Chapter 3 International Convergence Flashcards
International Harmonization of Accounting Standards
Allows countries to have different standards as long as they do not conflict
Accounting Harmonization can be considered in 2 ways
- harmonization of accounting regulations or standards
- harmonization of accounting practices
Accounting harmonization is a process that
reduces alternatives while retaining a high degree of flexibility in accounting practices
A. Harmonization is different from standardization (or uniformity), which implies the elimination of alternatives in accounting practices.
B. The objective of accounting harmonization is to have comparable financial statements from companies in different countries.
C. Harmonization of regulations (de jure harmonization) does not necessarily produce harmonization of practices (de facto harmonization).
Harmonization hampered by:
-Quality of audits
-Enforcement mechanisms
-Culture
-Legal requirements
-Socioeconomic and political systems
Harmonization Efforts through the International Accounting Standards Committee (I A S C)
First Phase [Lowest–Common–Denominator Approach]
-First 15 years, from 19 73 to 19 88.
-Issuance of 26 International Accounting Standards (I A S).
-Usually allowed multiple options.
-Produced little if any comparability of financial statements across countries.
Harmonization Efforts through the International Accounting Standards Committee (I A S C)
Second Phase [Comparability Project]
-Next 5 years, from 19 89 to 19 93.
Publication of Framework.
Objectives of financial statements.
Qualitative characteristics of financial information.
Definitions of elements of financial statements.
Criteria for recognition of financial statement elements.
There are many arguments for international harmonization of accounting standards. The arguments include that it would:
A. Make financial statements of companies in different countries more comparable, and hence make it easier for investors to evaluate foreign firms.
B. Simplify for MNCs the evaluation of possible foreign takeover targets.
C. Reduce the cost for MNCs to consolidate foreign listed companies.
D. Make it easier for companies to access foreign capital markets.
E. Make it easier for MNCs and international accounting firms to transfer accounting personnel to other countries.
F. Raise the quality level of accounting practices internationally.
Harmonization Efforts through the International Accounting Standards Committee (I A S C)
Final Phase [The I O S C O Agreement]
Final 8 years, from 19 93 to 2001.
Core set of international standards.
30 in total, ending with Financial Instruments: Recognition and Measurement.
Ended with creation of the I A S B.
There also are several arguments against international harmonization of accounting standards.
A. Considering the differences among countries in terms of socio-politico-economic systems, it would be almost impossible to arrive at a set of accounting standards that would satisfy all of the parties involved.
B. Nationalism—International standards would be perceived as a set of standards developed to suit the requirements of other countries, and hence would not be received favorably.
C. It is unnecessary to force all companies worldwide to follow a common set of rules.
D. Today’s global capital market has evolved without harmonized accounting standards.
E. It would lead to a situation of standards overload.
Other Harmonization Efforts
Several international organizations involved.
REGIONALLY.
European Union.
Association of Southeast Asian Nations.
WORLDWIDE.
United Nations.
OTHER ORGANIZATIONS INVOLVED.
I O S C O.
Facilitate cross–border listing of high–quality accounting standards.
Other Harmonization Efforts
I F A C.
Over 135 countries and 160 member bodies.
Promotes adherence to high–quality professional standards on:
Auditing.
Ethics.
Education.
Training.
The International Accounting Standards Board (IASB) has the primary responsibility for
international harmonization/convergence of accounting standards.
The IASB was formed in 2001 to replace the IASC with the objective of developing
a set of high-quality accounting standards to be used throughout the world.
The IASB follows a
due process procedure and uses a principles-based approach in developing international standards.
The IASB has 14 members—
11 full-time and 3 part-time. Seven full-time members serve as liaisons with national standard-setters. Technical competence is the most important criterion for selection as a Board member.
In addition to the IASB itself, the other main components of international standard setting include
the IASC Foundation and its Trustees, the International Financial Reporting Interpretations Committee (IFRIC), and the Standards Advisory Council (SAC).
International Financial Reporting Standards (IFRS) consist of
IFRS issued by the IASB, IAS issued by the IASC (and adopted by the IASB), and Interpretations developed by IFRIC.
The IASB has a conceptual framework (Framework for the Preparation and Presentation of Financial Statements) that serves as the basis for
developing IFRS
There are a number of ways in which a country might adopt IFRS.
