previously met with your staff to gain a 
further understanding of your needs concerning your request for a GAO 
study of the auditing profession's governance system. It was agreed 
that we would proceed with a design phase given the number of 
components of the auditing profession's governance system and the broad 
range of the Panel on Audit Effectiveness' recommendations affecting 
the governance system. A design phase will enable us to obtain a more 
complete understanding of the governance system and will allow for the 
time we will need to access the various senior representatives of each 
of the system components. The purpose of this letter is to set forth 
the study objectives and provide you with a completion date for the 
design phase. We agreed with your staff that the overall objectives of 
our work will be to:

 obtain an understanding of the structure and operation of the 
        auditing profession's current governance system;
 obtain an understanding of the governance system proposed by 
        the Panel on Audit Effectiveness and how it addresses 
        limitations identified by the Panel;
 determine whether the Panel's recommendations have been 
        accepted, how the system components are working together to 
        implement reforms, their current status, and timeframe for 
        implementation; and
 obtain views of the Panel and senior representatives of each 
        system component regarding critical factors to successful 
        implementation of recommended reforms and any gaps in the 
        recommended reforms.
    The design phase will be completed by August 2001. We will remain 
in contact with your staff, and at the end of the design phase, we will 
provide you with a projected completion date for the total study. If 
you should have any questions, please contact Cheryl Clark at (202) 
512-9377 or [email protected], or Robert Gramling at (202) 512-6535 or 
[email protected].
            Sincerely yours,
                                        Jeffey C. Steinhoff
              Managing Director, Financial Management and Assurance
                                 ______
                                 
                      U.S. House of Representatives
                           Committee on Energy and Commerce
                                                       June 7, 2001
The Honorable David M. Walker
Comptroller General
U.S. General Accounting Office
441 G Street, N.W.
Washington, D.C. 20548
    Dear Mr. Walker: I am writing to acknowledge receipt of your letter 
of May 23, 2001, agreeing to my January 17, 2001, request for a General 
Accounting Office (GAO) study of the auditing profession's governance 
system. I am generally comfortable with both your study objectives--
some specific comments are set forth below--and the August 2001 
timetable for completion of the design phase of GAO's work.
    Under my chairmanship, the Committee on Energy and Commerce's 
Subcommittee on Oversight and Investigations held over 30 hearings on 
the accounting profession. The GAO's two-volume 1996 report, The 
Accounting Profession (GAO/AIMD-96-98), prepared in response to my 
March 1994 request, remains one of the most-requested reports in GAO 
history and has made a major contribution to the public debate on 
important accounting issues. Therefore, I retain my interest in these 
matters, despite the fact that the Committee on Energy and Commerce no 
longer has a direct role in them. As you know, a recommendation by 
House Rules Committee Republicans and the House GOP Conference to shift 
most of the Committee on Energy and Commerce's historic jurisdiction 
over securities and exchanges to a newly created Financial Services 
Committee was narrowly approved by the House earlier this year. I 
believe that decision was unwise, but these important responsibilities 
have been shifted. Therefore, I am copying the Chairman and Ranking 
Member of the Financial Services Committee on this letter as I am sure 
that they will be interested in your report. On January 20, 2001, 
Speaker Hastert inserted in the Congressional Record at H67 a 
memorandum of understanding (MOU) to clarify this jurisdictional 
situation. Among other things, the MOU spells out that the Committee on 
Energy and Commerce will retain jurisdiction over the issue of the 
setting of accounting standards by the Financial Accounting Standards 
Board, thus requiring the two committees to work closely on accounting 
issues and ensuring that the Energy and Commerce Committee's 
considerable expertise will continue to be brought to bear on these 
issues.
    While I am satisfied with the general objectives set forth in your 
letter, I also request that these specific critical issues be addressed 
in your report within those objectives:

 The adequacy and effectiveness of the Securities and Exchange 
        Commission's (SEC) oversight of the profession's governance 
        system. See, e.g., enclosed February 9, 2001, letter from SEC 
        Chief Accountant Lynn E. Turner to Public Oversight Board 
        Chairman Charles A. Bowsher.
 The adequacy and effectiveness of the response of the 
        governance system to the recent string of major accounting 
        debacles, using Livent, Waste Management, MicroStrategy, 
        Cendant, Sunbeam, Rite Aid, and Xerox as case studies.
 The adequacy and effectiveness of the response of the 
        governance system to the sharp increase in misleading and 
        fraudulent accounting. Please update your February 4, 2000 
        letter report, Review of Reporting Under Section 10A. Given the 
        level of accounting chicanery in the five years since 10A went 
        into effect (1996), one might expect auditor's fraud reports to 
        be piling up at the SEC. However, GAO reported that only six 
        such reports had been filed through December 14, 1999. Are 
        auditors still missing in action?
 The adequacy and effectiveness of the response of the 
        governance system to complaints that ``going-concern'' clauses, 
        in which auditors raise substantial doubt about a company's 
        ability to stay in business for at least 12 months, were rare 
        among the dot-com companies that shut down or filed for 
        bankruptcy last year. See, e.g., enclosed article `` `Going 
        Concerns': Did Accountants Fail To Flag Problems at Dot-Com 
        Casualties?'' Wall Street Journal, Friday, February 9, 2001. 
        The Financial Services Subcommittee on Capital Markets is 
        conducting an inquiry into the Wall Street shills who passed 
        themselves off as ``independent'' analysts and how their 
        heavily compromised research and recommendations hurt retail 
        investors--an investigation that I strongly support--but Wall 
        Street analysts are not the only expert sentries who were 
        asleep at their sentry posts or abandoned them altogether.
    The adequacy and effectiveness of the response of the governance 
system with respect to oversight, review, and reporting on the quality 
control systems that accounting firms are supposed to have implemented 
to ensure compliance with SEC and firm independence regulations. See, 
e.g., enclosed article ``Opening the Books on Corporate Auditors,'' 
Washington Post, Sunday, June 3, 2001, on the thorny issues that 
continue to cast a shadow over the integrity of the profession and its 
audit function. The SEC's new disclosure requirements are making a 
tremendous contribution to the public debate on how best to maintain 
auditor independence in order to safeguard.the integrity of our 
financial reporting system. How has the governance system responded?
    Thank you for your cooperation and attention to my request. The 
importance of this work cannot be overstated. I look forward to hearing 
back from GAO at the end of its design phase, and I thank you for the 
significant contribution that GAO makes to the public interest and the 
protection of investors.
            Sincerely,
                                            John D. Dingell
                                                     Ranking Member
Enclosures

cc: The Honorable W. J. ``Billy'' Tauzin, Chairman
   Committee on Energy and Commerce
   The Honorable Michael G. Oxley, Chairman
   Committee on Financial Services
   The Honorable John J. LaFalce, Ranking Member
   Committee on Financial Services

    Mr. Stearns. And now, we welcome our panel: Mr. Edmund 
Jenkins, who is chairman of Financial Accounting Standards 
Board; Mr. James Leisenring, member of board, International 
Accounting Standards Board; and Mr. Barry Rogstad, president of 
the American Business Conference. And we welcome you gentlemen 
and we look forward to your opening statement.
    Mr. Jenkins?

      STATEMENTS OF EDMUND L. JENKINS, CHAIRMAN, FINANCIAL 
ACCOUNTING STANDARDS BOARD; JAMES J. LEISENRING, BOARD MEMBER, 
INTERNATIONAL ACCOUNTING STANDARDS BOARD; AND BARRY K. ROGSTAD, 
            PRESIDENT, AMERICAN BUSINESS CONFERENCE

    Mr. Jenkins. Thank you, Mr. Chairman, members of the 
subcommittee.
    I am Ed Jenkins and chair of the Financial Accounting 
Standards Board, or as I like to say it Ms. Harman, the FASB.
    I am pleased to be here with you today. I do understand the 
important oversight role of this subcommittee. And I appreciate 
the comments that were made by you, Mr. Chairman, and your 
colleagues this morning about the FASB's independence and the 
role that we play in our capital markets. That is very 
important to us.
    This morning I plan to discuss the mission and due process 
of the FASB and our two recently issued financial statements on 
improving the transparency of the accounting and reporting for 
business combinations. In addition, I will provide a very brief 
overview of the FASB's involvement in the area of international 
accounting standards study. I have very brief prepared remarks, 
and I would respectfully request that the full text of my 
statement and all supporting materials be entered in to the 
record.
    Mr. Stearns. By unanimous consent, so ordered.
    Mr. Jenkins. Thank you.
    The FASB is an independent organization, as you have 
recognized, that is funded entirely by the private sector. Our 
mission is to set accounting and reporting standards to protect 
the consumers of financial information; most notably investors 
and creditors. Those consumers rely heavily on credible, 
transparent and comparable financial information for effective 
participation in our capital markets.
    The FASB's authority with respect to public enterprises 
comes from the U.S. Securities and Exchange Commission. The SEC 
has the statutory authority to establish financial accounting 
and reporting standards for publicly held enterprises, but for 
over 60 years the SEC has looked to the private sector for 
leadership in establishing and improving standards.
    Because the actions of the FASB effect so many 
organizations, our decisionmaking process must be thorough. The 
FASB carefully considers the views of all interested parties: 
consumers, preparers and auditors of financial information.
    Our rules of procedure require an extensive due process 
that was modeled on the Federal Administrative Procedure Act, 
but is broader and more open. It involves public meetings, 
public hearings and exposure of our proposed standards to 
external scrutiny and public comment. The board makes final 
decisions only after carefully considering and understanding 
the views of all parties.
    Earlier in July the FASB issued two final statements: 
number 144 on business combinations and number 142 on goodwill 
and other intangible assets. The issuance of these two 
statements is the end result of a public due process that began 
in 1996, included the issuance of four documents for public 
comment, over 70 public meetings, 4 days of our own public 
hearings, company field tests and field visits, and the careful 
analysis and public discussion of over 600 comment letters 
received from a broad range of consumers, companies, auditors 
and other constituents.
    Statement 141 will significantly improve the transparency 
of the accounting and reporting for business combinations by 
requiring all business combinations to be accounted for under a 
single method: the purchase method; the use of the pooling of 
interest method is no longer permitted. The purchase method 
provides investors with information necessary to determine the 
true cost of one company buying another. And as a result, it 
provides a sound basis for consumers to track future returns on 
that investment.
    Statement 142 will improve the purchase method in a number 
of ways. Most significantly the statement requires that 
goodwill no longer be amortized to earnings, but instead be 
tested for impairment. That improvement will provide consumers 
with greater transparency with respect to the economic value of 
goodwill and the amount and timing of its impact on companies' 
earnings.
    Another significant development effecting the allocation of 
FASB resources over the past several years has been the 
increased attention to the globalization of the financial 
markets. This has placed heightened interest and emphasis on 
the quality of international accounting standards and the 
process for developing those standards. In order for companies 
from around the globe to share equal access to the capital 
markets, financial reporting must provide greater comparability 
and credibility. These issues have underscored the need for a 
single set of high-quality accounting standards.
    A single set of high-quality accounting standards cannot be 
achieved without first establishing a high-quality global 
standard-setting structure. Without such a structure, the 
continued independent process of the various national and 
international standard setters can only result in increasing 
divergencies among national financial reporting regimes and 
between national and international accounting standards.
    Since 1997, the FASB has been actively working with other 
accounting standards, securities regulators and other 
interested parties around the world to develop such a 
structure. The result of those efforts has led to the recent 
creation of the new standard setting body named the 
International Accounting Standards Board, the IASB. The IASB is 
based in London. It has a private sector structure and a due 
process very similar to the FASB. The IASB began its operations 
earlier this year and it is currently in the process of 
establishing its initial agenda.
    Mr. Leisenring will comment further on the structure and 
process of the IASB, I am sure.
    For the FASB, we are committed to having a close, 
constructive and an active relationship with the IASB and with 
other national standard setters in achieving convergence of 
high-quality financial reporting standards around the world.
    I just want to stop here and emphasize that the key to 
convergence is high quality. It is not convergence at any cost. 
It is not convergence to lowest common denominator. And it is 
certainly not convergence to diluting the quality of the 
standards we have at the present time in the United States.
    We plan on working in partnership with the IASB in 
contributing to projects that are international in scope and 
have important implications for our U.S. constituents.
    In closing, I believe that the improved transparency 
resulting from our new standards on business combinations and 
the thorough and open due process that the board followed in 
developing those statements illustrates the benefits and the 
strengths of independent private sector accounting standard 
setting. Those benefits and strengths will well serve the FASB 
and the IAMB too as we work in partnership to develop sound and 
consistent global standards for the world's capital markets.
    For over 28 years the FASB has proven, and will continue to 
prove, invaluable to the efficiency of the capital markets and 
to the continued confidence of investors and creditors; the 
consumers of financial information.
    Thank you very much, Mr. Chairman. I very much appreciate 
this opportunity to be here today, and I would be pleased to 
respond to questions.
    [The prepared statement of Edmund L. Jenkins follows:]

Prepared Statement of Edmund L. Jenkins, Chairman, Financial Accounting 
                            Standards Board

                                SUMMARY

    On July 20, 2001, the Financial Accounting Standards Board 
(``FASB'' or ``Board'') issued two final Statements--No. 141, Business 
Combinations, and No. 142, Goodwill and Other Intangible Assets.
    Statement 141 will significantly improve the transparency of the 
accounting and reporting for business combinations by requiring that 
all business combinations be accounted for under a single method--the 
purchase method. Use of the pooling-of-interests method (``pooling 
method'') is no longer permitted. The purchase method provides 
investors with the information necessary to determine the true cost of 
one company buying another and, as a result, provides a basis for 
investors to track future returns on the investment. Statement 141 
requires that the purchase method of accounting be used for all 
business combinations initiated after June 30, 2001.
    Statement 142 will improve the purchase method in a number of ways. 
Most significantly, the Statement requires that goodwill no longer be 
amortized to earnings, but instead be tested for impairment. That 
improvement will provide investors with greater transparency with 
respect to the economic value of goodwill and the amount and timing of 
its impact on companies' earnings. Statement 142 requires that 
amortization of goodwill cease upon initial application of the 
Statement, which, for most companies, will be January 1, 2002.
    Mr. Chairman, Members of the Subcommittee, I am Edmund Jenkins, 
chairman of the Financial Accounting Standards Board. I am pleased to 
be here today. I understand the important oversight role of this 
Subcommittee.
    This morning I plan to discuss the mission and due process of the 
FASB and our two recently issued final Statements to improve the 
transparency of the accounting and reporting for business combinations. 
In addition, I will provide an overview of the FASB's involvement in 
the area of international accounting standard setting. I have brief 
prepared remarks, and I would respectfully request that the full text 
of my statement and all supporting materials be entered into the public 
record.

