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A Nontechnical

Guide to International
A Nontechnical
Guide to International

Roger Hussey
Audra Ong
A Nontechnical Guide to International Accounting
Copyright © Business Expert Press, LLC, 2020.

All rights reserved. No part of this publication may be reproduced, stored

in a retrieval system, or transmitted in any form or by any means—
electronic, mechanical, photocopy, recording, or any other except for
brief quotations, not to exceed 250 words, without the prior permission
of the publisher.

First published in 2020 by

Business Expert Press, LLC
222 East 46th Street, New York, NY 10017

ISBN-13: 978-1-94664-686-6 (paperback)

ISBN-13: 978-1-94664-687-3 (e-book)

Business Expert Press Financial Accounting, Auditing and Taxation


Collection ISSN: 2151-2795 (print)

Collection ISSN: 2151-2817 (electronic)

Cover and interior design by S4Carlisle Publishing Services Private Ltd.,

Chennai, India

First edition: 2020

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Printed in the United States of America.

In this book we explain the reasons why we have international accounting
standards, the decision of the United States not to adopt international
standards, and the main requirements of the standards that have been
issued by the International Accounting Standards Board. Many countries
now use international accounting for reporting their financial activities,
and a knowledge of the standards is needed to understand the informa-
tion these financial reports convey.
Chapters 1 and 2 focus on the development of international accounting
and the strategy of the United States. Each of the remaining eight chapters
develops a theme based on the relevant standards. In Chapter 3, we exam-
ine those standards that determine the methods for calculating a company’s
profits and other income. Chapter 4 explains the Statement of Financial
Position, also known as the balance sheet, and the Statement of Changes
in Equity. The explanation of the main contents of the financial statements
is completed by Chapter 5, which explains the Statement of Cash Flow.
Chapter 6 to 9 focus on the details of differing business relationships
and activities and the standard that regulate these. Herein are i­ncluded
topics such as financial reporting in hyperinflationary economies,
­agricultural businesses, foreign exchange rates, and fair value measure-
ments. ­Finally, Chapter 10 concentrates on financial instruments, which
­comprise a fast-moving area that has caused the standard setters some
difficulties in determining the appropriate regulations.
In explaining international standards, we have concentrated on using
common business language instead of the technical terms used in the
standards. We have also referenced key sources for those who wish to
pursue their studies further.

accounting equation; balance sheet; cash flows; comprehensive income;
conceptual framework; consolidations; depreciation; fair value; financial
instruments; financial position; financial reporting; foreign exchange;
income taxes; interim reporting; international accounting standards;
­intangible assets; inventories; profit; leases; revenue
Chapter 1 The Growth of International Accounting...........................1
Chapter 2 Setting International Standards........................................15
Chapter 3 Measuring Profit and Income...........................................33
Chapter 4 The Statements of Financial Position (Balance Sheet)
and Changes in Equity.....................................................55
Chapter 5 The Timing of Events.......................................................77
Chapter 6 Intercompany Relations...................................................93
Chapter 7 Specific Situations..........................................................109
Chapter 8 Different Business Activities...........................................127
Chapter 9 Changing Values............................................................141
Chapter 10 Financial Instruments.....................................................153
About the Authors................................................................................177
Wherever you work, financial accounting is critical to measuring the
­success or otherwise of the organization. If you are a retiree, a professional
investor, or an employee, the profitability of a company can be critical to
your lifestyle. If you sell goods to companies or buy from them, you need
to know their financial strengths and weaknesses. The information you
require may be in the newspapers and magazines, but the most complete
and detailed information will be in the annual report and accounts issued
by companies.
Unfortunately, much of this information will contain technical jargon
because companies’ financial publications are strictly regulated. Financial
reports issued by companies must comply with financial accounting stan-
dards. The standards that a company follows will depend on the country
in which it operates.
Some countries, such as the United States, issue their own standards.
However, many countries comply with international ­accounting standards
issued by the International Financial R ­ eporting Standards (IFRS) Foun-
dation. This is a not-for-profit international organization that e­ stablishes
a single set of high-quality global a­ ccounting standards, known as IFRS
Standards. The IFRS was originally the I­nternational Accounting Stan-
dards Board and issued ­international ­accounting standards. Several of
these are still in force and are ­discussed in this book.
Our objective is to provide a broad understanding of international ac-
counting. It will assist readers in comprehending the financial statements
drawn up by companies to comply with international standards and to
understand articles concerned with the international world of accounting
and finance.
There are now over 50 standards dealing with different account-
ing topics. It would be impossible for us to provide the same detail in
our current book. Our aim is to give an understandable introduction

to the various accounting issues and the requirements set by the inter-
national regulators to address them. Of course, regulators update their
requirements. Fortunately, at the international level, this does not occur
­frequently. But to ensure you are up to date, we conclude each chapter
with information on the present status of the standards discussed in it.
In covering such a wide area as international accounting regulation, we
have been greatly assisted by students and professors at the University
of Windsor. Special thanks go to our research assistants, James Carlton
and Joshua Tarantola, who spent many hours enmeshed with accounting
Finally, our gratitude is given to Rene Caroline Balan and her team
for seeing the manuscript through the editing stages to final publication.

