Chapter 7

International Accounting
Standards and Global
Convergence

Strategic Decision Point

Rules-based

or principles-based standards?

Rules-based

Detailed and complex standards

Resulted in transaction manipulation
Enlarged gap between managers and owners

Principles-based

Reflects true underlying economic substance

Provides increased protection for companies
Makes comparability across companies difficult

Comparability of Accounting
Information
International

pressure exists for

comparability, especially with MNEs
Different approaches to comparability

Harmonization is more flexible

Standardization suggests a state of uniformity

Which groups are interested?

Governments
Trade

Unions
Investors (including financial analysts)
Bankers and lenders
Accountants and Auditors

Pressures for Harmonization

Governments

Government involvement in accounting determination varies

across the world
Do governments really use corporate reports?

Information needed by governments is often too extensive to

include in the report
Governments can demand whatever information they need

Information needs are extensive and confidential

These things suggest governments may not be important users

of corporate reports
Is this a paradox?

Explained by situations where governments might be users

Government use of annual

reports

Use reports, along with segmental information, to

check performance of local subsidiaries of MNEs
Governments wish to monitor MNE operations as a
whole
Governmental needs in differing departments can
be accommodated by an annual report
Developing countries would have more information
without bargaining for it with increased corporate
disclosure

Governmental use of annual

reports
Interest

in extranational operations of MNEs

Intergovernmental organizations use this
information for policy formulation (UN, EU).
Many governments desire increased
bargaining power for information as members
of intergovernmental organizations

Intergovernmental
Organizations

United Nations

1976 study revealed lack of information

1979 Working Group of Experts established
Emphasis on developing countries
Have different interests from those of OECD and IFRS
Major aim is international disclosure standards
Intergovernmental Working Group of Experts on International
Standards of Accounting and Reporting (ISAR) established in
1983
Current issues deal with corporate governance
Monitoring role in endorsing desirable standards
UNCTAD represented in

Standards Advisory Council of the IASB

Advisory Panel of Small and Medium-sized Entities of the IASB

Intergovernmental
Organizations
Organization

for Economic Cooperation and

Development (OECD)

Represents industrialized nations

Issued Guidelines for Multinational Enterprises
Aimed at strengthening confidence between
MNEs and governments
Not required by law
Guidelines are becoming more of a benchmark
Aim is to promote improvements in comparability
and harmonization of standards

Intergovernmental Organizations
European Union
Involved

in international harmonization of
standards as part of company law
harmonization
Goal is to promote European economic
integration and development
No company should be at a disadvantage
because of legal differences between
countries

International Organizations
European Union
Interests

of shareholders, lenders, suppliers,

and other parties are protected
Directives in the EU have the force of law and
must be ratified by member nations
Regulations become law without national
ratification

Intergovernmental Organizations
European Union
Fourth

Requirements relate to

Directive approved in 1978

Disclosure
Classification and presentation of information
Methods of valuation

Compromise between European and AngloAmerican systems

Contains detailed requirements for historical cost
accounting with some flexibility

Intergovernmental Organizations
European Union
Fourth

Directive

Level of disclosure and transparency increased

true and fair view concept adopted
Does not adequately address

Foreign currency translation

Leases and funds
Cash flow statement

Intergovernmental Organizations
European Union
Seventh

Control criteria other than ownership is applied on

an optional basis
Requirements

Directive adopted in 1983

Worldwide consolidations
Fair value approach for assets purchased through
acquisitions
Equity treatment of associated corporations
Segmental disclosures of turnover by line of business
and geographical area

Disclosure has been substantially improved

Intergovernmental Organizations
European Union
Additional

Eighth Directive adopted in 1984

Deals with qualification and work of auditors

Directives

Includes minimum educational requirements

Encourages mobility of professional auditors

Proposed directive for employee disclosure was

put aside due to MNE and government opposition

Issues readdressed in Charter of Fundamental Social

Rights

Intergovernmental Organizations
European Union
Harmonization

of stock exchange regulations

and securities laws is also a prerogative

Ensure investor access to sufficient information

Promote capital market and stock exchanges

No

plans for new directives

Mutual Recognition approach was once
considered more effective
IFRS adopted in 2005

Trade Unions and Employees

International Trade Union Confederations

Industry-specific trade unions

Deal with individual MNEs

National Trade Unions

European Trade Unions Confederation

International Confederation of Free Trade Unions
World Confederation of Labor

Influence MNEs on a variety of levels

Information needs depend on contact with MNEs

and purpose of information

Trade Unions and Employees

Power exists in the nation where they operate

Unions have not grown beyond national boundaries
as MNEs have
Trade union pronouncements are aimed at
establishing policies concerning MNEs
Main concern centers on subsidiaries

Transfer pricing policies are a major concern

MNE subsidiary transactions have received little attention
to date by regulatory bodies

Information about the terms, conditions, scale,

security, and location of employment are of concern

Investors
Owners

or potential owners of shares in the

MNE parent corp. or a subsidiary
Interests are represented by international
financial analyst organizations and IOSCO
Concerned with current lack of comparability
Some want information approach rather than
a market approach to disclosure

Investors
International

ICCFAA and IOSCO

IOSCO - works for multilisting and international

trading
IOSCO is closely associated with the IASB

Want

organizations

comparable information

Interested in segmental information of MNEs

Interested in consolidated results

Bankers and Lenders

Information

needs are focused on financial

positions, performance, and future prospects
Concerned with security of loans advanced
Significant impact in France, Germany, Japan
Have more direct access to required info
International banks are involved in
harmonization and often require special
financial reports (IFC, World Bank, etc.)