                 WHAT IS THE FASB AND WHAT DOES IT DO?

    The FASB is an independent private-sector organization. We are not 
part of the federal government and receive no federal funding. We are 
funded entirely from private-sector sources, primarily voluntary 
contributions and sales of publications.
    Our mission is to establish and improve standards of financial 
accounting and reporting for both public and private enterprises. Those 
standards are essential to the efficient functioning of the economy 
because investors and creditors rely heavily on credible, transparent, 
and comparable financial information.
    The FASB's authority with respect to public enterprises comes from 
the US Securities and Exchange Commission (``SEC''). The SEC has the 
statutory authority to establish financial accounting and reporting 
standards for publicly held enterprises. For over 60 years, the SEC has 
looked to the private sector for leadership in establishing and 
improving those standards. Therefore, the FASB may be viewed as an 
independent private-sector alternative to government regulation.
    The focus of the FASB is on consumers--users of financial 
information such as investors, creditors, and others. We attempt to 
ensure that corporate financial reports give consumers an informative 
picture of an enterprise's financial condition and activities and do 
not color the image to influence behavior in any particular direction.
    To quote a February 2000 letter from the Financial Accounting 
Policy Committee of the Association for Investment Management and 
Research, the leading organization of investment professionals in the 
US with over 40,000 members:
          The `lifeblood' of United States capital markets is financial 
        information that is: (1) comparable from firm to firm; (2) 
        relevant to investment and financing decisions; (3) a reliable 
        and faithful depiction of economic reality; and (4) neutral, 
        favoring neither supplier nor user of capital, neither buyer 
        nor seller of securities.
    The notion of neutrality is a fundamental element of our standard-
setting process. The FASB's Rules of Procedure explicitly require that 
the Board be objective in its decision making to ensure the neutrality 
of information resulting from its standards.
    Neutrality is an essential criterion by which to judge financial 
reporting standards, because information that is not neutral loses 
credibility and value. For example, surely, we would all agree there 
would be little value to Congress or the federal government of 
purposely altered and manipulated information about the rate of 
inflation or about unemployment.
    Similarly, to create or to tolerate financial reporting standards 
that bias or distort financial information to favor a particular 
transaction, industry, or special interest group undermines the proper 
functioning of the capital markets and impairs investors' capital 
allocation decisions.
    As former SEC Chairman Richard C. Breeden stated in testimony 
before Congress almost a decade ago:
          The purpose of accounting standards is to assure that 
        financial information is presented in a way that enables 
        decision-makers to make informed judgments. To the extent that 
        accounting standards are subverted to achieve objectives 
        unrelated to fair and accurate presentation, they fail in their 
        purpose.
    More recently, in an October 1997 speech, former SEC Chairman 
Arthur Levitt stated:
          It is compellingly clear to me that the objectivity and 
        fairness of standards-setting can only be guaranteed if the 
        process is insulated from political agendas, special interests, 
        and bureaucratic convenience. If that independence is 
        compromised, or perceived to be compromised, we would pay a 
        heavy price in declining investor confidence in the markets.
    The FASB sets standards only if, in the Board's independent 
judgment after carefully considering the input from all interested 
parties, there is a significant need for the standard and the costs the 
standard imposes are justified by the overall benefits. The objective, 
and implicit benefit, of issuing an accounting standard is increased 
credibility and representational faithfulness of financial reporting. 
However, the value of that improvement to financial reporting is 
usually impossible to measure and the Board's assessment of an 
accounting standard's benefit to companies that prepare financial 
reports and to investors and creditors that use financial reports is 
unavoidably subjective.
    The US capital markets are the deepest, most liquid, and most 
efficient markets in the world. The unparalleled success and 
competitive advantage of the US capital markets are due, in no small 
part, to the high-quality and continually improving US financial 
accounting and reporting standards. As Federal Reserve System Chairman 
Alan Greenspan stated in a June 4, 1998 letter to former SEC Chairman 
Levitt:
          Transparent accounting plays an important role in maintaining 
        the vibrancy of our financial markets . . . An integral part of 
        this process involves the Financial Accounting Standards Board 
        (FASB) working directly with its constituents to develop 
        appropriate accounting standards that reflect the needs of the 
        marketplace.

 WHAT PROCESS DOES THE FASB FOLLOW IN DEVELOPING ACCOUNTING STANDARDS?

    Because the actions of the FASB affect so many organizations, its 
decision-making process must be thorough. The FASB carefully considers 
the views of all interested parties--consumers, preparers, and auditors 
of financial information. Our Rules of Procedure require an extensive 
due process that was modeled on the Federal Administrative Procedure 
Act, but it is broader and more open in several ways. It involves 
public meetings, public hearings, and exposure of our proposed 
standards to external scrutiny and public comment. The Board makes 
final decisions only after carefully considering and understanding the 
views of all parties.
    The FASB's due process for developing a new financial reporting 
standard is best illustrated by describing the process followed in 
developing Statements 141 and 142:

 Following the Board's extensive agenda decision process, we 
        decided to add the project on business combinations to the 
        Board's technical agenda in 1996. (Attachment 2 includes a 
        detailed description of how topics are added to the FASB's 
        technical agenda.)
 When we began the project in 1996, we established a business 
        combinations task force comprising individuals from a number of 
        organizations representing a wide range of the Board's 
        constituents. (Attachment 13 lists the members and their 
        affiliations.) The first public meeting of the task force was 
        held in February 1997.
 In June 1997, we published for public comment a Special Report 
        that contained some of the Board's initial tentative decisions 
        about the project's scope, direction, and content. We received 
        54 comment letters in response to the Special Report.
 In November 1998, we held a second public business 
        combinations task force meeting to discuss issues related to 
        the project.
 In December 1998, we published for public comment, in 
        participation with other members of an international 
        organization consisting of representatives from the accounting-
        standard-setting bodies of Australia, Canada, New Zealand, the 
        United Kingdom, and the International Accounting Standards 
        Committee (``IASC'') (collectively the ``G4+1''), a Position 
        Paper that addressed a number of issues related to the methods 
        of accounting for business combinations. We received 148 
        comment letters in response to the G4+1 Position Paper.
 From 1996 through 1999 we held over 40 public meetings to 
        address the issues associated with the methods of accounting 
        for business combinations and the accounting for goodwill and 
        other purchased intangible assets and to consider constituent 
        comments.
 After each meeting, we updated a summary of all of the Board's 
        decisions. The updated summary was available on the FASB 
        website and was sent by mail to anyone who requested it.
 Our weekly newsletter, Action Alert, announced each meeting in 
        advance and reported a summary of the results of each meeting. 
        (In addition, press reports of some of the meetings were 
        available in certain business publications.)
 In September 1999, we published for public comment an Exposure 
        Draft that contained proposed changes to the existing standards 
        of accounting for business combinations and intangible assets. 
        We received approximately 200 comment letters in response to 
        the 1999 Exposure Draft.
 In connection with the issuance of the 1999 Exposure Draft, we 
        prepared and issued a number of explanatory documents to assist 
        constituents in understanding the Board's proposed decisions 
        including a FASB Viewpoints, Why Eliminate the Pooling Method? 
        (Attachment 6). All of the documents were available on the FASB 
        website and were sent by mail to anyone who requested them.
 We held four days of public hearings in February 2000 (two 
        days in San Francisco and two days in New York City) to discuss 
        the 1999 Exposure Draft with interested parties. More than 40 
        individuals and organizations testified.
 In March 2000, we held a third public business combinations 
        task force meeting to discuss issues raised by constituents in 
        the comment letters and public hearings.
 In October and November 2000, we conducted field visits with 
        14 companies in a variety of industries to discuss a goodwill 
        impairment approach developed by the FASB staff in response to 
        constituent input.
 In November 2000, we held a fourth public business 
        combinations task force meeting to discuss the results of the 
        field visits and the potential need for issuance of a revised 
        Exposure Draft proposing changes to the 1999 Exposure Draft's 
        provisions for accounting for goodwill.
 We held over 15 public meetings during 2000 to consider 
        constituent input received in response to the 1999 Exposure 
        Draft.
 In February 2001, we published for public comment a revised 
        Exposure Draft that contained proposed changes to the 1999 
        Exposure Draft's provisions for accounting for goodwill. We 
        received approximately 200 comment letters in response to the 
        2001 revised Exposure Draft.
 In connection with the issuance of the 2001 revised Exposure 
        Draft, we prepared and issued to the public a FASB Viewpoints, 
        Why Did the Board Change Its Mind on Goodwill Amortization? 
        (Attachment 9). The document was available on the FASB website 
        and was sent by mail to anyone who requested it.
 We held over 10 public meetings during 2001 to address the 
        issues raised by constituents in response to the 2001 revised 
        Exposure Draft and to continue to address issues raised by 
        constituents in response to the 1999 Exposure Draft.
 In May 2001, the Board completed its public deliberations of 
        all the substantive issues raised by constituents in response 
        to both the 1999 Exposure Draft and the 2001 revised Exposure 
        Draft. The Board reviewed the entire package of decisions made 
        in connection with its public deliberations and unanimously 
        supported the issuance of two final Statements--Statements 141 
        and 142, replacing Accounting Principles Board (``APB'') 
        Opinion No. 16, Business Combinations (``Opinion 16''), and APB 
        Opinion No. 17, Intangible Assets (``Opinion 17''), 
        respectively.
 In June 2001, we issued the FASB's monthly newsletter, Status 
        Report, which included an article entitled Conversations with 
        Constituents. The purpose of the article was to provide 
        constituent perspectives on the impact of Statements 141 and 
        142. In addition, the FASB website contained up-to-date details 
        of all of the Board's significant decisions to be contained in 
        the two Statements.
 In July 2001, the Board issued Statements 141 and 142 to the 
        public.

     WHAT WAS WRONG WITH THE ACCOUNTING FOR BUSINESS COMBINATIONS?

    Prior to the issuance of Statements 141 and 142, the accounting for 
business combinations was governed by the requirements of Opinions 16 
and 17, which were issued in 1970 by the APB, a former standard-setting 
group of the American Institute of Certified Public Accountants.
    Under Opinion 16, business combinations were accounted for using 
one of two methods, the pooling method or the purchase method. Use of 
the pooling method was required whenever 12 criteria were met; 
otherwise, the purchase method was to be used. Because those 12 
criteria did not distinguish economically dissimilar transactions, 
business combinations that were similar were accounted for using 
different methods that produced dramatically different financial 
statement results. Consequently:

 Analysts and other consumers of financial statements indicated 
        that it was difficult to compare the financial results of 
        companies because different methods of accounting for business 
        combinations were used.
 Because intangible assets are an increasingly important 
        economic resource for many companies and are an increasing 
        proportion of the assets acquired in many business 
        combinations, consumers of financial statements also indicated 
        a need for better information about those assets. While the 
        purchase method recognizes all intangible assets acquired in a 
        business combination (either separately or as goodwill), only 
        those intangible assets previously recorded by the acquired 
        entity are recognized when the pooling method is used.
 Company managements indicated that the differences between the 
        pooling and purchase methods of accounting for business 
        combinations affected competition in markets for mergers and 
        acquisitions.
    Under Opinion 17, all intangible assets acquired in a business 
combination, including goodwill, were required to be amortized or 
charged to earnings over the useful economic life of the asset. 
Consumers, including analysts and other users of financial statements, 
as well as company managements, noted that intangible assets, including 
goodwill, are an increasing proportion of the assets acquired in many 
transactions. As a result, better information about those assets was 
needed. Consumers of financial statements also indicated that they did 
not regard goodwill amortization expense as being useful information in 
analyzing investments.