Accounting standards in this book with chapter numbers

IAS means International Accounting Standard,
and IFRS means International Financial Reporting
Standard. They have equal authority. Standards Chapter
IAS 1 Presentation of Financial Statements 3
IAS 2 Inventories 3
IAS 7 Statement of Cash Flows 5
IAS 8 Accounting Policies, Changes in Accounting Estimates and 7
IAS 10 Events after the Reporting Period 5
IAS 11 Construction Contracts 3
IAS 12 Income Taxes 9
IAS 16 Property, Plant, and Equipment 3
IAS 18 Revenue 3
IAS 19 Employee Benefits 7
IAS 21 The Effect of Changes in Foreign Exchange Rates 9
IAS 23 Borrowing Costs 4
IAS 28 Investments in Associates and Joint Ventures 6
IAS 29 Financial Reporting in Hyperinflationary Economies 7
IAS 32 Financial Instruments: Presentation 10
IAS 33 Earnings Per Share 9
IAS 34 Interim Financial Reporting 5
IAS 37 Provisions, Contingent Liabilities, and Contingent Assets 7
IAS 38 Intangible Assets 4
IAS 40 Investment Property 8

(continued )

IAS means International Accounting Standard,

and IFRS means International Financial Reporting
Standard. They have equal authority. Standards Chapter
IAS 41 Agriculture 8
IFRS 2 Share-Based Payment 9
IFRS 3 Business Combinations 6
IFRS 5 Noncurrent Assets Held for Sale and Discontinued 7
IFRS 6 Exploration for and Evaluation of Mineral Assets 8
IFRS 7 Financial Instruments: Disclosures 10
IFRS 8 Operating Segments 8
IFRS 9 Financial Instruments 10
IFRS 10 Consolidated Financial Statements 6
IFRS 11 Joint Arrangements 6
IFRS 12 Disclosure of Interests in Other Entities 6
IFRS 13 Fair Value Measurement 9
IFRS 15 Revenue from Contracts with Customers 3
IFRS 16 Leases 7
IFRS 17 Insurance Contracts (Possible Effective Date 2022)

The Growth of International


About This Chapter

The basic process of accounting, known as double entry b­ ookkeeping
can be traced back for many centuries. The first formal book of
­instruction on the use of this method appeared in 1494 (Pacioli). An
explanation of the history can be found in Sangster (2016). Every or-
ganization now keeps some form of financial records. Even with the
smallest business, the owners, the tax authorities and possibly the bank,
will want to know its financial performance and its financial strengths
and weaknesses.
When we consider large companies, particularly those with shares
publicly traded on a stock exchange, there will be national legislation
compelling them to disclose financial information publicly. Companies
comply by issuing a document that will contain financial statements
and other corporate information. There may even be the require-
ment for limited financial information to be published half-yearly or
The annual documents are lengthy, usually more than 200 pages.
They include the financial statements and accompanying Notes required
by accounting standards. This takes up roughly 50 pages. There will
also be information required by government legislation and that which
the company decides to include, such as product details. Over recent
years there have been moves in many countries for companies to pro-
vide information on various topics that come loosely under the general

heading of “Corporate Governance.” The main headings you may find

that make up the total contents of present “Annual Report and Accounts”
document are:

Strategic Report
Governance Report
Corporate Social Responsibility
Management Report
Report of the Chairman
Financial Statements (or Annual Report and Accounts)

One can obtain a company’s annual report and accounts by contact-

ing them. You will also find that most companies have a website and you
can download the annual report and accounts for several years. Take care!
The sheer volume of the information available can be intimidating, with
financial information being only one part of it.
Legislation is necessary to ensure that companies are properly run but is
a very unwieldy system for determining the detailed financial information
companies should disclose in the annual report and accounts. Another pro-
cess is required. In this chapter, we discuss the development of regulations
in the form of national accounting standards. We identify the limitations
of such an approach and explain the birth of international accounting stan-
dards and the development of international financial reporting standards.
Many countries now use international financial reporting standards
including Australia, Canada and all member states of the European
Union. One country that started to converge its own standards with in-
ternational accounting standards was the U.S. We describe that process as
well as the reasons that full convergence did not take place.

