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    The document discusses international convergence of financial reporting standards. It describes the objectives of harmonizing accounting standards across countries through increasing agreement in rules and practices. The major organizations involved in harmonization efforts include the IASB, FASB, IOSCO, IFAC, and the EU. The document outlines the principles-based approach used by the IASB, including its framework for developing International Financial Reporting Standards (IFRS).

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    AcFn 611-ch IV ppt-LK-2013

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    The document discusses international convergence of financial reporting standards. It describes the objectives of harmonizing accounting standards across countries through increasing agreement in rules and practices. The major organizations involved in harmonization efforts include the IASB, FASB, IOSCO, IFAC, and the EU. The document outlines the principles-based approach used by the IASB, including its framework for developing International Financial Reporting Standards (IFRS).

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    The document discusses international convergence of financial reporting standards. It describes the objectives of harmonizing accounting standards across countries through increasing agreement in rules and practices. The major organizations involved in harmonization efforts include the IASB, FASB, IOSCO, IFAC, and the EU. The document outlines the principles-based approach used by the IASB, including its framework for developing International Financial Reporting Standards (IFRS).

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    164 views39 pages

    AcFn 611-ch IV ppt-LK-2013

    Uploaded by

    temedebere
    The document discusses international convergence of financial reporting standards. It describes the objectives of harmonizing accounting standards across countries through increasing agreement in rules and practices. The major organizations involved in harmonization efforts include the IASB, FASB, IOSCO, IFAC, and the EU. The document outlines the principles-based approach used by the IASB, including its framework for developing International Financial Reporting Standards (IFRS).

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    of 39

    INTERNATIONAL CONVERGENCE OF

    FINANCIAL REPORTING

    Chapter IV

    ACFN 611: Advanced Financial Accounting & Auditing /Dr. Laxmikantham


    International Convergence of
    Financial Reporting
    Chapter Topics
    > Harmonization and convergence
    > Evolution of the International Accounting Standards
    Board (IASB)
    > Other organizations involved in harmonization
    > IASB framework and IFRS
    > Use of and support for IFRS
    > Principles-based vs. rules-based accounting
    > Convergence of IAS and U.S. GAAP

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 2


    International Convergence of
    Financial Reporting

    Objectives
    1. Explain the differences between harmonization and
    convergence.
    2. Identify the arguments for and against
    international harmonization of accounting standards.
    3. Discuss major harmonization efforts.
    4. Explain the principles-based approach used by the
    International Accounting Standards Board (IASB).

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 3


    International Convergence of
    Financial Reporting
    Objectives
    5. Describe the proposed changes to the IASB’s
    Framework.
    6. Discuss the IASB’s Standards related to 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 IASB/FASB convergence project.
    10. Explain the meaning of “Anglo-Saxon” accounting.
    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 4
    Harmonization and Convergence

    Harmonization -- the process of increasing the


    level of agreement in accounting standards and
    practices between countries.

    Convergence -- the adoption of one set of


    standards internationally. This is the main
    objective of the IASB.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 5


    Harmonization

    The two “levels” of harmonization


    > 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.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 6


    Harmonization

    > 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.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 7


    Harmonization: The Pros and Cons

    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

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 8


    Harmonization: The Pros and Cons

    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.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 9


    Harmonization Efforts

    Organizations involved
    > Association of South East Asian Nations
    (ASEAN)
    > United Nations (UN)
    > European Union (EU)
    > International Organization of Securities
    Commissions (IOSCO)
    > International Federation of Accountants (IFAC)
    > IASB and FASB
    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 10
    Harmonization Efforts

    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.
    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 11
    Harmonization Efforts

    IOSCO
    > Works to achieve improved market regulation
    internationally
    > Works to facilitate cross-border listings
    > Advocates for the development and adoption of
    a single-set of high quality accounting standards

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 12


    Harmonization Efforts

    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

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 13


    Harmonization Efforts

    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.”
    > Seventh Directive – requires consolidated
    financial statements for company groups of a
    certain size.
    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 14
    Harmonization Efforts