                WHAT DO STATEMENTS 141 AND 142 REQUIRE?

    The provisions of Statements 141 and 142 reflect a significantly 
different approach to the accounting for business combinations than was 
taken in Opinions 16 and 17. The most significant of those changes are:

 Statement 141 requires that all business combinations be 
        accounted for by a single method--the purchase method. Thus all 
        business combinations will be accounted for in the same way 
        that other asset acquisitions are accounted for--based on the 
        values exchanged.
 In contrast to Opinion 16, which required separate recognition 
        of intangible assets that can be identified and named, 
        Statement 141 requires that intangible assets be recognized as 
        assets apart from goodwill if they meet one of two criteria--
        the contractual-legal criterion or the separability criterion. 
        To assist in identifying acquired intangible assets, Statement 
        141 also provides an illustrative list of intangible assets 
        that meet either of those criteria.
 In addition to the disclosure requirements in Opinion 16, 
        Statement 141 requires disclosure of the primary reasons for a 
        business combination and the allocation of the purchase price 
        paid to the assets acquired and liabilities assumed by major 
        balance sheet caption. When the amounts of goodwill and 
        intangible assets acquired are significant in relation to the 
        purchase price paid, disclosure of other information about 
        those assets is required, such as the amount of goodwill by 
        reportable segment and the amount of the purchase price 
        assigned to each major intangible asset class.
 Acquiring companies usually integrate acquired companies into 
        their operations, and thus the acquirers' expectations of 
        benefits from the resulting synergies usually are reflected in 
        the premium that they pay to acquire those companies. However, 
        the transaction-based approach to accounting for goodwill under 
        Opinion 17 treated the acquired entity as if it remained a 
        stand-alone entity rather than being integrated with the 
        acquiring entity; as a result, the portion of the premium 
        related to expected synergies (goodwill) was not accounted for 
        appropriately. Statement 142 adopts a more aggregate view of 
        goodwill and bases the accounting for goodwill on the units of 
        the combined entity into which an acquired entity is integrated 
        (those units are referred to as reporting units).
 Opinion 17 presumed that goodwill and all other intangible 
        assets were wasting assets (that is, finite lived), and thus 
        the amounts assigned to them should be amortized in determining 
        net income; Opinion 17 also mandated an arbitrary ceiling of 40 
        years for that amortization. Statement 142 does not presume 
        that those assets are wasting assets. Instead, goodwill and 
        intangible assets that have indefinite useful lives will not be 
        amortized but rather will be tested at least annually for 
        impairment. Intangible assets that have finite useful lives 
        will continue to be amortized over their useful lives, but 
        without the constraint of an arbitrary ceiling.
 Previous standards, including Opinion 17, provided little 
        guidance about how to determine and measure goodwill 
        impairment; as a result, the accounting for goodwill 
        impairments was not consistent and not comparable and yielded 
        information of questionable usefulness. Statement 142 provides 
        specific guidance for testing goodwill for impairment. Goodwill 
        will be tested for impairment at least annually using a two-
        step process that begins with an estimation of the fair value 
        of a reporting unit. The first step is a screen for potential 
        impairment, and the second step measures the amount of 
        impairment, if any. However, if certain criteria are met, the 
        requirement to test goodwill for impairment annually can be 
        satisfied without a remeasurement of the fair value of a 
        reporting unit.
 In addition, Statement 142 provides specific guidance on 
        testing intangible assets that will not be amortized for 
        impairment and thus removes those intangible assets from the 
        scope of other impairment guidance. Intangible assets that are 
        not amortized will be tested for impairment at least annually 
        by comparing the fair value of those assets with their recorded 
        amounts.
 Statement 142 requires disclosure of information about 
        goodwill and other intangible assets in the years subsequent to 
        their acquisition that was not previously required. Required 
        disclosures include information about the changes in the 
        carrying amount of goodwill from period to period (in the 
        aggregate and by reportable segment), the carrying amount of 
        intangible assets by major intangible asset class for those 
        assets subject to amortization and for those not subject to 
        amortization, and the estimated intangible asset amortization 
        expense for the next five years.

      HOW WILL STATEMENTS 141 AND 142 IMPROVE FINANCIAL REPORTING?

    The changes to accounting for business combinations required by 
Statements 141 and 142 will significantly improve financial reporting 
for the benefit of the public--investors, creditors, and other 
consumers of financial statements--as well as companies that prepare 
and audit those reports. More specifically, application of Statements 
141 and 142 will result in financial statements that:

 Better reflect the investment made in an acquired entity--the 
        purchase method records a business combination based on the 
        values exchanged, thus, consumers are provided information 
        about the total purchase price paid to acquire another company, 
        which allows for more meaningful evaluation of the subsequent 
        performance of that investment. Similar information is not 
        provided when the pooling method is used.
 Improve the comparability of reported financial information--
        all business combinations are accounted for using a single 
        method, thus, consumers are able to compare the financial 
        results of companies that engage in business combinations on an 
        apples-to-apples basis. That is because the assets acquired and 
        liabilities assumed in all business combinations are recognized 
        and measured in the same way regardless of the nature of the 
        consideration exchanged for them.
 Provide more complete financial information--the explicit 
        criteria for recognition of intangible assets apart from 
        goodwill, the required nonamortization and impairment testing 
        for goodwill and certain intangible assets, and the expanded 
        disclosure requirements provide consumers with more information 
        about the assets acquired in business combinations. That 
        additional information should, among other things, provide 
        consumers with a better understanding of the resources acquired 
        and the expectations about and changes in those resources over 
        time, and improve their ability to assess future profitability 
        and cash flows.
 Reduce certain transaction costs--requiring the purchase 
        method of accounting for all business combinations reduces the 
        costs incurred by companies in positioning themselves to meet 
        the criteria for using the pooling method, such as the monetary 
        and nonmonetary costs of taking actions they might not 
        otherwise have taken or refraining from actions they might 
        otherwise have taken.

     WHEN DO COMPANIES HAVE TO BEGIN FOLLOWING THE REQUIREMENTS OF 
                        STATEMENTS 141 AND 142?

    The provisions of Statement 141 apply to all business combinations 
initiated after June 30, 2001. Statement 141 also applies to all 
business combinations accounted for using the purchase method for which 
the date of acquisition is July 1, 2001, or later.
    Statement 141 does not apply, however, to combinations of two or 
more not-for-profit organizations, the acquisition of a for-profit 
company by a not-for-profit organization, and combinations of two or 
more mutual enterprises. All of those combinations are being considered 
in a separate Board project.
    The provisions of Statement 142 are required to be applied starting 
with fiscal years beginning after December 15, 2001. Early adoption is 
permitted for companies with fiscal years beginning after March 15, 
2001, provided that the first interim financial statements have not 
previously been issued. Statement 142 is required to be applied at the 
beginning of a company's fiscal year and to be applied to all goodwill 
and other intangible assets recorded in its financial statements at 
that date.
    There is one exception to the date at which Statement 142 becomes 
effective: Goodwill and intangible assets acquired by companies after 
June 30, 2001, will be subject immediately to the nonamortization and 
amortization provisions of Statement 142.

  WHAT IS THE FASB'S INVOLVEMENT IN INTERNATIONAL ACCOUNTING STANDARD 
                                SETTING?

    Among the significant developments affecting the FASB over the past 
several years has been the increased attention to the globalization of 
the financial markets. This has placed heightened interest and emphasis 
on the quality of international accounting standards and the process 
for developing those standards. In order for companies from around the 
globe to share equal access to the capital markets, financial reporting 
must provide greater comparability and credibility. These issues have 
underscored the need for a single set of high-quality accounting 
standards.
    In 1999, the FASB and our parent entity the Financial Accounting 
Foundation (``FAF'') published a report, International Accounting 
Standard Setting: A Vision for the Future (the ``FAF-FASB Vision'') 
(Attachment 14). The FAF-FASB Vision identified the establishment of a 
high quality global standard-setting structure as essential to the 
future success of a truly international financial reporting system in 
which a single set of accounting standards could be used world-wide. 
Without such a structure, the continued independent processes of the 
various national and international standard setters would only result 
in increasing divergences among national financial reporting regimes 
and between national and international accounting standards. That would 
increase the difficulties of meeting market demands for international 
comparability. Continued differences would augment the risks and 
uncertainties surrounding cross-border investment opportunities and 
would raise questions about the relative quality of one set of 
standards compared to another.
    In its vision, the FASB identified the restructuring of the 
existing London-based international accounting standard setter, the 
IASC, as one way in which a quality global standard setter might be 
established. The IASC had begun the process of reorganizing itself to 
create a new global standard-setting structure in 1997. It appointed a 
Strategy Working Party (``SWP'') to develop the IASC's strategy and 
structure. That SWP included a FASB member and an FAF trustee. In 
November 1999, the SWP published a report, Recommendations on Shaping 
IASC for the Future, which was unanimously supported by the IASC board. 
The recommendations describe a private sector structure with many of 
the characteristics of the existing FAF-FASB structure and in many ways 
consistent with the ideal structure described in the FAF-FASB Vision.
    In December 1999, the IASC began implementing the SWP's 
recommendations. In May 2000, the IASC established a group of trustees 
responsible for overseeing a new standard-setting body, named the 
International Accounting Standards Board (``IASB''). In January 2001, 
the IASC trustees selected the initial members of the IASB. Two members 
of the IASC trustees are or were members of the FAF trustees, and two 
members of the IASB are former members of the FASB. One of those 
members will be responsible for maintaining liaison between the FASB 
and the IASB.
    While the FASB's primary focus has always been and will continue to 
be on US accounting standards, it has for many years been an important 
contributor to the convergence of international accounting standards. 
The business combinations project resulting in the issuance of 
Statements 141 and 142 is the most recent example of our continued 
support of that effort. The Accounting Standards Board (``AcSB'') of 
the Canadian Institute of Chartered Accountants has been conducting a 
project on business combinations concurrently with the FASB project 
with the goal of converging North American accounting standards related 
to business combinations. The AcSB will soon issue final standards that 
prohibit the use of the pooling method and are similar in most other 
material respects with Statements 141 and 142.
    During the past year, the FASB also continued to support the 
convergence effort through our participation in the G4+1. Carrying on 
its mission of encouraging dialogue and collaboration among 
participating nations, the G4+1 published two reports last year. The 
first was on a new approach to lease accounting and the second focused 
on share-based payments. Following the recent formation of the IASB, 
the G4+1 disbanded in anticipation that much of its past work will be 
addressed in the future through the IASB.
    Yet another example of FASB participation in the global accounting 
arena over the past year was the December 2000 publication of a Special 
Report on the fair value of financial instruments. The Special Report 
was published in collaboration with several national standard setters 
from around the globe and the IASC that were brought together through a 
Joint Working Group of standard setters. The Special Report recommends 
far-reaching changes to accounting practices for financial instruments 
and similar items, including measurement of virtually all financial 
instruments at fair value and the elimination of special accounting for 
instruments used in hedging relationships.
    As the FASB participates in the critical task of developing sound 
and consistent global standards, we look forward to a close, 
constructive and active relationship with the IASB and other national 
standard setters in achieving convergence of high quality financial 
reporting standards around the world. We are particularly pleased that 
two former FASB members are members of the IASB. (Attachment 15 is an 
interview with the two former FASB members discussing their 
perspectives on the IASB). We plan on continuing to work in partnership 
with the IASB and contributing to projects that are international in 
scope and have important implications for our US constituents.
    In closing, I believe the improved transparency that will result 
from Statements 141 and 142, and the thorough and open due process that 
the Board followed in developing those Statements, illustrates the 
benefits and the strengths of independent private sector accounting 
standard setting. Those benefits and strengths will well serve the FASB 
and the IASB as we work in partnership to develop sound and consistent 
global standards for the world's capital markets. For over 28 years the 
FASB has proven, and will continue to prove, invaluable to the 
efficiency of the capital markets and to the continued confidence of 
investors--the consumers of financial information.
    Thank you, Mr. Chairman. I very much appreciate this opportunity 
and would be pleased to respond to any questions.
    [Additional materal submitted is retained in subcommittee files:]

    Mr. Stearns. Thank you, Mr. Jenkins.
    Mr. Leisenring?

