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Chapter Topics
Convergencethe buzz word in international financial reporting. Other organizations involved in harmonization. The International Accounting Standards Committee. Evolution of the International Accounting Standards Board (IASB). IASB framework and IFRS. Use of and support for IFRS. Principles-based vs. rules-based accounting. IAS 1 and IFRS 1. Arguments for and against convergence. International convergence towards and the adoption of IFRS.
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Learning Objectives
1. Explain the meaning of convergence.
2. Identify the arguments for and against international convergence of accounting standards. 3. Discuss major harmonization efforts. 4. Explain the principles-based approach used by the International Accounting Standards Board (IASB). 5. Describe the proposed changes to the IASBs Framework.
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Learning Objectives
6. Discuss the IASBs Standards related to first-time adoption of IFRS and the presentation of financial statements. 7. Describe the support for and the use of IFRS across countries. 8. Examine the issues related to international convergence. 9. Describe the progress made in the IASB/FASB convergence project. 10. Explain the meaning of Anglo-Saxon accounting.
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Harmonization
The process of reduction of alternatives while maintaining a high degree of flexibility in accounting practices. Term is now becoming antiquated.
Harmonization in accounting standards, which is increased agreement in accounting rules. Harmonization in practice, which is increased agreement in actual accounting practices. Harmonization in standards may or may not result in harmonization in practice.
Is different from standardization. Harmonization allows for different standards in different countries as long as there are not logical conflicts. Standardization involves using the same standards in different countries.
Pros:
Expedite the integration of global capital markets and make easier the cross-listing of securities. Facilitate international mergers and acquisitions. Reduce investor uncertainty and the cost of capital. Reduce financial reporting costs. Allow for easy and cost effective adoption of high-quality standards by developing countries. Easier to transfer accounting staff internationally.
Cons:
Significant differences in standards currently exist. The political cost of eliminating differences. Overcoming Nationalism and traditions. Perhaps it will not provide significant benefits. Will cause Standards Overload for some firms. Diverse standards for diverse places is acceptable.
Organizations involved
Association of South East Asian Nations (ASEAN) United Nations (UN) European Union (EU) International Accounting Standards Committee(IASC) dissolved in 2001 International Organization of Securities Commissions (IOSCO) International Federation of Accountants (IFAC) IASB (successor to IASC) and FASB
Organizations involved
IOSCO is essentially the international equivalent of the U.S. Securities and Exchange Commission (SEC). IFAC is similar, at the international level, to the American Institute of Certified Public Accountants (AICPA). IASB is essentially the international equivalent of FASB.
IOSCO
Works to achieve improved market regulation internationally. Works to facilitate cross-border listings. Advocates for the development and adoption of a singleset of high quality accounting standards.
IFAC
Works to develop international standards of auditing, ethics, and education. Began International Forum on Accountancy Development (IFAD) to enhance the accounting profession in emerging countries. Started the Forum of Firms to raise global standards of accounting and auditing.
EU
Has worked to harmonize accounting standards within the EU, primarily by way of two directives. Fourth Directive a set of comprehensive accounting rules built on the principle of a true and fair view.---valuation rules, disclosure and format. Seventh Directive requires consolidated financial statements for company groups of a certain size.
IASB
Preceded by the IASC (International Accounting Standards Committee). Works toward convergence of national and international accounting standards. IASC was established in 1973.
IASB
Comprised of 16 members (13 full, 3 part-time). Represents a geographical mix. Develops IFRS and Exposure Drafts using due process. Approves IFRIC (International Financial Reporting Interpretations Committee) Interpretations. Standards are principles-based. Since establishment of IASB, focus is on global standardsetting rather than harmonization per se.
Establishment of a core set of 30 accounting standards. Standards agreed upon by IOSCO and IASC.
IASB Perspective
Follows a principles-based approach to standard setting vs a rules-based approach. As such, accounting standards are grounded in the IASB Framework. Limits guidance and encourages professional judgment in applying general principles to entities or industries.
IASB Framework
Created to develop accounting standards systematically. Provides the basis for financial statements presented in accordance with IFRS. Similar to the relationship between U.S. GAAP financial statements and the FASB Conceptual Framework.
IASB Framework
The objective and underlying assumptions of financial statements. Qualitative characteristics of information. Definition, recognition, and measurement of elements in financial statements. Concepts of capital and capital maintenance.
IASB Framework
Primary objective is to provide information useful to decision making. Underlying assumptions include accrual basis and going concern.
Understandability should be understandable to people with reasonable financial knowledge. Comparability allows for meaningful comparisons to financial statements of previous periods and other companies.
Relevance useful for making predictions and confirming existing expectations. Reliability free from bias (neutral) and represents that which it claims to represent (representational faithfulness).
Definition assets, liabilities, and other financial statement elements are defined. Recognition guidelines as to when to recognize revenues and expenses. Measurement various bases are allowed: historical cost, current cost, realizable value, and present value.
Phases:
Objectives and qualitative characteristics. Elements and recognition. Measurement. Reporting entity. Presentation and disclosure. Purpose and status. Application to not-for-profits. Finalization.
Proposed Changes:
Decision-useful objective encompassing information relevant to assessing stewardship (actually two parallel objectives with different emphases). Stakeholder approach (vs. U.S. framework shareholder approach)--users other than capital providers explicitly acknowledged. Asset of an entity = present economic resource to which, through an enforceable right or other means, entity has access or can limit others access. Emphasis on fair value measurements in IFRSexit price as measurement base, or, if notdevelop additional guidance.
Joint statement in November 2009 affirmed June 2011 as target date for completing major projects. March 2010joint exposure draft issued Conceptual Framework for Financial Reporting: The Reporting Entity GOAL: to significantly improve and converge IFRS and U.S. GAAP.
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Purpose of financial statements to provide decision-useful information. Components of financial statements balance sheet, statements of income, cash flows, changes in equity, and notes to the financial statements.
Fair presentation the overriding principle of financial statement presentation. Accounting policies
Should be consistent with all IASB standards. When specific guidance is lacking, use standards on similar issues, and definitions of the financial statement elements.
Provides guidance for first time adoption. Requires compliance with all effective IFRS. Allows exemptions when costs deemed to outweigh benefits.
The complicated nature of standards such as financial instruments and fair value accounting. The tax-driven nature of the national accounting regime. Disagreement with significant IFRS, such as financial statements and fair value accounting. Insufficient guidance on first time application of IFRS. Limited capital markets = little benefit. Investor satisfaction with national accounting standards. IFRS difficulties in language translation.
Reached in 2002. Between the IASB and FASB. To work toward accounting standards convergence.
Joint projects boards will work together to address some issues (e.g., revenue recognition). Short-term convergence to remove differences between IFRS and U.S. GAAP for issues where convergence is deemed most likely.
Learning Objective 9
Following global financial crisis both groups formed Financial Crisis Advisory Group (FCAG). July 2009 FCAG report addresses:
Effective financial reporting. Limitations of financial reporting. Convergence of accounting standards. Standard-setting independence and accountability.
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Countries include U.S., U.K., Canada, Australia and New Zealand. Accounting systems not identical but share fundamental features:
Micro orientation (firm level) with emphasis on professional rules and self-regulation. Investor orientationprimary aim is efficient operation of capital markets (very transparent). Less emphasis on prudence and measurement of taxable income or distributable incomesubstance over form.