Problems with National Accounting

On a personal basis, most of us do some simple form of accounting. We
need to ensure that we do not spend more money than we possess or we
can borrow. We keep a record of how much money we have in the bank
and we may have to decide whether we need a loan and, if so, whether
we can pay it back.
The Growth of International Accounting 3

The owners and managers of a business need to conduct more detailed

accounting. They require financial information to make decisions and
monitor business activities. They may also have to keep shareholders and
other lenders informed. There may be various groups of people and indi-
viduals, not employed by the company, who require financial information
or are legally entitled to receive it. The purpose of financial accounting is
to provide that information. The larger the business, the more complex
the accounting system will be.
In most countries there are usually regulations that specify the types
of organizations that must produce financial information. This regula-
tion may be part of the law of the country, but is usually in the form of
accounting standards, also known as financial reporting standards. These
are issued usually by a professional accounting body, or some organiza-
tion specifically established for the purpose within that country.
Accounting standards are concerned with specific economic transac-
tions, arrangements and events conducted by a business. For example,
you will have one standard that is concerned only with identifying and
measuring the revenue that a company receives. Another standard will
set out the procedures for purchasing buildings and machinery. Other
standards apply to such topics as accounting for valuing goods you have
in stock and recording transactions in a foreign currency.
A standard usually focuses on the following three topics:

1. Recognition. This specifies the transactions and events that should to

be incorporated into the financial statements. The Chief Executive
having a heart attack may be interesting and impact the share price
of the company, but it is not shown on the financial statements. The
factory burning down will be.
2. Measurement. The method used to determine the financial value of
transactions and events. This can be tricky. Everything a company
does has to be converted into financial measures. With many items
there are no problems, but we need to know how entities do their
calculations and to have confidence in their methods. Accounting
standards provide this reliability. With some transactions and events
there must be estimations and we will discuss these when we con-
sider the individual standards.

3. Disclosure. Companies do not “open their books” to anybody who

asks. Not only are there concerns over privacy, but the volume of
information is huge. Information must be extracted and disclosed in
a useful way. There is a standard that specifies the content and struc-
ture of the main financial statements. We explain these statements in
detail in the following chapters.

In early times there were no accounting standards. Companies de-

cided themselves how to account for their activities and, frequently,
would not give investors and lenders a complete picture. Not surprisingly,
shareholders relying on this financial information could “scarcely avoid
arriving at erroneous conclusions” (Naylor 1960). To protect those who
use the financial statements of companies for investment decisions, many
countries began to develop their own accounting standards. Frequently,
it was an organization of professional accountants in a particular country
that began to recommend to its members how to account for financial
transactions and activities.
In the U.S. the Securities and Exchange Commission (SEC) was es-
tablished in 1934 by the Securities Exchange Act to remedy the poor
corporate financial information that was available (Galbraith 2009). In
1973, The Financial Accounting Standards Board was established and is
accountable to the SEC for setting accounting regulations. These were
first issued as Statements of Financial Accounting Standards, and since
2009 there has been an online Accounting Standards Codification (ASC)
in the U.S.
Accounting Standard Updates (ASUs) are issued to amend the codi-
fication. Updates are published for all authoritative U.S. GAAP released
by the FASB, regardless of the form in which such guidance may have
been issued prior to release of the FASB codification. Updates will also be
issued for amendments to the SEC content in the FASB codification, as
well as for editorial changes.
Other countries also have established their own methods requiring
companies to provide publicly financial information. Unfortunately, the
accounting techniques and methods of accounting can have strong na-
tional characteristics. In other words, one could not compare the infor-
mation in the financial statements of companies in the U.S. with those
The Growth of International Accounting 5

in the U.K. or Japan, or any other country because they had different
methods for recognizing, measuring and disclosing financial transactions
and events.
Much has been written on the reasons for countries having differ-
ent financial accounting and reporting regulations (Frank 1979; Mueller
1967; Nair and Frank 1980; Nobes 1983). The main reasons would ap-
pear to be:

1. The different sources of external financing for companies. In some

countries, companies rely on financing from wealthy private individ-
uals. In other countries there is a stock exchange where a company
can list its shares.
2. The legal system in the country will reflect the values and procedures
within that country including financial accounting.
3. The types of business organizations and ownership differ.
4. The culture of the country will influence the approach to regulating
corporate activities.

Although national regulations for financial accounting greatly im-

proved financial reporting in one country, there were substantial prob-
lems at the international level. If you wanted to do business, buy shares,
or make loans with a company in another country you could not refer
to their nationally produced financial statements, unless you “translated”
them to your own methods.
When countries use different accounting standards to regulate the fi-
nancial statements of companies operating within their borders, there is
difficulty in comparing a company in one country with one in another
country. As businesses and investors have become more international in
their activities, this has caused problems.
To compare the financial statements of a foreign company to that
of a U.S. company, the financial statements had to be redrawn ac-
cording to the U.S. method of accounting to give the “profit or loss”
­according to U.S. regulations. This was not only a laborious task, but
the amount of profit shown under the two different country systems
could vary considerably. The worrying question was “Which one is the
­correct figure?”