                STATEMENT OF JAMES J. LEISENRING

    Mr. Leisenring. Good morning, Mr. Chairman.
    Mr. Stearns. Good morning.
    Mr. Leisenring. And members of the subcommittee.
    My name is Jim Leisenring and I am a member of the 
International Accounting Standards Board, IASB. My specific 
responsibilities with the IASB includes serving as that board's 
liaison board member for the Financial Accounting Standards 
Board, or FASB.
    I have submitted to you information concerning the 
organizational structure of the IASB, together with a list of 
trustees of the foundation and the membership of the IASB 
advisory group's Standards Advisory Council. I would 
respectfully request that those materials be submitted to the 
subcommittee that I submitted to be part of the official 
hearing.
    Mr. Stearns. By unanimous consent, so ordered.
    Mr. Leisenring. Thank you.
    And you will note, in looking at those materials, that the 
structure and the board's required due processes are very 
similar to those required by the FASB, though they are not 
identical.
    As you are probably aware, the IASB has been in the process 
of getting organized, primarily focusing on attracting a 
technical staff and analyzing potential agenda projects. Our 
staffing is essentially complete, and over the next few weeks 
those who have agreed to work for the IASB will become 
available to begin the staff work on the initial agenda 
projects.
    Efforts of the IASB are expected to be in cooperation with 
various domestic standard setting organizations including, of 
course, the FASB. The FASB has been very generous in sharing 
their expertise and particularly helpful to the IASB. These 
efforts are widely recognized around the world, and I believe 
very much appreciated.
    The cooperation between the IASB and the FASB should be 
expected because we have a shared objective: the creation of a 
single set of accounting standards suitable or useful 
domestically and internationally.
    While each board must reach their own conclusion on the 
issues addressed, with appropriate procedures in place it is 
anticipated we will be able to substantially converge 
accounting standards. I must emphasize a point that Mr. Jenkins 
made, however, the convergence must not be accomplished by the 
search for the lowest common denominator, but rather a search 
for superior standards. As a result, financial reporting would 
improve internationally and in domestic jurisdictions as well.
    I thank you for your interest in the IASB and in inviting 
me to this hearing. I am confident the IASB will also, in time, 
earn the high esteem in which you hold the FASB. I look forward 
to responding to your questions.
    [The prepared statement of James J. Leisenring follows:]
    Prepared Statement of James J. Leisenring, Member of the Board, 
                International Accounting Standards Board
    Mr. Chairman, Members of the Subcommittee, I am James J. 
Leisenring, a Member of the Board of the International Accounting 
Standards Board (``IASB'') and the IASB's liaison to the Financial 
Accounting Standards Board.
    I have a brief oral statement, and I would respectfully request 
that my (attached) supporting materials submitted to the Subcommittee 
be made a part of the official hearing record.
    Thank you, Mr. Chairman. I would be happy to respond to any 
questions.

    Mr. Stearns. I thank the gentlemen.
    Mr. Rogstad, your opening statement?

                  STATEMENT OF BARRY K. ROGSTAD

    Mr. Rogstad. Thank you, Mr. Chairman, members of the 
subcommittee.
    I am Barry Rogstad, president of the American Business 
Conference. ABC is a nonpartisan coalition of mid-size chief 
executives of a fast-growing companies. And before coming to 
ABC, I served as chief economist and managing partner of 
strategic international consulting services for Coopers & 
Lybrand.
    I congratulate the subcommittee for holding this hearing. 
Oversight of the FASB is a wholly legitimate responsibility to 
the Congress. Congress created the SEC and charged the 
commission with the setting of accounting standards. The SEC in 
turn endowed the FASB with operational responsibilities for 
setting those standards. Thus there is a chain of 
accountability emanating from Congress through the SEC to the 
FASB. I find the critics of congressional oversight of the FASB 
forget this important fact and I think it needs to be stated.
    I think, to be sure, past Congresses have not always 
exercised the oversight authority with much vigor. That is 
because the FASB typically has acted in ways that have not 
carried much political urgency. That has changed. Looking 
ahead, I think it is safe to say that the subcommittee can 
anticipate exercising its oversight authority with ever greater 
diligence as more and more Americans invest in the equities 
markets and as the changing nature of the international economy 
forces the FASB to address highly controversial issues such as 
stock options accounting under the rubric of international 
accounting harmonization.
    Now for the purposes of today's hearing, I was asked to 
focus my testimony to an evaluation of the effectiveness of the 
FASB process with respect to the recently concluded business 
combinations and intangible assets project.
    The members of the American Business Conference have a 
long-standing interest in the health and stability of the 
Nation's capital market. Central to their successful 
performance is the private sector standard-setting process of 
which the FASB is the central custodian. This process has 
served our Nation well, and the focus of all participants in 
the capital market should be on its continued viability.
    The ABC has had significant involvement with the FASB on 
numerous issues. Since Mr. Ed Jenkins became FASB chairman, we 
have sustained a dialog on the broader FASB agenda as well as 
the business combination project. It is from all of these 
discussions that I draw my testimony this morning.
    The stated mission of the FASB, as Mr. Jenkins has just 
said, is to establish and improve standards of financial 
accounting and reporting for the guidance in education of the 
public, including issuers, auditors and users of financial 
information.
    This challenging task is made more daunting by the 
increased emphasis in our economy on intangible assets and the 
acknowledged inadequacy of the traditional historical cost 
accounting model to capture today's business and economic 
reality.
    There is also one other important change impacting the FASB 
process. With 50 percent of households now equity owners in 
American businesses, Main Street and Wall Street have become 
closely aligned. This growing constituency of users of 
financial statements understands the significance of accounting 
standards on the performance of financial markets. This has 
important ramifications for the FASB and the Congress. 
Confronted with this reality, FASB will find it increasingly 
difficult to separate its deliberations from any public policy 
considerations. The Congress, for its part, will face increased 
pressure to intervene and move beyond its traditional oversight 
role.
    Strengthening the FASB process is essential, from my 
perspective, if for no other reason than to ensure these two 
external forces are properly addressed. My view of the role of 
FASB is one of consensus-builder across the users of financial 
statements. The board has a responsibility to put forward a 
proposed standard and the reasons underlying the required 
changes. It then seeks views of interested party and uses these 
views to evolve a position that represents the best possible 
technical accounting and business judgment. Achieving the 
broadest possible consensus across the dominant viewpoints is 
essential to the ultimate acceptance and utility of the 
finalized standards.
    The FASB process, as it applied to the business 
combinations project, in my judgment, did not perform well. We 
wrote a number of memorandums on these observations during the 
conduct of the project throughout the process. In our judgment, 
FASB reached interim conclusions that to the objective reader 
of the record could not be justified. Lack of transparency in 
the process generated significant frustrations among user 
groups; in particular, many of us in the business community. 
Given our perception of FASB's intransigence, I am talking 
about the middle of this project now, we reluctantly initiated 
discussions with Members of Congress responsible for 
congressional oversight of the FASB. This action led to a 
letter of concern from 10 members of the Senate and the 
introduction of legislation in the House calling for a 
moratorium on the FASB project.
    It is important to emphasize to this committee the degree 
of discomfort that I personally felt about involving the 
Congress in this issue. We felt the FASB process had broken 
down and the only recourse was through a congressional 
oversight function. The acknowledged danger of our action was 
the potential for congressional involvement in the standard-
setting process itself.
    Faced with these circumstances, it was important for the 
FASB to reconsider its position. To its credit, it initiated 
steps designed to achieve what I referred to throughout the 
process as a win-win outcome; a win for the FASB meant a 
standard that conforms to sound technical accounting basis and 
addressed the requirements of all users of financial 
statements, a win for users in general and the business 
community in particular meant a standard that correctly 
portrayed business in economic reality and facilitated 
efficient and effective reporting.
    FASB did reconsider its position. It now appears the 
results of the project have achieved the desirable win-win 
results. Much of the credit goes to Chairman Jenkins for his 
management skills and willingness to reconsider positions 
already taken.
    FASB's response focused on consideration of a major change 
to purchase accounting methodology: the substitution of an 
impairment approach to goodwill in place of required use of 
fixed appreciation schedules. This was a major breakthrough 
and, because it was controversial, required courage on the part 
of the FASB.
    I was privileged to be part of the team that met with FASB 
last September to discuss the proposed impairment test that 
would apply to goodwill. The FASB expanded this proposal and 
discussed it with users through interviews and provided another 
opportunity for user input during the comment period last May.
    This impairment approach to accounting for purchased 
goodwill is a major part of the final standard recently 
published by the FASB. It represents a technically correct and 
workable approach to the challenge of how to account for 
business combinations. FASB is to be congratulated for this 
breakthrough.
    Did the FASB process, as used in the business combinations 
project, produce a good result? Yes.
    Did this experience demonstrate a profound need to 
strengthen the FASB process itself to ensure successful 
outcomes in the future? Yes.
    And I say that in the sense that I think the process needs 
to work more routinely. By that I mean it should always rely on 
extra outside pressure, either from the business community or 
the Congress. And most importantly a routine process should not 
require the extraordinary leadership of the chairman.
    My major recommendations to the FASB would be to focus on 
consensus building across user groups. FASB, to its credit, has 
been attempting to involve users much earlier in the process. 
This emphasis needs to be continued. Of prime significance, 
however, is the need for the FASB to document its decision 
process, showing, in particular, how it balanced technical 
considerations in the views of interveners in reaching its 
positions. This process, I believe, requires greater 
transparency and the sustaining of a dialog until the necessary 
consensus is achieved. It was the failure on this issue that 
led to the breakdown of the process during the business 
combinations project.
    It is clear to this observer that FASB does have the 
capacity to develop among the users the financial statements 
generally accepted standards on highly controversial subjects. 
Based on our experience with the business combinations project, 
it is also clear that the FASB process needs to be 
significantly improved. Absent this, in my judgment, FASB will 
not have sufficient support to always succeed in the long-term.
    The stakes are very high and we in the ABC look forward to 
working with the FASB to ensure that its process continues to 
produce win-win outcomes in the future.
    Thank you, Mr. Chairman.
    [The prepared statement of Barry K. Rogstad follows:]

 Prepared Statement of Barry K. Rogstad, President, American Business 
                               Conference

    Mr. Chairman and Members of the Committee.
    I am Barry Rogstad, president of the American Business Conference 
(ABC). ABC is a nonpartisan coalition of chief executives of fast-
growing, mid-size companies. Before coming to ABC, I served as chief 
economist and Managing Partner for International Consulting at Coopers 
& Lybrand.
    I congratulate the Subcommittee for holding this hearing. Oversight 
of the Financial Accounting Standards Board (FASB) is a wholly 
legitimate responsibility of Congress. Congress created the Securities 
and Exchange Commission and charged the Commission with the setting of 
accounting standards. The SEC, in turn, endowed the FASB with 
operational responsibility for setting those standards. Thus, there is 
a chain of accountability emanating from Congress, through the SEC, to 
the FASB. Critics of Congressional oversight of the FASB forget this 
important fact.
    To be sure, past Congresses have not always exercised the oversight 
authority with much vigor. That is because the FASB typically has acted 
in ways that have not carried much political urgency. That has changed. 
Looking ahead, I think it is safe to say that this Subcommittee can 
anticipate exercising its oversight authority with ever greater 
diligence, as more and more Americans invest in the equities markets 
and as the changing nature of the international economy forces the FASB 
to address highly controversial issues - such as stock options 
accounting - under the rubric of international accounting 
harmonization.
    For the purposes of today's hearing, I have been asked to confine 
my testimony to an evaluation of the effectiveness of the FASB process 
with respect to the recently concluded project on Business Combinations 
and Intangible Assets.
    The members of ABC have a long-standing interest in the health and 
stability of the Nation's capital markets. Central to their successful 
performance is the private sector standard setting process, of which 
the FASB is the central custodian. This process has served our nation 
well, and the focus of all participants in the capital markets should 
be on its continued viability.
    The ABC has had significant involvement with the FASB on numerous 
issues. Since Mr. Ed Jenkins became FASB Chairman, we have sustained a 
dialogue on the broader FASB agenda as well as the business combination 
project. These discussions, together with our significant participation 
in the business combination project form the basis of the remainder of 
my testimony.
    This testimony constitutes my personal views, since time does not 
permit its formal approval by ABC management. However, I do believe it 
incorporates the views of the members of the ABC.
    The stated mission of the Financial Accounting Standards Board 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. This challenging 
task is made more daunting by the increased emphasis in our economy on 
intangible assets, and the acknowledged inadequacy of the traditional 
historical cost accounting model to capture today's business and 
economic reality.
    There is also one other important change impacting the FASB 
process. With fifty percent of households now equity owners in American 
businesses, Main Street and Wall Street have become closely aligned. 
This growing constituency of users of financial statements understands 
the significance of accounting standards on the performance of 
financial markets.
    This has important ramifications for the FASB and for the Congress. 
Confronted with this reality, FASB will find it increasingly difficult 
to separate its deliberations from any public policy considerations. 
The Congress will face increased pressure to intervene, and move beyond 
its traditional oversight role. Strengthening the FASB process is 
essential if for no other reason than to insure these two external 
forces are properly addressed.
    My view of the role of FASB is one of consensus builder across the 
users of financial statements. The Board has a responsibility to put 
forward a proposed standard and the reasons underlying the required 
changes. It then seeks views of interested parties, and uses these 
views to evolve a position that represents the best possible technical 
accounting and business judgment. Achieving the broadest possible 
consensus across the dominant viewpoints is essential to the ultimate 
acceptance and utility of the finalized standards.
    The FASB process as it applied to the Business Combinations Project 
did not perform well. FASB reached interim conclusions that to the 
objective reader of the record could not be justified. Lack of 
transparency in the process generated significant frustrations among 
user groups, in particular many of us in the business community. Given 
our perception of FASB intransigence, we reluctantly initiated 
discussions with members of Congress responsible for Congressional 
oversight of the FASB. This action led to a letter of concern from ten 
members of the Senate, and the introduction of legislation in the House 
calling for a moratorium on the FASB project.
    It is important to emphasize to this committee the degree of 
discomfort I felt about involving the Congress in this issue. The 
members of ABC as well as my Washington colleagues who were involved in 
the effort shared that concern. We felt the FASB process had broken 
down and the only recourse was to the Congressional oversight function. 
The acknowledged danger of our action was the potential for 
Congressional involvement in the standard setting process itself.
    Faced with these circumstances, it was important for the FASB to 
reconsider its position. It initiated steps designed to achieve what I 
referred to throughout the process as a win-win outcome. A win for the 
FASB meant a standard that conformed to sound technical accounting 
basis and addressed the requirements of all users of financial 
statements. A win for users in general, and the business community in 
particular, meant a standard that correctly portrayed business and 
economic reality and facilitated efficient and effective reporting.
    FASB did reconsider its position. It now appears the results of the 
project have achieved this desirable win-win result. Much of the credit 
goes to Chairman Jenkins for his management skills and willingness to 
reconsider positions already taken.
    It was always clear to this observer that FASB wanted to eliminate 
the pooling of interests approach to accounting for business 
combinations. If the FASB were to place sole reliance on the purchase 
accounting option, then it had to be sure that the methodology 
addressed all of the key technical and operational issues. Merely to 
list the issues involved indicates the importance of the discussion: 
goodwill amortization, valuation of intangibles, separation of 
identifiable intangible assets from goodwill, and the associated 
effects on reported earnings.
    FASB 's response focused on consideration of a major change to 
purchase accounting methodology: the substitution of an impairment 
approach to goodwill in place of required use of fixed depreciation 
schedules. This was a major breakthrough and, because it was 
controversial, required courage on the part of the FASB. I was 
privileged to be part of a team that met with FASB last September to 
discuss a proposed impairment test that would apply to goodwill. The 
FASB expanded this proposal, and discussed it with users through 
interviews and another opportunity for user input during a comment 
period in March of this year. ABC together with two of its members, 
NASDAQ and Grant Thornton, conducted a survey of businesses to provide 
FASB with as many views as possible.
    This impairment approach to accounting for purchased goodwill is a 
major part of the final standard recently published by the FASB. It 
represents a technically correct and workable approach to the challenge 
of how to account for business combinations. FASB is to be 
congratulated for this breakthrough.
    Did the FASB process as used in the business combinations project 
produce a good result? Yes. Did this experience demonstrate a profound 
need to strengthen the FASB process to insure successful outcomes in 
the future? Yes.
    My major recommendation to the FASB would be to focus on consensus 
building across user groups. FASB, to its credit, has been attempting 
to involve users much earlier in the process. This emphasis needs to be 
continued. Of prime significance, however, is the need for the FASB to 
document its decision process showing in particular, how it balanced 
technical considerations and the views of interveners in reaching its 
positions. This process, I believe, requires greater transparency and 
the sustaining of a dialogue until the necessary consensus is achieved. 
It was a failure on this issue that led to the breakdown of the process 
during the business combination project.
    It is clear to this observer that the FASB does have the capacity 
to develop among the users of financial statements generally accepted 
standards on highly controversial subjects. Based on our experience 
with the business combinations project it is also clear that the FASB 
process needs to be significantly improved. Absent this, FASB will not 
have sufficient support to succeed in the long term.
    The stakes are very high. We in the ABC look forward to working 
with the FASB to insure that its process continues to produce win-win 
outcomes in the future.
    Thank you. I would be pleased to answer any questions.