Accountants and Auditors

International

Formerly the IASC

Governed by 14 board members
Objectives

Accounting Standards Board

Propose international standards and promote their

acceptance
Work toward improvement and harmonization of
standards

Works for comparability of accounting standards

Accountants and Auditors

IASB
Adopted 41 IAS standards, completed 5 new standards, and
revised 15 existing standards
Achievements

Completed a core set of standards in 2000 as agreed with IOSCO for

cross-board and national listings
Recent efforts are focused on EU compliance with IFRS in 2005

Endorsement by IOSCO was limited

Members of IOSCO are permitted to require reconciliation of certain

items, supplementary information, and eliminate some options
existing in IAS
Members will individually determine whether or not to endorse IFRS
for cross-boarder listings

Figure 7.2: The IASBs

Governance Structure

Accountants and Auditors

IFRS

and U.S. GAAP

IASB and FASB are working toward similar

accounting standards
FASB is researching international convergence

Objectives include

Identify every substantive difference between U.S. GAAP

and IFRS
Catalog those differences according to the strategy for
resolving them
Recommend further agenda decisions to the Board to
further the objective of convergence with IFRS

Accountants and Auditors

IFRS

and U.S. GAAP

Benefits of convergence according to the FASB

Increased efficiency in capital markets by increased

comparability and transparency from nation to nation
Reducing the administrative burden for MNEs by
allowing only one set of financials to be prepared
Enable U.S. companies access to capital markets
throughout the world without reconciling U.S. GAAP to
IFRS

Accountants and Auditors

IFRS

Street, Nichols, and Gray (2000) suggest the gap

is narrowing
Major differences are in the areas of

and U.S. GAAP

Property, plant and equipment revaluations

Deferred taxes
Goodwill
Capitalized borrowing costs

SEC desires enforcement of international

standards if they are in place

Accountants and Auditors

Rules

versus Principles

Recent scandals and aftermath perhaps show a

need for principle-based standards
Sarbanes-Oxley requires the SEC to examine the
feasibility of principles-based standards
Problems with principles-based standards

Guidance for application

Comparability
No guidance for complex transactions

Accountants and Auditors

Rules

versus Principles

Survey by Mike Ng (2004)

93% of companies surveyed reported that is was

possible to apply rules-based standards but not reflect
the economic substance of the transaction
Only 7% of companies surveyed believed principlesbased standards would lead to a better reflection of
economic reality
Results show that neither approach will ensure that
companies report the economic reality of transactions

Accountants and Auditors

Noncompliance with IFRS is problematic

IASI states that compliance means following IFRS and

each interpretation of IFRS
Improper accounting treatment is not condoned by
explaining accounting treatments applied or by footnotes
(paraphrase IASI).
Street and Gray (2000) found that only 775 of the
companies in their sample stated they were fully compliant
with IAS.
International accounting firms are not supporting the
enforcement of IAS
New structure of the IASB should help with compliance

Accountants and Auditors

International

Federation of Accountants

Sets international auditing guidelines

Promotes international convergence of standards

International

Auditing and Assurance

Standards Board

Independent body under the IFAC that creates

International Auditing Standards (ISA)

Accounting and Auditors

Reforms by the IFAC in cooperation with accounting

firms, member bodies, regulators, and accounting
organizations include:

Establishment of the Public Interest Oversight Board to

oversee IFACs standard setting process
Increased transparency with regard to IFAC governance
and international standard setting
Public participation in the standard-setting process
A more formal process of communicating with international
regulators

Accountants and Auditors

International Forum on Accountancy Development (IFAD)

Created after the Asian financial crisis to aid developing nations
Encourages conformity with IFRS
Developed the International Financial Framework to aid in
improving standards within national financial frameworks
Conducted a GAAP Convergence Survey (2002)

90% of countries surveyed plan to convert to IFRS

Majority of countries surveyed plan to converge with IFRS by
establishing a government regulation or a standard-setting body
Half of the countries surveyed see a barrier to convergence in the
complication of standards

Accountants and Auditors

International Association for Accounting Education and

Research
Promotes excellence in accounting education
Contributes to development of international standards

The International Harmonization

and Disclosure Debate

Some see harmonization and disclosure as a means

to create a balance of power between MNEs and
domestic corporations
More industrialized nations will not be totally
supportive of increased regulation
Regional integration

Long-term goal to remove market imperfections and

eliminate regulatory barriers (EU)

Many countries are more concerned with protecting

their own business community at the expense of
others

The International Harmonization

and Disclosure Debate
Differences

in reporting are due to differences

in domestic needs
With domestic corporations, there is little
concern for international standards
Natural accounting coordination will be a
lengthy process according to research
Regional economic groupings (EU) and
intergovernmental organizations (UN) will
help

The International Harmonization

and Disclosure Debate
Future

developments will be centered on

MNEs
May be less disclosure now in practice
because of the complex nature of MNEs
National reporting requirements may limit
disclosure