The Start of International Accounting

After the Second World War, international trade began to increase. Com-
panies were buying and selling in different parts of the world, and inves-
tors and lenders of finance were also taking an international approach.
The problem of being unable to compare financial statements drawn up
under different national procedures was a major obstacle to an increase in
international activity. Some form of action was required.
In 1973 the national accountancy bodies, not governments, from Aus-
tralia, Canada, France, Germany, Mexico, the Netherlands, the United
Kingdom, Ireland, and the United States met and agreed to form the Inter-
national Accounting Standards Committee (IASC). This was to be based in
London, U.K. with the task of establishing international accounting stan-
dards. These would be used by companies, whatever their country of origin.
Unfortunately, progress was slow. The (IASC) was a private sector,
non-governmental organization. It received modest funding and had only
a part-time body of standard-setters who met 3 or 4 times annually to
agree on a uniform way of accounting.
In its early years, with scarce resources and little power, the IASC
concentrated mainly on the harmonization of financial reporting on a
worldwide basis. It issued its first International Accounting Standard, IAS
1 Disclosure of Accounting Policies, in January 1975 and in October 1975
issued IAS 2 Inventories. This standard, although it has been amended, is
still in force.
There were external factors that assisted the work of the IASC. Many
emerging economies were attempting to establish themselves in interna-
tional trade. The IASC offered a way for following an appropriate and
acceptable accounting regime. A company’s financial statements could be
understood by interested parties in other countries.
A second factor assisting the IASC was the increased involvement
from several organizations in developing international business activities.
The European Union (EU) for many years had been seeking accounting
harmonization throughout the EU. This was achieved by issuing “Direc-
tives” that were binding to all member states. Towards the end of the
1980s, the European Commission gave increasing support to the efforts
of the IASC.
The Growth of International Accounting 7

Although the IASC made progress, it was under resourced. It was

heavily reliant on the support of national accounting bodies as well as
other parties who sometimes argued for international standards that best
met their own national interests. The aim was international accounting
regulations, but the question was whether the IASC could achieve that
aim. Either a complete overhaul of all aspects of the IASC was required or
a new body must be formed. The latter was the course of action chosen.
In 1992, the three standard setting bodies of Canada, the United
Kingdom, and the United States met to discuss ways for making greater
progress. Australia and New Zealand later joined the working group, and
this became the group known as the G4+1.
In January 2001, it was agreed that G4+1 group would disband and a
newly constructed organization, the International Accounting Standards
Board would replace the IASC. The IASB, with a highly experienced ac-
countant, David Tweedie, as its Chair was established in April 2001. It
had more substantial financial support than the IASC and a reorganized
The IASB kept several of the IASs issued by the IASC and commenced
issuing its own standards entitled International Financial Reporting Stan-
dards (IFRSs) starting with IFRS First-time Adoption of International Fi-
nancial Reporting Standards followed by IFRS 2 Share-based Payments.
The numbering of individual standards is somewhat confusing. The
present position is that the IASC issued 41 standards between 1975 and
2000. The standards were numbered consecutively starting with number
1. Each standard also had a descriptive title, for example, IAS 7 Cash Flow
Statements. Most of the IASC standards are still in effect.
When the IASB took over from the IASC it “adopted” the IASs still
in force and started to issue its own standards. These are named Interna-
tional Financial Reporting Standards (IFRSs). Once again, these stan-
dards are numbered consecutively, starting with number 1 and have a
descriptive title, for example, IFRS 7 Financial Instruments: Disclosures.
When referring to all the standards that have been issued, we gener-
ally use the term international standards. It is essential, however, to use
correctly the term IAS or IFRS when referring to a specific standard, for
example, IAS 2 Inventories or IFRS 2 Share-Based Payment.

The Spread of Internationalization

The pressure for international accounting standards arose from the need
for comparable financial statements. The financial reports of all compa-
nies would be prepared according to the same principles. Ideally, all com-
panies would use the same accounting standards in their financial reports.
Several countries have adopted international accounting standards.
This does not necessarily mean that those countries require all compa-
nies within its borders to comply with them. Normally, it is only major
companies listed on its national stock exchange that must do so. U ­ sually
smaller companies will follow the national regulations for financial re-
porting or, if there are none, they will comply with the IFRS for SMEs
Standard. SME refers to small and medium sized enterprises.
The SME is a small Standard of ~250 pages. It concentrates on the
presumed information needs of lenders, creditors and other users of
smaller entities. It is assumed that these groups are most interested in
information about cash flows, liquidity and solvency. We do not discuss
IFRS for SMEs in this book.
Even where a country claims it “uses” international accounting, cau-
tion must be applied when examining the financial statements of com-
panies within that country (Zeff and Nobes 2010). The reasons are that
some countries may:

• claim to have adopted international standards. If so, it is highly

likely that the standards will apply only to certain organizations,
that is, the large listed companies.
• endorse international standards. Usually, they will have their own
standard setting process. The international standard will be exam-
ined and, if it is considered suitable, it will form part of national
regulations. However, the country may require further disclosures
or make some changes in the requirements.
• adapt international standards. In other words, they use the interna-
tional standard as a basis but amend it to meet their particular needs.