    Mr. Stearns. I thank you. I will be first with my 
questions.
    Probably the world will little note nor long remember what 
we say here this morning. With the exception of a few, maybe 
Ms. Harman, most of us do not have the corporate experience to 
understand the accounting process. But there has been a lot in 
the newspapers and most of us have invested in stocks and we 
rely generally on these accounting procedures and when we talk 
to the stockbroker, we assume that he is working off the same 
set of books as other corporations are, so you can compare. But 
lo and behold, we find out that has not been true and that is 
why FASB issued its June 27 and July 20, the report came out on 
dealing with the standards 141 and 142.
    Not getting too arcane or esoteric here, I say to my 
colleagues, this hearing is important because we are trying to 
say, as Mr. Rogstad has said, 50 percent of Americans are now 
invested in equities. They are talking to their brokers and 
their broker has to know if these standards from company to 
company are meaningful.
    So, Mr. Jenkins, the first question is, this is a little 
past history, a prologue: A company buys another company under 
the pooling standards and the expense for this company 
evaporates and they continue to build and the expense to buy 
evaporates. And so the investor says, ``Gee whiz, that 
company's making money hand over fist.'' But none of the 
expenses are showing. So you stepped in and have these new 
standards 141 and 142.
    So my question to you: Tell me today how it is going to 
differ for company A and B: A buys B and let's say B costs $10 
billion; what happened in the old days and what is going to 
happen? Is this too new? I know it is too new, but give me some 
comfort on what is going to happen in the new day where this 
purchase of $10 billion is going to show up so that the 
investor and the broker will say, ``Oh, yeah, there is some 
expense for purchasing this company.''
    Mr. Jenkins. Thank you, Mr. Chairman, I will be happy to 
try to respond to that.
    Mr. Stearns. Very, you know, you have to make it very 
layman oriented.
    Mr. Jenkins. The key is the investment that one company 
makes in another when they acquire it.
    Mr. Stearns. Right.
    Mr. Jenkins. In your example company A acquires company B 
and company A used $10 billion worth of consideration to buy 
company B.
    Mr. Stearns. Right.
    Mr. Jenkins. Under the old pooling of interest method, the 
company that was bought would not be recorded as an investment 
at $10 million, it would be recorded at whatever company B had 
shown on its books.
    Mr. Stearns. What its book value was.
    Mr. Jenkins. What its book value was. And let's say it was 
$500 million.
    Mr. Stearns. Right.
    Mr. Jenkins. If we have an example that was like that.
    Mr. Stearns. So the rest would be goodwill.
    Mr. Jenkins. The rest would not be even goodwill in the 
pool.
    Mr. Stearns. Nothing.
    Mr. Jenkins. It would be nothing.
    Mr. Stearns. Let's see, $10 billion, now you are down to 
$500 million.
    Mr. Jenkins. That is about a difference of----
    Mr. Stearns. So you show the expense of $500 million.
    Mr. Jenkins. You would have $500 million on the company's 
books and $9.5 billion would just, kind of, disappear.
    Mr. Stearns. Where would it go? Would it show anywhere?
    Mr. Jenkins. Does not get recorded at all under the pooling 
of interest method. Does not get recorded at all.
    Mr. Stearns. So corporation America has this enormous 
expansion acquisition program and, lo and behold, maybe 0.5 
percent or 1 percent or, you know, very little of it shows up 
and each company keeps rolling on.
    Mr. Jenkins. Yes. The problem is that then this company, 
the earnings of company B look pretty good when measured 
against $500 million, but they might not look quite so good if 
they were measured against $10 billion.
    Mr. Stearns. $10 billion.
    Mr. Jenkins. $10 billion.
    Mr. Stearns. Right.
    Mr. Jenkins. So what our new standard does is it does away 
with this pooling of interest methodology. It says every 
business combination, every acquisition, regardless of the form 
of consideration used to acquire it, whether it is stock or 
cash or debt or whatever, needs to be recorded at the full 
value of the consideration paid.
    Mr. Stearns. Okay. So if A buys B for $10 billion, then it 
has to show the entire $10 billion as expense.
    Mr. Jenkins. Right, and that is where the transparency 
comes in. That is the transparency we have been looking for; 
what did you actually put out in consideration for this 
company? Well, let's reflect this on the financial statements 
and then subsequent performance can be measured against the 
totality of that investment rather than some other number.
    Mr. Stearns. Has this procedure of pooling gone back to 
John D. Rockefeller? Has he been doing it? Did he do it, too?
    Mr. Jenkins. No, he did some other things, I think, that 
maybe we do not need to get into today.
    Mr. Stearns. Right.
    Mr. Jenkins. I do not think he used pooling of interest 
accounting.
    Mr. Stearns. How long has pooling been going on?
    Mr. Jenkins. Well, for a long time.
    Mr. Stearns. Ten years? Twenty years?
    Mr. Jenkins. No, no. No, no much longer. The standard that 
we just replaced.
    Mr. Stearns. A hundred years.
    Mr. Jenkins. It has been in existence since 1970.
    Mr. Stearns. Okay.
    Mr. Jenkins. And it was designed to, the project was 
designed to approve abuses in pooling of interest accounting 
that existed at that date.
    Mr. Stearns. And so, Ernst and Young and Pricewaterhouse, 
all of them accept pooling as a standard procedure; that this 
huge $10 billion is an advantage, and they all accepted that as 
a-okay?
    Mr. Jenkins. Well, in their defense, that was the standard 
and that was required. In fact, if you met certain standards--
--
    Mr. Stearns. But would not these accounting firms have some 
kind of feeling, like, ``Gee whiz, we just evaporated $9.5 
billion''? Would not they come to you and say, ``Gee whiz, this 
is not right''? 1971, I mean, why did it take so long?
    Mr. Jenkins. Well, it took a long time because it was a 
very controversial subject. Many companies liked the idea of 
recording the $500 million instead of the $10 billion.
    Mr. Stearns. Okay.
    Now, let's go to a new problem. It appears, based upon 
newspaper reports, that corporations are involved with what is 
called a pro forma approach to accounting; that is, basically, 
that they are going to provide earnings based upon pro forma 
and that will show, in some cases, a corporation has a profit. 
But, lo and behold, when they give the SEC their P&L statement, 
it shows a loss.
    But the pro forma will come out, sometimes it might be 
printed at the same time, but it will come out 2 or 3 months 
later. Well, meanwhile, all the stockbrokers look at this 
profit from company A and say, ``Gee whiz, it is making 
money,'' so the stock goes up. Whereas a lot of the people who 
are in the know realize we just had a $250 million or a $1 
billion loss.
    So how did that happen? And is it, in the same sense, that 
this has just been generally accepted accounting procedures? Or 
why do not you just take me through that scenario?
    Mr. Jenkins. This phenomenon of so-called pro forma 
earnings is relatively recent. I would say in the last 6 years 
it has begun.
    Mr. Stearns. Maybe since the dot-com type stuff.
    Mr. Jenkins. Yes, and earlier that was certain, kind of, 
corporate restructuring charges and so on.
    The first thing I would like to say is that the 
presentation of pro forma information, the type your talking 
about, is not permitted under our standards within the context 
of financial statements.
    Mr. Stearns. So there are no standards for pro forma 
reporting in America?
    Mr. Jenkins. That is correct, Mr. Chairman.
    Mr. Stearns. Okay. So every corporation can make up their 
own standards and issue their own report.
    Mr. Jenkins. They can.
    Mr. Stearns. Okay.
    Mr. Jenkins. And what I think is important is that the 
earnings and the earnings per share information that comes from 
generally accepted accounting principles, from our financial 
reporting standards, is the benchmark.
    Mr. Stearns. Right. That is what the SEC wants to see.
    Mr. Jenkins. Right. And that is what shown in this 10-Q.
    Mr. Stearns. When you do a pro forma, does not Ernst and 
Young and Pricewaterhouse, do they have they have their name on 
it at all?
    Mr. Jenkins. No.
    Mr. Stearns. No. So no one backs up the information except 
the corporation.
    Mr. Jenkins. That is correct.
    Mr. Stearns. Okay.
    Mr. Jenkins. And I believe and I think this gets to a 
similar point that you made in your opening remarks, but I 
believe that because GAAP reporting is the benchmark, that when 
pro forma information is presented, that the GAAP information 
needs to be presented at the same time.
    Mr. Stearns. Simultaneously. So that is your 
recommendation?
    Mr. Jenkins. Yes. So that the difference between the pro 
forma earnings and the GAAP, the general accepted earnings, are 
available to all investors or all customers in financial 
information.
    Mr. Stearns. Well, do you think the average investor or 
broker is aware that the pro forma report he gets is really 
something that the corporations make up with no standard 
accounting procedures? Do you think, I mean, do we need to 
educate Americans to point out that when you have corporation A 
say, ``We had a profit,'' that is all based upon their own 
standards, whereas accepted standards show they had loss, a 
huge loss? I mean, do we need to get that out or is it known by 
investors?
    Mr. Jenkins. I cannot really speak for all investors, but I 
think that the idea that I just suggested, and I think it is 
consistent with yours, of showing this information at the same 
time.
    Mr. Stearns. At the same time, okay.
    Mr. Jenkins. Or at least disclosing the information at the 
same time in the same place, is, in of itself, an educational 
process.
    Mr. Stearns. We will probably have a second round. We do 
not have a lot of members.
    What role does the SEC have in the pro forma report? Any?
    Mr. Jenkins. The SEC could exercise jurisdiction over, as I 
understand it, over any type of information that is presented.
    Mr. Stearns. But they do not. They have done no 
jurisdiction.
    Mr. Jenkins. What they have said, to the best of my 
understanding, is that when you present pro forma information, 
you should describe how you have computed it.
    Mr. Stearns. Okay. Just quickly, any one of you gentlemen 
would like to comment on the conversation Mr. Jenkins and I 
have had, maybe just anything you wish to add?
    Mr. Leisenring. I would add that internationally the 
problem seems to be increasing. The notion of pro forma 
earnings seems to be something that America can export. It is 
probably going to cause the same confusion elsewhere that you 
are concerned about here. But I think you have to look very 
closely at what is attempting to be accomplished.
    People are trying to suggest that they want to be measured 
by a different paradigm than a pool basis accounting earnings 
under generally accepted accounting principles. There may be 
some justification for that concern, which is why FASB and 
others are looking at alternative measures of performance for 
disclosure and things that might be useful to investors and 
potential investors.
    But the benchmark has and remains to be earnings and I 
think, increasingly, at least informed investors and their 
agents, are fairly aware that some of these other presentations 
are, sort of, earnings before undesirable items or some other 
paradigm such as that. And, historically, a good many people 
interested in promulgating that sort of measure have been 
people that would not have had earnings, as you suggested, 
under the traditional approach.
    But I think we cannot just dismiss it as only shenanigans 
and look at the deeper cause of the fact that there are some 
problems.
    Mr. Stearns. I am not even saying, I am just trying to 
understand.
    Mr. Leisenring. No, I understand.
    Mr. Stearns. I am not saying it is shenanigans, and I am 
just saying that there might be a legitimate reason for a pro 
forma. But I say it is confusing and I think that we need some 
kind of standard so that we can compare what it means.
    Mr. Leisenring. And that is why the FASB, I think, has put 
a lot of effort over the last few years into attempting to 
explore those alternative measures.
    Mr. Stearns. Do you have anything, Mr. Rogstad?
    Mr. Rogstad. I would just add to everything that has just 
been said two things: No. 1, I think that what users are 
looking for is to try to figure out what are the earnings from 
operations of a business. What business are you in?
    Mr. Stearns. What is your turn on investment?
    Mr. Rogstad. What are the earnings on that business?
    There are two other things that influence that that FASB's 
very much engaged in how you report to it. No. 1 is this whole 
relationship between the income statement and the balance 
sheet, which is what intangible assets and this amortization 
versus impairment test is all about. And second, there is the 
question, a lot of companies today are reporting positive 
earnings, the vast majority of which is coming from their 
investments in other companies as opposed from their own 
operations. It is pretty important for an investor to delineate 
those issues. So some of the pressures for pro forma reporting, 
I think, come from that.
    I think I would emphasize, however, it is much more 
desirable for these issues to be dealt with within the FASB 
framework. I think that is why the FASB framework, in its 
continued development, is absolutely important.
    Mr. Stearns. Do you think FASB should oversee this and come 
up with standards for pro forma?
    Mr. Rogstad. I think I do agree with that. I think the 
notion that, in fact, any business can use its own discretion 
as to the process in which it reports this, the final 
requirement here is so that users can make comparability 
decisions across an array of investments. If we have everybody 
reporting on a different basis, I think that outcome is not 
facilitated.
    Mr. Stearns. I appreciate your candid comments.
    Yes?
    Mr. Jenkins. If I may comment, tomorrow at our public board 
meeting we usually hold every Wednesday, we are going to 
discuss the scope of two potential projects that bear on this 
issue. One will be a potential project to look at how we might 