A. Replace national GAAP with IFRS.
B. Require parent companies to use IFRS in preparing consolidated financial statements.
C. Require stock exchange-listed companies to use IFRS in preparing consolidated financial statements.
D. Require foreign companies listed on a domestic stock exchange to use IFRS.
E. Require domestic companies listing on a foreign stock exchange to use IFRS.
There are some concerns about adopting IFRS.
A. They are too complicated for some companies.
B. Using them as the basis for taxation could be a problem.
C. Some IFRS, such as those related to financial instruments and fair value accounting, are controversial.
D. Guidance for first-time adopters is inadequate.
E. In countries that do not have well-developed capital markets, and where the users are satisfied with the local standards, the adoption of IFRS would be of little benefit.
F. There could also be issues in translating IFRS to different languages.
Despite the difficulties, there is a worldwide trend towards convergence with, or adoption of, IFRS, as evidenced by:
A. Support for the IASB structure and its highest common denominator approach.
B. The IASB’s initiatives to facilitate and enhance its role as a global standard-setter, for example, by issuing guidelines for first-time adopters, holding public round table forums, and having direct liaison with some national standard-setters.
C. The European Union requiring the use of IFRS by publicly traded companies in preparing consolidated financial statements.
D. The FASB/IASB convergence project (the so-called Norwalk agreement).
E. More recently, the FASB and the IASB seem to have moved beyond their goals of near-term convergence. However, American accountants play an important role in the IASB’s deliberation process. Thus, the two systems will continue to converge in the future, albeit at a slower rate than was originally envisioned.
International Federation of Accountants
(I F A D) International Forum on Accounting Development launched by I F A C.
To help developing and emerging nations.
Membership includes:
World Bank.
International Monetary Fund.
Asian Development Bank.
I O S C O.
I A S B.
S E C.
Large Accountancy Firms.
Primary aim: promote transparent financial reporting, duly audited to high standards by a strong accounting and auditing profession.
European Union
Aim: create a unified business environment.
Harmonization of company laws and taxation.
Promote full freedom in the movement of goods and labor.
Creation of community capital market.
Two Directives to harmonize accounting
Fourth Directive: provides considerable flexibility
-Valuation rules.
-Disclosure requirements.
-Format of financial statements.
Seventh Directive.
Consolidated financial statements.
Led to reduced differences but not complete comparability.
International Forum on Accounting Development (I F A D) 1
Created as working group.
Basel Committee.
The I F A C.
The I O S C O.
The large accounting firms.
The O E C D (Organization for Economic Cooperation and Development).
The U N C T A D (United Nations Conference on Trade & Development).
The World Bank and regional banks.
Objectives:
Promote the importance of transparent financial reporting.
Accounting responsibility to support the public interest.
Focus on accounting/auditing needs of developing countries.
Cooperation between:
International Forum on Accounting Development (I F A D)
Governments.
Accountancy and other professions.
International financial institutions.
Regulators.
Standard–setters.
Capital providers.
Issuers of financial statements.
Creation of the I A S B
Problems of the I A S C led to creation of the I A S B.
Lacked legitimacy.
Sought balance between:
Geographic representativeness.
Technical competency.
Independence.
I A S B focus on convergence rather than harmonization
The Structure of the I A S B
Organized under independent I F R S Foundation:
I A S B.
Monitoring Board.
I F R S Foundation.
I F R S Interpretations Committee (I F R S I C).
I F R S Advisory Council (I F R S A C).
Working groups.
Monitoring Board
Members:
The European Commission.
The Growth and Emerging Markets Committee of I O S C O.
The U.S. S E C.
Securities regulators from Brazil, Japan, China, and South Korea.
Function:
Enhance public accountability of the I A S C Foundation.
Participate in trustee nominations.
Oversight of I A S B activities.
Agenda–setting process.
I A S B efforts to improve accuracy/effectiveness of financial reporting.
The Structure of the IASB
Monitoring Board: approve and oversee trustees
IFRS Foundation: 22 trustees appoint, oversee, raise funds
Board 16 (maximum 3 part-time): Set technical agenda. Approve standards, exposure drafts, and interpretations.
IFRS Advisory Council: approx: 40 members
IFRS Interpretations Committee: 14 members
Working Groups for major agenda projects