Even where a country has adopted fully an international standard,

political, legislation, tax regulations and other pressures can lead to
The Growth of International Accounting 9

differences. New standards generally are in force on the date of annual pe-
riods beginning on or after January 1, but early applications are normally
permitted. The result is that two different versions can be in force at the
same time depending on the implementation year chosen by a particular
country compared to the choice by another country.
Year ends of companies can also differ. Some may find that a new
standard becomes applicable in their financial year. Others, with an earlier
year-end date, will not have to comply with the IFRS until the following
year’s financial statements. In some countries, for example, Australia and
the United Kingdom, corporate accounting periods do not necessarily
end on December 31. In other countries, that may be the usual year-end
date for all companies registered in that country.
Caution must also be used in assessing the extent of adoption. In
a comparison of India and China, the authors concluded that account-
ing estimates in India are useful in predicting future earnings and cash
flows, but accounting estimates in China are not. They conclude that
accounting quality varies with accounting systems and legal enforcement.
Accounting standards in China and India are converging to IFRS, but
both countries have not fully implemented IFRS (Eng and Vichitsara-
wong 2017).

The U.S. and International Accounting

The U.S. was at the original 1973 meeting that launched the IASC. It was
not until 1988, after the IASC had issued nearly 30 separate standards,
that the FASB (Financial Accounting Standards Board) declared that it
would support the development of superior international standards and
these would replace national standards.
The IASC welcomed the declaration by the FASB for greater interna-
tional involvement. This statement of commitment by the world’s largest
market was a major shift in the spread of internationalization. The rela-
tionship was further strengthened in 1999. The FASB and its oversight
body, the Financial Accounting Foundation (FAF) declared their wish for
a worldwide single set of high-quality accounting standards. These would
be used both for companies within the country and also for those with an
international profile.

Further progress towards convergence came in 2002. Robert Herz was

appointed the new Chair of the FASB. He was a qualified U.K. Char-
tered Accountant and brought a greater commitment to convergence.
This meshed well with the objectives of the restructured IASB under its
Chair, David Tweedie.
Other factors were also operating to make full internationalization
appear a probability. The New York Stock Exchange was facing growing
competition from markets in other countries. Foreign companies were
finding U.S. regulations increasingly onerous. In addition, a succession of
financial scandals such as Enron and WorldCom weakened confidence in
U.S. financial reporting regulations.
External events were also changing the landscape. Several countries
had either adopted international accounting or were planning to do so.
The influence of the IASB was growing in strength and this could result
in the U.S. becoming isolated unless it took action.
All the indications were that the FASB and the IASB were willing to
work together on standard setting. The first major step was the signing of
the Norwalk Agreement in 2002, which had the objective of converging
U.S. and international standards. The intention was not for the U.S. to
adopt international standards set by the IASB. The intention was for the
U.S. to retain its own standard setting authority and for the FASB and the
IASB to jointly develop and agree on the contents of individual standards.
It was a rocky route towards convergence. It involved identifying
standards that both parties agreed were weak and replacing them with
high-quality standards, a term that we discuss at the end of this chapter.
There was an international financial crisis in 2007/8 which gave
encouragement to the convergence project. It was argued by some pol-
iticians that the reason for the crisis was the weak regulations for transac-
tions known as financial instruments. Pressure was put on the FASB and
the IASB to produce strong, effective standards for financial instruments.
The FASB and the IASB jointly responded positively and this gave new
impetus to the convergence project.
In 2010 the SEC published its Strategic Plan for the fiscal years 2010
to 2015. It supported the objective of a single set of high-quality global
accounting standards and the work of the FASB and the IASB. Most im-
portantly, it also stated that the decision for incorporating international
accounting standards in the U.S. would be made in 2011.
The Growth of International Accounting 11

The progress that had been made has been well documented by Kirsch
(2012) and one can only conclude that there was insufficient commit-
ment to full convergence. However, the debate on convergence has been
focused on the interactions of the FASB, the U.S. standard setter, and the
IASB. There are many countries involved in the convergence process and
Ruder, Canfield, and Hudson (2005) have argued that the IASB is subject
to influence by business interests and that business interest successes in
influencing endorsement or adoption of accounting standards are likely
to delay or impede convergence.

The End of Convergence

In 2010 it seemed that the convergence project was on a sound course.
However, some were expressing the opinion that the convergence project
was not a success. There had been examples of standards where the two
parties had not been able to reach a full convergence. Although the FASB
nor the IASB had not made any public declarations, there was an obvious
decline in the U.S. enthusiasm. It was not surprising that in 2014 the
FASB argued that the objective for international accounting standards
could be achieved in different ways.
The FASB suggested that the original aim of convergence was to de-
velop a unified set of high-quality international standards. This did not
necessarily mean that the two parties had to issue a single standard to
which they were both committed fully. To achieve converged standards
the FASB considered a better route was to work on global issues with the
IASB and other countries through membership of the Accounting Stan-
dards Advisory Forum (ASAF).
Some interpreted this statement as the FASB not being willing to give
up its role as the standard setter in the U.S. and it had limited interest in
international developments. Others warmly welcomed the move arguing
that the FASB should concentrate on improving the quality of standards
in the U.S. They regarded that the convergence project was an expensive
waste of time and effort that would not lead to high-quality standards.
This reference to high quality standards raised two related issues that
weakened the chance of further convergence between the two bodies. One
was concerned with the definition of high quality and the other issue related
to the nature of the standard; known as the rules versus principles debate.