improve disclosures with respect to intangible assets, 
intangible assets particularly that are developed internally, 
like that result from a company's own research and development 
efforts.
    We also are going to consider a separate project that would 
relate to what I refer to as performance metrics that may not 
be pro forma earnings in its entirety, but it is things that 
get at the issue of a company's performance and what might be 
expected in the future. It is things like quality of product, 
time to market, backlog, other performance-related issues.
    The FASB, as Mr. Leisenring just mentioned, has been 
working on this area for some time. It really is an outgoing 
effort of a committee that I chaired back in the early 1990's 
that issued a report in 1994 called ``Business Reporting Model: 
Focusing On The Information Needs Of Users.'' And the FASB has 
earlier this year published this document. It is called 
``Improving Business Reporting: Insights Into Enhancing 
Voluntary Disclosures.'' It calls for more discipline, and yet 
more voluntary disclosure of performance metrics to supplement 
financial information.
    We also have just issued in April this special report 
called ``Business And Financial Reporting: Challenges From The 
New Economy'' that really focuses on the challenges of 
providing better information about intangibles.
    So we are going to be considering the potential scope of 
two projects in this area that would clearly bear on these 
issues that you are raising this morning, Mr. Chairman.
    Mr. Stearns. Thank you. My time has expired.
    The gentleman from New York?
    Mr. Towns. Thank you very much, Mr. Chairman.
    Mr. Jenkins, I congratulate FASB for the successful 
completion of its business combinations project. I believe that 
your process was open and fair, and that the SEC and Congress 
exercise appropriate oversight. The Finance Subcommittee, on 
which I served as ranking member, held a hearing on this issue 
last May.
    While most of your constituents are happy with the end 
results, some questions remains. Let me get to the question.
    My question is, could you please explain how the impairment 
tests will be implemented, and what safeguards have been put in 
place to make sure that the tests cannot be gamed? Some critics 
complain that the tests can be used to distort values.
    Mr. Jenkins. I will be glad to respond to your question, 
Congressman.
    The impairment tests relies on determining the fair values 
that are involved in the company's operation. The first step is 
to decide where this goodwill that you have acquired resides 
within the various operations of a company. Usually it will 
reside in one or more operating segment of the company. The 
FASB standards already require the disclosure of a significant 
amount of information about segments, so the basic information 
is already there and reported publicly, in most cases. In some 
cases, it will be necessary to go to a level below that, but in 
most cases we think the operating segment will be where this 
goodwill resides.
    There is an initial requirement to measure the fair value 
of that, what we call reporting unit, at the time that an 
acquisition is made. That serves as benchmark for subsequent 
measurements. And the methodology that is used in that initial 
fair value needs to be documented and retained by the company.
    Subsequently, each year, at least each year, and in the 
case where there are other indicators of, let's say, adverse 
events, to summarize, the tests may need to be performed more 
often than once a year. But each year the fair value of that 
reporting unit and every reporting units that contains goodwill 
needs to be determined and evaluated against the fair value of 
the individual underlying assets, excluding the goodwill. To 
the extent that the fair value of the reporting unit is less 
than the fair value of the underlying assets and liabilities, 
excluding goodwill, goodwill is impaired and must be written 
down.
    So it does require fair value determinations, which can be 
subjective. And yet, there is a very sufficient methodology in 
the marketplace today to determine fair value.
    We went through an extensive due process in testing this 
methodology. Mr. Rogstad has said in his statement, he 
participated in a presentation to us on similar methodology, 
one we developed from that presentation and others. We have 
discussed this with many business corporations and entities in 
the process of reaching our final conclusions. And we believe 
we have an operational test for goodwill impairment.
    Can it be gamed? Well, that depends in part on the 
diligence and dedication of companies themselves and their 
auditors.
    We have many estimates that we use in accounting. Almost 
everything in accounting is estimate.
    Mr. Towns. I was doing fine up to that point.
    Mr. Jenkins. So there is judgment involved in almost 
everything, maybe even cash today is an estimate. I do not 
know. But certainly everything else is the value of your 
inventory. We have had a requirement in accounting for many, 
many years that you can never carry an asset at more than what 
it is worth. And while we do not adjust to that worth if it is 
up, we have always had what we called impairment tests for 
inventory. We have loss reserves for receivables. We have 
impairment tests for buildings and equipment. And this is a 
similar approach but actually a more rigorous and well-
documented approach than we, perhaps, have in other areas.
    Mr. Towns. Is there anything Congress can do other than 
pray?
    Mr. Jenkins. Well, prayer is always in order, I believe. 
But in addition, I think you can urge your constituents, as we 
will urge ours, and basically our constituencies are the same, 
I believe, to apply this standard in good faith, in an 
objective way and with rigor.
    Mr. Towns. Thank you very much.
    Mr. Rogstad, let me ask you, it appears to be your 
testimony that FASB should not act until the industry has 
achieved consensus on an issue. Isn't this a recipe for 
gridlock?
    If Congress waited for the industry's consensus on issues 
like energy, health, telecommunications, we would never 
legislate a thing around here. We would just be sitting here, 
twiddling our thumbs.
    Isn't it more reasonable to ask FASB to exercise leadership 
on accounting standards, while meeting with and listening to 
its constituent groups and making the necessary revisions? 
Otherwise, you will probably never achieve timely improvements 
to accounting standards.
    Mr. Rogstad. Congressman Towns, I think it is the level of 
consensus that I am referring to here. Obviously, these are 
areas of incredible complexity. The notion that all users are 
going to ever agree on all aspects of this is not what I am 
talking about here. And there is a degree of healthy regulatory 
tension, part of which is always divides different views on 
some of these subjects.
    I do believe, however, and what I was trying to say in my 
prepared statement was, that we did reach a point in this 
process that FASB appeared to be heading in a direction that, 
as I noted, a reading of the record, as it is stated in public 
there at that point in time, was very difficult to say, ``How 
did you arrive at a central tendency, never mind a very 
detailed consensus, a just mainstream central tendency of where 
this project was going?'' based on all the intervener 
statements that had been made at that point in time.
    I think how FASB got to the point that they were stating at 
that juncture was not transparent. It is the consideration 
process, to pick up on Mr. Jenkins' word, that I did not think 
was transparent at that point, that caused everybody to reload 
and take another look at this.
    You do have to gradually converge toward a central tendency 
here, which is what I mean by consensus. And I think FASB, in 
the second half of this project, did that in a very, very 
notable way.
    But in the middle, to repeat, I thought there was not, on 
the basis of major statements by whole classes of interveners 
across accounting firms, across policy officials, across 
businesses, across financial institutions, there was just 
disparity all over the place, and very difficult to see that 
central tendency. And I think you have to start there and move 
a process forward based on that level of consensus. And I think 
that it is a level of detail, sir, I think.
    Mr. Towns. Mr. Chairman, I know my time has expired, but 
could I just have a minute to ask Mr. Jenkins to respond to Mr. 
Rogstad's claim that FASB's process is broken and needs to be 
repaired?
    Mr. Jenkins. I would be very happy, and I appreciate the 
opportunity to do that.
    I particularly object to Mr. Rogstad's claim that we were 
intransigent at any point in this project. That simply, in my 
judgment, is not the case.
    There is no group that we met with more often or listened 
to more careful than the American Business Conference. I cannot 
right now tell you how many times during the course of this 
project that I met with Mr. Rogstad and with his associates, 
with his members. They came to the FASB on more than one 
occasion and we listened carefully to them.
    The routine of our process, that Mr. Rogstad suggests we 
need to improve, contemplates change during the course of a 
project. That is why we issue documents for exposure and 
comment, so that we can hear and make changes accordingly. You 
cannot find a final standard at the FASB that is exactly the 
same, usually in some fairly significant way, from the exposure 
draft or drafts.
    We do make changes. That is evidence of the involvement and 
the process of working together with all of our constituencies. 
If we knew enough before we issued a document for exposure and 
comment to be 100 percent confident that we had the right 
answer, we would not bother with the exposure draft, not would 
we bother with public hearings and the extensive process, nor 
would we bother with educational measures. This is part of our 
normal process, and we do listen and learn.
    And on the basic issue of eliminating pooling of interest 
accounting, the basic issue, we did receive strong support from 
our constituencies at the exposure draft period of time. The 
issue then turned to focus on this goodwill issue, which we 
resolved as a result of continuing our full, open due process. 
Thank you.
    Mr. Towns. Mr. Chairman, allow me to request that the 
material be part of the record, submitted and become a part of 
the record. Mr. Jenkins indicated, in fact, that he had all 
this information, material for the record, because of the fact 
there were several meetings, several discussions, and we would 
like to have this be part of the record.
    Mr. Stearns. Mr. Jenkins, do you understand he is asking 
that the references that you have alluded to, he would like to 
make that part of the record, if that is possible?
    Mr. Jenkins. With respect to the meetings with the American 
Business Conference?
    Mr. Towns. Yes, that is correct.
    Mr. Jenkins. We would be glad to provide that information 
to you, yes.
    Mr. Stearns. Okay.
    The gentleman's time has expired.
    The gentleman from Illinois?
    Mr. Shimkus. Thank you, Mr. Chairman. I am just going to 
start and then I will go into my questions.
    Mr. Rogstad, in your testimony you say, ``Did the FASB 
process, as used in the business combinations project, produce 
a good result?'' And you say, the answer, yes. And then you 
also go on to say, ``It could be more improved.'' Much like 
what we do here in Washington; it gets pretty messy in how we 
eventually move something, but the ultimately objective is 
whether you get a product that works. And I would suggest that, 
even though this process got to a slow start, it was fairly 
satisfactorily concluded by most of the major parties.
    And I do have a question about the role of, actually a 
caution of the role of how much you would encourage elected 
officials to be actively intervening in rulemaking. You might 
get what you wish, which is an active role by public 
policymakers that spin on the whim of, sometimes on public 
perception, where your profession is a, what we are talking 
about is numbers and decimal points and stuff that do not have 
to carry the whim of public emotion at the time. There is a 
fine line, and I would just be cautious.
    Let me go to the international arena. Part of this 
subcommittee also has a trade jurisdiction. And, Mr. Leisenring 
and Mr. Jenkins, first of all, is the EU attempting at all to 
have some interplay in the financial accounting systems of the 
EU members, and how does that reflect on what we are doing 
here?
    I am very cautious and skeptical of EU and how, because of 
its merging, has created additional barriers to trade for us, 
along with our allies in the EU. How does this play out in the 
financial accounting market?
    Mr. Leisenring. The EU has historically had a significant 
involvement in financial reporting, within the countries within 
Europe. They have had a series of directives and they are much 
more law-driven toward their financial reporting than we have 
been in the United States.
    The EU, however, has seemed to embrace fairly 
enthusiastically the notion of international accounting 
standards. They have proposed legislation that has not passed 
as yet, but proposed and is highly anticipated that it will, 
that would require all European companies that are what we 
would call public companies, the same as SEC registrants, 
across Europe to comply with the international accounting 
standards by the year 2005. That would seem to drop the 
barriers and the differences across Europe and be a rather 
fundamental breakthrough.
    That is the good news side of it. There is a least a 
cautionary side, and your skepticism, Congressman, I personally 
find well taken. They have done that and made that endorsement, 
but done it also by forming a committee that is going to look 
at the product of the board that I serve on, International 
Accounting Standards Board, to access the suitability of those 
standards.
    If, as they describe it, that committee's work is to 
provide insight and input of the deliberative process, 
participate in the due process, as we have been talking about 
on the other project, I think it would be very constructive. If 
it is intended to do something other than that, it raises the 
warning flags that you are worried about.
    I think we do not know how they will behave in that regard. 
They are certainly going to get a significant amount of 
pressure from the IASB, the FASB, the Accounting Standards 
Board in Great Britain, the Canadians, the Australians, the 
Germans, all of them are not or share the same concerns.
    So, I do not think within the private sector that there is 
an enthusiasm for this group, but it is a reality that we are 
going to deal with, and hope that they are constructive part of 
the process.
    Mr. Shimkus. Mr. Jenkins, do you want to respond?
    Mr. Jenkins. I would share Mr. Leisenring's comments there. 
The thing I would add is that the deadline that they have 
proposed to impose of 2005 in my judgment is premature, 
particularly since it would require the adoption of 
international accounting standards by companies within the 
European community, even those companies that currently report 
under U.S. generally accepted accounting standards.
    Many of them do that as an efficient way of accessing our 
capital market. They would then be required to revert to 
international standards, and presumably reconcile the U.S. 
standards, a costly exercise, and one that probably does not 
provide full U.S. transparency.
    Beyond that, while I think the structure is in place and 
the process is there to develop strong, high-quality standards 
going forward, my judgment, the totality of the existing 
international standards are not the sufficient quality to be 
used in U.S. reporting or as a substitute for U.S. financial 
statements. And therefore I would be reluctant to endorse a 
process that would require the use of IS at this point in time.
    In order to adopt the standards by 2005, companies, in 
effect, have to begin doing this in 2003 just to get the 3 
years of required information recorded. We are not going to 
have very many new international standards of high quality by 
2003, just 2 years from now.
    Mr. Leisenring. If I may, Congressman, I just agree with 
Mr. Jenkins comment. So that you do not believe there is any 
disagreement, I agree about his comment about the totality of 
international standards, at the present time not suitable.
    Mr. Shimkus. And I would just finish by saying, you know, I 
am concerned that there is a higher, there may be a higher cost 
of capital through the differing standards, and if ours are 
more stringent, and that is the unlevel playing field that is 
hard to figure out when we are talking about crunching of 
numbers and evaluating portfolios versus actual trade.
    With that, Mr. Chairman, I yield back my time.
    Mr. Stearns. I thank the gentleman.
    The gentlelady from California?
    Ms. Eshoo. Thank you, Mr. Chairman.
    I have several questions, and I also have some amendments 
up at the Rules Committee, so I am sure you want this to move 
quickly and I will move through the questions, and if you can 
keep them as brief as possible, but obviously with some 
answers.
    I am curious about the IASB and how there will be a 
harmonization with what we have.
    And I think that some of the questions that members have 
asked were directed in this area. Will they have the same open 
and transparent procedures as FASB in setting their agenda and 
formulating their rules and will they have the same due process 
requirements?
    Mr. Leisenring. The short answer to that is yes.
    Ms. Eshoo. Is yes.
    Mr. Leisenring. An identical, as I said no, but public 
meetings, required exposure periods, public hearings, the same 
activity level, conducted perhaps differently because the 
international circumstance make it difficult, for example, with 
the Japanese and the Chinese and the Australians to 
simultaneously participate in the hearings, so.
    Ms. Eshoo. Will the rule issued by one body be superseded 
by another?
    Mr. Leisenring. Let's keep it in the United States. The 
FASB absolutely has the authority to issue standards through 
the SEC and the ICPA in the United States. The goal is to make 
the differences between those standards become so trivial that 
it is not consequential. But there is no authority for the IASB 
to issue something that overrules the FASB or vice versa, 
because the FASB has its own jurisdiction and the IASB has none 
other than to the extent people in other countries are allowed 
to use non-domestic standards for cross-border financing.
    Ms. Eshoo. So the restructuring of the IASB is being done 
for what reasons? I mean, it is probably obvious, but I mean, 
if they cannot supersede, it is meant to harmonize, how is that 
different from how it is operated?
    Mr. Leisenring. Well, I think Mr. Jenkins can comment on 
this from their exclusive perspective. I think, as long as you 
accept that the objectives of the FASB is a comparable 
information or a decision useful to investors, that they can 
discriminate between investment and alternatives because of the 
quality of the information they have, it does not seem like 
borders ought to change that in a world where capital flows are 
so easily done across continents, much less across borders. 
There is no real jurisdiction or authority to accomplish that, 
if it is not done by a private sector organization, like the 
IASC.
    You could argue that the FASB which, I think is widely 
regarded by everyone in the world, as setting the highest level 
of accounting standards, should have done the accounting 
standards the world was willing to adopt. I can assure you, 
Congresswoman, that is not the case. They are not ready to just 
say, ``The American way is the way we want to do it.''
    Now they may end up with a very similar answer, but they 
seem to want to have their own participation in that process. 
So I think we all made a conscious decisions that if you agree 
on the objectives of getting a single set of high-quality 
standards, the alternative organization in partnership with the 
FASB and other standard setters is a more efficient way to get 
there, than to try and, for example, reorganize the FASB and 
make it look a little more international.
    Ms. Eshoo. I especially thank you for your answer. I 
especially appreciate the ``Restructuring In Brief.'' I mean, 
it is here at the podium and as others were asking questions, I 
went over it.
    Just a couple of curiosity questions about it. On the first 
page, it talks about the supervision, the restructuring, the 
blue ribbon nominating committee, and it is blue ribbon, 
because it is chaired by the former chairman of the SEC, Arthur 
Levitt.
    How is the board funded? It says fund-raising here. And so, 
does each company contribute? Where does the money come from?
    Mr. Leisenring. It would be nice if it would. But no, the 
funding actually of the IASB is very similar now, is very 
similar under the restructuring as the FASB's. There is a 
significant amount of private contribution.
    Ms. Eshoo. From whom, though? I mean, just give us an idea 
of who.
    Mr. Leisenring. Each of the five largest accounting firms 
promised a significant amount of money over 5 years. A great 
many major corporations around the world have similarly done 
the same thing, financial institutions.
    Ms. Eshoo. I am not saying it to aggravate you. Just a 
curiosity question.
    Mr. Leisenring. No, no. Financial institutions. I actually 
have never seen the donor list. I know of some that have said 
to me, ``We have contributed so much,'' and they are names that 
you would know in the United States and they are the same 
people that contribute to the FASB.
    Ms. Eshoo. In the same memo there is some mention about the 
need to provide competitive salaries to attract high-caliber 
candidates for board positions and that the proposed salaries 
will generally match the level of members of FASB in the United 
States. What is that level?
    Mr. Jenkins. The current level for an FASB board member is 
$420,000 annually.
    Ms. Eshoo. And is that considered a full-time position?
    Mr. Jenkins. Yes. Yes. The FASB, in order to have----
    Ms. Eshoo. I think there would be a lot of members here 
interested in serving on the board, Mr. Jenkins.
    Mr. Jenkins. Well, it should not be a surprise.
    I will tell you that members do not join the FASB for the 
money. But in order to be independent and objective in our 
decisionmaking----
    Ms. Eshoo. Nor do we want to be or serve as Members of 
Congress for the money either.
    Mr. Jenkins. Exactly.
    We need to be independent, and, therefore, we are full-
time. The ISB is structured, in a nutshell, if you want a short 
answer, the new FASB structure is virtually identical to the 
FASB structure. It is designed to give independence, private 
sector approach, and to significantly improve on the old 
structure which was not independent and objective. The members 
were part-time. If you wanted to be an FASB member, you had to 
pay to be an ISB member, if you had to pay, or your 
organization had to pay; that is hardly a way to get objective 
decisionmaking accomplished. Their due process was lacking, and 
therefore their standards did not have the credibility that 
hopefully ours do.
    The restructuring, which took a long time, was designed to 
accomplish that, and I think it has, and that is why I have 
great hopes for it.
    Ms. Eshoo. Well, I once again appreciate, not only the 
opportunity that the hearing represents to hear you and to ask 
questions, but I also recognize that there are tensions of 
values between the FASB and the Congress. I view them as being 
healthy. They are not going to go away. We as human beings in 
our interactions with one another are not always going to see 
eye to eye. But wherever there are either standards and/or 
representation relative to our national economy and our 
international economy, we are going to be working together.
    So I look forward to that future and I thank the chairman 
for having this general oversight hearing.
    Mr. Stearns. I thank the gentlelady.
    The gentleman from Chicago, Mr. Rush?
    Mr. Rush. Thank you, Mr. Chairman.
    Mr. Chairman and witnesses, I want to begin by apologizing. 
I know I missed some of the testimony; I was at a number of 
conflicting appointments this morning, meetings this morning. 
And so some of these questions might have been asked and 
answered already, but please indulge me, if you will.
    Mr. Rogstad, in your testimony, you mentioned the 
importance of FASB performance consensus building across user 
groups in determining new accounting principles. You also note 
the ever-increasing number of households that own stocks. What 
would FASB do to make sure that this large contingent of 
household investors, that they be included in your consensus-
building process?
    Mr. Rogstad. I think, Congressman, that those groups are 
increasingly represented by an organization that represent 
classes of investors, shareholders, securities industry in 
general, and I think that there is, and there was in this 
process, ample testimony and submissions for the record and for 
FASB's consideration that incorporated the views and growing 
importance of the views of this rapidly growing component of 
the population that has great interest in the financial 
markets.
    Mr. Rush. What would be the profile of the input from 
consumers? Would that profile be more organized, in terms of 
consumer interest groups, or would that profile be more 
individuals that appear before you?
    Mr. Rogstad. I would probably let Chairman Jenkins answer 
that better than I could.
    Mr. Jenkins. I would say that we do have contact with and 
receive inputs and carry on due process with consumer groups 
and, therefore, with consumers. Some place in the thick stack 
of materials that we provided you for this meeting are excerpts 
from comment letters that we received on our process on 
business combinations and other evidence that, I think, that 
our process is exhausted and is working. And these letters were 
received during the first exposure draft in our process.
    But, for example, we heard from the Consumer Federation of 
America, that represents 260 consumer groups, and they wrote in 
support of FASB's decisions to eliminate pooling of interest 
accounting.
    Nel Minow, who is from Chicago, Congressman Rush, and who 
you know and I know, as well, since I come from Chicago as 
well, editor of the Corporate Library and a consumer advocate 
has long weighed in on financial reporting issues and in 
support of transparency of information and so on.
    We have Sarah Teslik, who represents perhaps more 
institutional investors, but does so from the focus of 
investors in mutual funds, in 401(k) plans, in pension plans, 
where a vast majority of this 50 percent of equity ownership by 
individuals resides. They do not probably own those shares 
directly, but they do through one of these other vehicles. So 
Sarah Teslik, from the Council of Institutional Investors, 
another group that we have interchange and due process with 
and, again, supported our work on business combinations. Those 
would just be some examples.
    Mr. Rush. Well, as have been indicated by you and by 
others, Mr. Jenkins, we know that more and more Americans are 
depending on stocks for their retirements, particularly, and 
also long-term investments. I guess, as a segue into your 
comments, do you think that the information that these 
investors are getting is, are they more accessible now? Is the 
information more easily understood now? Are you getting that 
kind of feedback from your comments and your interaction with 
these consumers, these investors?
    Mr. Jenkins. I think, in total, when you look at not only 
financial reporting, but you look at other forms of 
communication and information, would be web sites that 
companies have today where they are reporting a significant 
amount of information, the study that I referred to that we did 
and reported on, I am not sure whether you were here when I 
commented on it earlier, the study that we did earlier this 
year about the voluntary disclosures of information encompass 
all kinds of public disclosures, not just financial reports, 
but it focused on web sites, it focused on access that 
investors have to corporate meetings with analysts that are now 
open to telephone discussions so an investor can call up and 
listen to these meetings. There is a great deal going on and 
much more information.
    The issues is whether that information is presented in the 
proper context that it can be understood. And that is why I 
called for a presentation of this information in conjunction 
with the reporting of GAAP financial information so that 
investors can see the difference between the two and hopefully 
reconcile and, therefore, understand these kinds of performance 
metrics and other things that are being reported.
    Mr. Stearns. Thank the gentleman.
    We are going to go another round, Mr. Rush, if you want to 