Both the FASB and the IASB would claim that they wished to pro-
duce high-quality standards. Although there is general agreement that
such standards would lead to comparability and transparency with the
qualities of relevance and reliability, nobody has been able to define pre-
cisely the characteristics of high-quality standards. It was really a case of
“we will know it when we see it.”
Another obstacle on the route to convergence was the differences in
the rules based versus the principles-based approach to establishing stan-
dards and enforcing them. The rules-based approach lays down specific,
detailed requirements in a standard to ensure that financial statements do
not mislead the users. Most would agree that the FASB inclines towards
this method for setting its standards. It can be argued that the rules-based
approach may result in financial statements that are consistent with the
rules but do not always provide the most reliable and relevant informa-
tion for users. Strict conformity with the rules may fail to capture fully the
complexities of business operations.
The principles-based approach sets out the general boundaries of the
standard’s requirements. It is the preparers and auditors who apply their
professional judgment and experience to ensure that the financial state-
ments do not mislead the users. This view was a basis for standard setting
in the UK and may have influenced the opinions of the IASB. It can be
argued that this approach gives too much scope to preparers and auditors
to select various methods for recording accounting transactions and this
may not be in the interests of the users.
Undoubtedly, the U.S. put considerable time and energy into the
Convergence project. In 2006 a “Road Map” was issued that set out its
strategy. The weaker international standards would be replaced by stron-
ger ones and more effort would be given to develop new high-quality
standards. In 2008 an update to the 2006 Road Map was issued. A series
of priorities and milestones were set out and it was made clear that the
U.S. would only adopt international standards if these targets were met.
In 2010 a strategic plan was issued which emphasized the need for
high-quality standards. The plan also stated that the decision for the U.S.
incorporating international standards would be made in 2011. In 2012
a Joint Progress Report was issued and it was anticipated that the SEC
would set out its plans for convergence. It did not do so.
The Growth of International Accounting 13

The concerns of the FASB on converging with international standards

were set out on FASB’s website in 2014. It was argued that the term
“convergence” refers both to the intended goal and the path by which to
achieve it. The FASB intended to continue its work on global accounting
issues with the IASB. However, for issues of primary interest to stakehold-
ers in the U.S. capital markets, the FASB would make its own decisions.
The announcement by the FASB did not come as a surprise. There
were several groups and individuals in the U.S. who were critical of U.S.
standards but also did not regard adopting international standards as a
worthwhile strategy. They believed international standards were not of
“high quality” and argued that practices and standards in the U.S. should
be reformed. This would lead to high quality US standards that would be
examples for the rest of the world.
There are no indications of the convergence project being revived. It
would seem that the FASB and the IASB will retain the responsibility for
issuing their own standards. It may be that the two sets of standards will
be similar but U.S. GAAP will remain under the control of the SEC and
FASB. International standards will remain the domain of the IASB.
However, beginning in fiscal 2007, the U.S. Securities and Exchange
Commission (SEC) allowed foreign companies traded on U.S. stock
exchanges to report under International Financial Reporting Standards
(IFRS) or U.S. Generally Accepted Accounting Principles (U.S. GAAP)
so convergence may be resurrected. The similarity of the two sets of stan-
dards for sophisticated users of financial statements has already been es-
tablished. One study (Jategaonkar, Lovata, and Sierra 2014) concluded
that the predictive models employed by analysts are equally effective
when based on financial results reported under U.S. GAAP or IFRS.

Companies have several groups interested in their financial performance
and positions. To meet the needs of the various users, companies provide
financial statements. It is essential that those financial statements come
under some form of regulation to ensure the reliability and relevance of
the information and to enable comparisons over time and with other

To meet these needs, most countries legislation allows for an orga-

nization to have the authority to issue financial accounting standards.
Companies are required to comply with these standards and the users of
the financial statements can have confidence in the information they re-
ceive, usually in the form of the annual report and accounts. Companies
listed on a stock exchange may also be required to issue half-yearly or even
quarterly financial statements.
Over the years it became apparent that countries had different ac-
counting regulations. This made it very difficult to compare the finan-
cial performance and position of one company to another in a foreign
country. The solution was to develop international standards and the
­International Accounting Standards Committee was established to carry
out this role.
The IASC was successful, but it was considered that a stronger, bet-
ter financed organization was required, and the International Accounting
Standards Board was formed in 2001. A year later the FASB declared a
U.S. interest in developing international standards. An agreement was
signed and the FASB and the IASB started work on a convergence project
intended to achieve a common set of international standards.
Although progress was made, the FASB decided that this was not the
best route for establishing international accounting standards or meeting
the needs of the U.S. It withdrew from the agreement but has declared
its interest in contributing to the development of international standards,
but without the convergence relationship with the IASB. The FASB has
made it clear that it will retain its authority for the accounting standards
used in the U.S.
The standard we discussed in this chapter, International Accounting
Standard (IAS) 1, is still in effect. There have been several minor amend-
ments over the years usually caused by a change in another standard. The
latest amendment was on October 31, 2018 which amended the term
“material.” This comes into effect on January 1, 2020. Our explanation of
this term is given in Chapter 2.
Accounting equation, 57–58 Depreciation methods, 50–51
Accounting estimates, 112–113 Disclosures
Accounting policy, 44–46, 111–112 IFRS 7 Financial Instruments,
Accounting Standard Updates (ASUs), 4 163–165
Assets IFRS 8 Operating Segments,
annual assessments, 70 138–140
CGU, 71–73 Discrete method, 85
impairment, 69–70
impairment calculation, 70–71 Earnings per share (EPS), 150–151
Associates ventures, 97–99 Employee benefits, 114–117
ASUs. See Accounting Standard EPS. See Earnings per share (EPS)
Updates (ASUs) Equity, 73–74
Equity-settled share-based payment
Balance sheet, 56 transactions, 148
Business combination standards, 94 Exchange rate risk, 154

Cash flow Fair value

financing activities, 83–84 hedge, 162, 167–168
hedge, 162–163, 168 measurements, 149–150
investing activities, 82–83 Fair value through profit or loss
operating activities, 81–82 (FVTPL), 167
Cash-generating unit (CGU), 71–73 Financial assets, 166
Cash-settled share-based payment Financial instrument
transactions, 148 IAS 32, 155–159
CBPs. See Contribution-based IAS 39, 159–160
promises (CBPs) IFRS 7, 163–165
CGU. See Cash-generating IFRS 9, 165–166
unit (CGU) Financial liability, 167
Comprehensive income, 37–40 Financial position, 57, 58
Conceptual framework, 25–27 Financial Reporting Council
Consolidation, 103 (FRC), 28–30
Contingent assets, 123–124 Financial statements, 27–28
Contingent liability, 122–123 Firm commitment, 160
Contribution-based promises Five-step model, 41–42
(CBPs), 117 Forecast transaction, 160
Convergence, 11–13 Foreign exchange, 145–148
Currencies, translation of, 146–147 FRC. See Financial Reporting
Council (FRC)
Defined benefit plans, 116 FVTPL. See Fair value through profit
Defined contribution plan, 115–116 or loss (FVTPL)

Hedge accounting, 167–168 offsetting, 158–159

Hedging, 154 puttable instruments, 156–157
Hedging instrument IAS 33 Earnings per Share, 150–151
accounting for IAS 34 Interim Financial Reporting,
cash flow hedges, 162–163 78, 84–85
fair value hedges, 162 main requirements, 86–88
net investment in foreign IAS 36 Impairment of Assets
operation, 163 annual assessments, 70
hedged effectiveness, 161 asset impairment, 69–70
hedged item, 160 calculating impairment, 70–71
hedging relationships, 161 CGU, 71–73
Hybrid schemes, 116–117 IAS 37
Hyperinflationary economies, contingent assets, 123–124
117–119 contingent liability, 122–123
corporate restructuring, 121–122
IAS 1 Profit, 37–40 onerous contracts, 122
IAS 10 Events, 88–90 provisions, 119–121
IAS 11 Construction Contracts, IAS 38 Intangible Assets, 64–65
50–52 acquired intangible assets, 65
IAS 12 Income Taxes depreciating intangible assets, 66
deferred tax asset, 144 goodwill, 66–68
profits, 142–143 internally generated intangible
tax inversion, 145 assets, 65–66
IAS 16 Depreciation, 46–51 IAS 39 Financial Instruments,
IAS 16 Property, Plant and 159–160
Equipment IAS 40 Investment Property
acquisition costs and depreciation, measurement models, 129–131
59–61 recognition, 128–129
revaluations, 61–62 IAS 41 Agriculture
IAS 18 Revenue, 52 exclusions, 132
IAS 19 Employee Benefits produce, 131–132
postemployment benefits, 115–117 recognition and measurement,
short-term benefits, 115 132–133
IAS 2 Inventories, 43–46 IAS 7 Statements of Cash Flows
IAS 21 Foreign Exchange Rates financing activities, 83–84
functional and presentation investing activities, 82–83
currencies, 146–147 operating activities, 81
translating foreign operations, 148 IAS 8
IAS 23 Borrowing Costs, 62–64 accounting estimates, 112–113
IAS 24 Related Party Disclosures, accounting policy, 111–112
94–95 prior period errors, 113–114
IAS 27 Separate Financial Statements, IASB. See International Accounting
95–96 Standards Board (IASB)
IAS 28 Investments in Associates and IASC. See International Accounting
Joint Ventures, 96–99 Standards Committee (IASC)
IAS 29 Financial Reporting, 117–119 IFRS 10 Consolidated Financial
IAS 32 Financial Instruments Statements, 102–104
compound financial instruments, IFRS 10 Separate Financial
157–158 Statements, 102–104