stay and if Mr. Towns comes back.
    I want to direct my questions to Mr. Leisenring, dealing 
with two issues: business combination and stock options 
accounting. Now when I talked to Mr. Jenkins about what he was 
talking about with pooling, did you have that problem? Do 
corporations in Europe have that problem that you need to issue 
the same type of regulation, the 141 and 142 standards?
    Mr. Leisenring. Well, it is not, of course, just Europe. If 
you were talking about Australia and New Zealand, they never 
allow pooling.
    Mr. Stearns. They never allow pooling. Okay. Did they allow 
it in Europe?
    Mr. Leisenring. At the present time it depends on which 
country in Europe you are talking about because it is very 
varied. So I think it is easier to focus on the international 
standards versus the FASB.
    And the international standard has been viewed as being far 
more restrictive on the ability to employ what they called 
uniting of interests, but it meant the same thing.
    Mr. Stearns. Which is pooling.
    Mr. Leisenring. I am not sure that that is an accurate 
reading of what necessarily happened in practice everywhere.
    Mr. Stearns. But it is not prevalent in the international.
    Mr. Leisenring. It is less prevalent than it was in the 
United States, I believe. That does not change the conceptual 
basis for having what is clearly anomalous accounting, as Mr. 
Jenkins has described. And there are some high-profile 
combinations that have the----
    Mr. Stearns. So you can still do it in the international 
scene.
    Mr. Leisenring. The international----
    Mr. Stearns. Even though Mr. Jenkins has issued these, 
promulgated these new standards, it does not apply to Europe, 
obviously, or apply to the international scene. So some 
corporations can still do pooling?
    Mr. Leisenring. Absolutely.
    Mr. Stearns. Okay. Now, do they also do the pro forma type 
of presentation prior to their audited GAAP?
    Mr. Leisenring. There is not the same amount of disclosure 
of information that you would consider to be other than the 
GAAP-reported information in other parts of the world. But it 
is increasing. There is more of it, by the same types of 
companies and probably for the same reasons.
    But one of the things that is not as focused 
internationally is quarterly financial reporting; in fact, that 
is the exception not the rule. So that they do not have as much 
periodic reporting, which seems to drive much of this and the 
short-term fixation on stock pricing in the United States. So 
it has not been as widespread, but it is not. We cannot say 
that it does not happen, because it does in certain countries.
    To the point of pooling, yes, they can still do pooling and 
will be able to for some period of time. But the IASB's agenda 
includes a project intended to look at exactly the same 
questions that FASB has. And I believe there will be no 
sympathy for maintaining a pooling of interest notion.
    Mr. Stearns. So you expect to issue standards in your 
organization much like FASB does?
    Mr. Leisenring. It would be----
    Mr. Stearns. Ninety percent sure.
    Mr. Leisenring. [continuing] inappropriate for me to 
speculate on a group I have never watched yet actually come 
down and promulgate a standard how they will come out. But I 
believe from the discussions that we have had at the board 
meeting last week, there is only a couple of jurisdictions with 
sympathy for retaining pooling of interest.
    Mr. Stearns. These are the board members that make $600,000 
instead of $400,000.
    Mr. Leisenring. Yes. It is the strength of the dollar, has 
given me a 4.62 percent pay cut already this year, according to 
the paper this morning, because I am paid in pounds.
    Mr. Stearns. Oh, I see. Okay.
    Do you agree with Mr. Rogstad when he said that there 
should be some standards put on these pro forma?
    Mr. Leisenring. There is not any doubt in my mind that the 
information is potentially misleading.
    Mr. Stearns. Just yes or no.
    Mr. Leisenring. Whether or not a private standard-setting 
organization can do that or not, I think I would have to defer 
to some lawyers. I am not sure of our ability to have 
jurisdiction over press releases.
    Mr. Stearns. No, no, no, the question is, as a member of 
the board, do you think, like Mr. Rogstad said, that there 
should be some standards for the pro forma; just yes or no?
    Mr. Leisenring. Highly desirable, yes.
    Mr. Stearns. Okay. Let me just quickly, in the time I have 
left, talk about stock options, how they get dealt with in 
terms of showing up on the books on the international scene, 
and then we will talk to Mr. Jenkins.
    I am an employee of a large corporation and I have stock. 
Let's say I had a stock valued at $10,000 and then I sell it 2 
years later for $50,000, so a $40,000 profit as an employee. 
Where is the controversy in here? And is there anything you are 
doing to solve the problem?
    Mr. Leisenring. I do not think the controversy is with the 
stock you own or its changes in price. The controversy 
historically in the United States, and I predict will be 
internationally, is over accounting for the granting of an 
option.
    Mr. Stearns. Okay.
    Mr. Leisenring. And to acquire the stock at some perhaps 
set price or some variable price.
    The international standards are nonexistent.
    Mr. Stearns. Okay. So I have an option to buy $10,000 worth 
of stock, 10,000 shares at $1, and the stock is now at $5. It 
is not even shown on the books or anything?
    Mr. Leisenring. There are no international standards with 
respect to stock options.
    Mr. Stearns. Okay.
    Mr. Leisenring. Now there are jurisdictions that do, in 
fact, account for stock options. I am not quite sure why, I 
guess it is cultural. The Germans have issued an exposure draft 
just 2 weeks ago that would require grant a fair value for all 
stock options; a proposal very similar to the one the FASB 
suggested several years ago. The International Accounting 
Standards Board has voted to put share-based compensation on 
its agenda. It is a widespread concern, particularly in Europe.
    Mr. Stearns. What is the concern?
    Mr. Leisenring. The concern is that there are absolutely no 
standards for accounting, and the standards in the United 
States, even the standards in the United States prior to the 
FASB's recent project, are nonexistent internationally.
    Mr. Stearns. So what does it mean as an investor and I look 
at the P&L statement in a European company? Is there some case 
that by not having it in there it would help the P&L statement 
look better?
    Mr. Leisenring. Let's back up.
    Mr. Stearns. I mean, I just do not have the accounting 
experience to know.
    Mr. Leisenring. There are three possibilities. One that we 
know for sure, in the international community where you will 
not have the body of information that you have in the United 
States because of the issuance of statement 123. While it did 
not require recognition of stock option expense, the disclosure 
would provide a user a way of compensating, excuse the pun, for 
not having compensation expense in the income statement.
    However, internationally you could have two other 
possibilities. In the United States we have always expensed, or 
have for 30 years, certain types of stock options. That is not 
true internationally.
    Mr. Stearns. Just never shows on the books, the expense 
forms.
    Mr. Leisenring. Not internationally. Those options are 
relatively rare on the grand scheme of things compared to the 
type of options that also do not show on the books anywhere in 
the United States.
    So you can have a situation exactly comparable to the 
United States in terms of measurement, if you had a certain 
type of option you would have a more lenient treatment, no 
compensation internationally, where you would have compensation 
in the United States, but in all circumstances internationally 
you would not have the body of information about the options 
granted that exist in the United States.
    One of the reasons for the project internationally is that 
however it comes out, it has not even caught up to where the 
United States is. And as you probably know, I do not personally 
believe that the United States accounting is particularly 
exemplary.
    Mr. Stearns. Okay.
    Mr. Jenkins, anything you want to add to that, and then I 
will close?
    Mr. Jenkins. I basically agree with Mr. Leisenring in his 
explanation of the status. In most countries, and certainly in 
the international standards, because there is no accounting, 
even stock schemes that result in the payment of cash instead 
of stock, at the end of the day, still do not get counted for 
as expense.
    They would under our existing standards. And there are many 
other cases where we would have some compensation but you would 
not otherwise. Our disclosures are now providing much better 
information to investors on stock compensation than they did.
    I am pleased that the IASB intends to take up a project in 
this area, in the hopes that they will be able to come closer 
to where we are today.
    Mr. Stearns. Thank you. My time has expired.
    The ranking member, Mr. Towns?
    Mr. Towns. Mr. Chairman, I will only ask unanimous consent 
to put Mr. Dingell's statement in the record. I am asking for 
him to be able to add a statement for the record.
    Mr. Stearns. With unanimous consent, so ordered.
    Mr. Towns. The ranking committee is tied up this morning 
continuing negotiation with the patients' bill of rights 
legislation in the Rules Committee hearing, and the pending 
energy legislation and, therefore is unable to attend today's 
hearing.
    He has, however, has asked you to note for the record the 
strong support for FASB and its work and the work of this 
subcommittee and request the ability to submit a statement for 
the record on this extremely important issue.
    Mr. Stearns. By unanimous consent, so ordered.
    Mr. Rush, do you have any additional questions?
    Mr. Rush. Mr. Chairman, I just have one or two additional 
questions here.
    Mr. Jenkins, an impairment test, I am not sure if you 
addressed that, for intangible assets. And I guess the general 
consensus is that all tangible assets may not be depreciated.
    Mr. Jenkins. Certain intangibles and goodwill need not be 
depreciated.
    Mr. Rush. Okay. Now, we are in the midst of a slowing 
economy now. Can you tell me what the varying effect on an 
impairment principle, based on the fact that this economy is 
slowing down?
    Mr. Jenkins. It is possible because there would be, yes. 
The impairment test is based on the determined fair value of 
the particular intangible or goodwill intangible, and at the 
end of the day fair value basically is the discounted value of 
future cash-flows.
    To the extent that the economy is turning down, and that 
that is predicted to last for an extensive period of time, then 
the future cash-flows might be less, and, therefore, that would 
lead to a lower fair value. Now, that alone would not be a 
write-down, but if that fair value was less than what you had 
the intangible on the books for, it would lead to a partial 
write-down of that intangible.
    On the other hand, if you believe that the slow-down is not 
going to be long-lasting and it is a dip then and you can 
support that based on your understanding of the marketplace, 
then the current dip might not have an adverse effect on the 
impairment test.
    Mr. Rush. Just a final question, Mr. Chairman.
    What is the level of public input for the IASB? Is there a 
comparable level as it relates to FASB?
    Mr. Leisenring. Congressman Rush, that is difficult to 
answer because the IASB as such has only been in existence 
since April 1 and has issued no exposure drafts or anything. So 
in terms of the way it is structured now, I would anticipate 
the answer to your question, yes, it will be very comparable.
    Historically, the predecessor organization had an open due 
process. They had open meetings. They had exposure drafts. The 
level of public involvement considering worldwide was not high. 
It was concentrated in certain jurisdictions, and particularly 
was not high from the United States.
    It is increasingly more from the United States. And because 
of the legislation that we talked about earlier in your 
absence, by the European Commission requiring European 
companies to use those standards by 2005 that comes about, I 
suspect, there will be a lot more involvement from Europe.
    So I think it will end up to very similar. I would be 
disappointed if it was not, and I anticipate that it will be.
    Mr. Jenkins. It is designed to be the same. It is up to the 
constituents as to whether they choose to take advantage of the 
process.
    Mr. Rush. Okay. thank you so much.
    I yield back, Mr. Chairman.
    Mr. Stearns. I thank the gentleman.
    Our hearing is completed.
    Mr. Rogstad, yes, sir?
    Mr. Rogstad. My Chairman, might I ask permission to 
introduce into the record a memorandum that we wrote in July of 
last year, which spelled out the issues that underscored, at 
that time, our concerns with the process? I realize this was a 
charged conversation.
    Mr. Stearns. No, I welcome that.
    Mr. Rogstad. We just laid that all out.
    Mr. Stearns. No. You mentioned that earlier about this 
process. And so, we would appreciate that.
    Mr. Rogstad. I would like to add as part of the record. 
Because I think it did document a concern at that point in 
time, which all of our motivation is to make sure we never get 
back to again. So I would like to have that.
    Mr. Stearns. By unanimous consent, so ordered.
    When was the memo dated?
    Mr. Rogstad. I believe, July 20, 2000.
    Mr. Stearns. Okay.
    Mr. Jenkins. And, Mr. Chairman, we responded to that memo, 
and I would appreciate the opportunity to put that into the 
record.
    Mr. Stearns. By unanimous consent, so ordered. We will have 
the whole record in its entirety.
    Let me conclude by saying, I appreciate the three of you 
coming here voluntarily to help out. We have had, I think, a 
pretty good debate upon some of the recent actions that your 
organizations have been involved with. I think it goes to the 
point that with a global economy on the horizon or presently 
that we are in, updating standards to reflect the realities of 
what exists is very important. And you folks are on the cutting 
edge and we need your help here. And, I think, for the members, 
including myself, it has been very edifying. So thank you very 
much.
    The committee is adjourned.
    [Whereupon, at 11:58 a.m., the subcommittee was adjourned.]

```