IFRS 11 Joint Arrangements, International accounting standards,

104–105 6, 8, 16
IFRS 13 Fair Value Measurement, International Accounting Standards
149–150 Board (IASB), 16–17
IFRS 15 Revenue production process, 21–22
five-step model, 41–42 projects, 31–32
requirements of, 41 International Accounting Standards
IFRS 16 Leases, 125–126 Committee (IASC), 6
IFRS 2 Share-Based Payments, Internationalization, 8–9
148–149 Inventories
IFRS 3 Business Combinations IAS 2, 36, 43–46
cost of acquisition, 100–101 measurement of, 24
identify, 100 Inventory, 44–46
intangible assets and goodwill, 101 Investment entities, 104
IFRS 5 Investment property, 128–129
and discontinued operations, 124
noncurrent assets held for sale, 125 Joint ventures, 97–99
IFRS 6 Exploration
impaired assets, 135 Leases, 125–126
requirements, 133–135
IFRS 7 Financial Instruments, Measurement models
163–165 IAS 39 Financial Instruments,
IFRS 8 Operating Segments 159–160
disclosures, 138–140 IAS 40 Investment Property,
identify, 137 129–131
IFRS 9 Financial Instruments IAS 41 Agriculture, 131–132
accounting for IFRS 13 Fair Value, 149–150
financial assets, 165 of inventories, 24
financial liabilities, 165 Mineral assets, evaluation of, 133–135
hedge accounting, 166
Income, 37–40 National accounting, 2–5
Income taxes, 142–145 Noninvestment properties, 128
Intangible assets, 64–68
Integral method, 85 Onerous contracts, 122
Interest rate risk, 154
Interim reporting, 84–85 Prior period errors, 113–114
International accounting, 6–7 Profit
language of calculation of, 34–35
accruals assumption, 18 IAS 1, 36
comparability, 20–21 IAS 11 Construction
completeness, 20 Contracts, 37
faithful representation, 19 IAS 16 Depreciation, 36–37
going concern, 18 IAS 2 Inventories, 36
materiality, 19 IFRS 15 Revenue, 36
neutrality, 20
relevance, 18–19 Recognition
reliability, 19 expense, 24
substance over form, 19 IAS 39 Financial Instruments,
and U.S., 9–11 159–160

Recognition (continued ) Share-based payment

IAS 40 Investment Property, transactions, 148
128–129 Standard, structure of
IAS 41 Agriculture, 131–132 definitions, 23
Revenue disclosures, 24
IAS 18, 52 effective date, 24
IFRS 15, 36, 40–42 expense, 24
inventory measurement, 24
SEC. See Securities and Exchange objectives, 23
Commission (SEC) scope, 23
Securities and Exchange Commission
(SEC), 4 U.S. accounting, 6–7
Mark S. Bettner, Bucknell University; Michael P. Coyne, Fairfield University;
and Roby Sawyers, Editors
• A Refresher in Financial Accounting by Faisal Sheikh
• Accounting Fraud, Second Edition: Maneuvering and Manipulation, Past and Present
by Gary Giroux
• Corporate Governance in the Aftermath of the Global Financial Crisis, Volume I:
Relevance and Reforms by Zabihollah Rezaee
• Corporate Governance in the Aftermath of the Global Financial Crisis, Volume II:
Functions and Sustainability by Zabihollah Rezaee
• Corporate Governance in the Aftermath of the Global Financial Crisis, Volume III:
Gatekeeper Functions by Zabihollah Rezaee
• Corporate Governance in the Aftermath of the Global Financial Crisis, Volume IV:
Emerging Issues in Corporate Governance by Zabihollah Rezaee
• Using Accounting & Financial Information, Second Edition: Analyzing, Forecasting,
and Decision Making by Mark S. Bettner
• Pick a Number, Second Edition: The U.S. and International Accounting by Roger Hussey
• The Story Underlying the Numbers: A Simple Approach to Comprehensive Financial
Statements Analysis by S. Veena Iyer
• The Tax Aspects of Acquiring a Business, Second Edition by W. Eugene Seago
• Forensic Accounting and Financial Statement Fraud, Volume I: Fundamentals of
Forensic Accounting by Zabihollah Rezaee
• Forensic Accounting and Financial Statement Fraud, Volume II: Forensic Accounting
Performance by Zabihollah Rezaee

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