    IASB
    > Preceded by the IASC (International Accounting
    Standards Committee).
    > Works toward convergence of national and
    international accounting standards
    > IASC was established in 1973.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 15


    Harmonization Efforts

    IASB
    > Comprised of 14 members (12 full, 2 part-time)
    > 7 members are liaisons with a national board.
    > Standard development process is open.
    > Standards are principles-based.
    > Since establishment of IASB, focus is on global
    standard-setting rather than harmonization per
    se.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 16


    Harmonization Efforts

    IASB – Major Initiatives


    Comparability Project
    > Comprehensive review of existing IAS
    (International Accounting Standards)
    > Begun in 1989
    > In order to increase rigor of IAS
    > eg IAS 11 requiring use of percentage of
    completion method when certain criteria are met

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 17


    Harmonization Efforts

    IASB – Major Initiatives


    IOSCO Agreement
    > Establishment of a core set of 30 accounting
    standards
    > Standards agreed upon by IOSCO and IASC

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 18


    Harmonization Efforts

    IASB – Revised Structure


    The restructured IASB is overseen by the IASC
    Foundation which also oversees:
    > The International Financial Reporting
    Interpretation Committee (IFRIC).
    > The Standards Advisory Council (SAC).
    > Also, IFRS are subject to due process and the
    IASC Foundation now periodically reviews its
    constitution.
    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 19
    Principles-Based Approach to
    Accounting Standard Setting
    IASB Perspective
    > IASB attempts to follow a principles-based
    approach to standard setting.
    > As such, accounting standards are grounded in
    the IASB Framework.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 20


    Principles-Based Approach to
    Accounting Standard Setting
    A principles-based approach
    > Represents a contrast to a rules-based
    approach
    > Attempts to limit additional accounting guidance
    (e.g., FASB, EITFs, FASB Interpretations)
    > Is designed to encourage professional judgment
    and discourage over-reliance on detailed rules

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 21


    IASB Framework and IFRS

    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
    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 22
    IASB Framework and IFRS

    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

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 23


    IASB Framework and IFRS

    IASB Framework
    > Primary objective is to provide information
    useful to decision making.
    > Underlying assumptions include accrual-basis
    and going concern.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 24


    IASB Framework and IFRS

    Qualitative characteristics of information


    > Understandability – should be understandable
    to people with reasonable financial knowledge.
    > Comparability – allows for meaningful
    comparisons to financial statements of previous
    periods and other companies.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 25


    IASB Framework and IFRS

    Qualitative characteristics of information


    > Relevance – useful for making predictions and
    confirming existing expectations.
    > Reliability – free from bias (neutral) and
    represents that which it claims to represent
    (representational faithfulness).

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 26


    IASB Framework and IFRS

    Elements of Financial Statements


    > 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.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 27


    IASB Framework and IFRS

    Concepts of capital maintenance


    > Financial capital maintenance
    > Physical capital maintenance

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 28


    Proposed Changes to IASB
    Framework by IASB and FASB
    Phases:
    > Objectives and qualitative characteristics
    > Elements and recognition
    > Measurement
    > Reporting entity
    > Presentation and disclosure
    > Purpose and status
    > Application to not-for-profits
    > Finalization
    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 29
    Proposed Changes to IASB
    Framework by IASB and FASB
    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 IFRS—exit price as
    measurement base, or, if not—develop additional guidance

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 30


    Presentation of Financial
    Statements (IAS 1)
    This standard provides guidance in the
    following areas
    > 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.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 31


    Presentation of Financial
    Statements (IAS 1)
    > 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.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 32


    Presentation of Financial
    Statements (IAS 1)
    Basic principles and assumptions
    > Reiteration of underlying assumptions.
    >Accrual basis/going concern/comparability.
    Structure and Content of Financial Statements
    > Provides information on presentation format:
    >Current/noncurrent.
    >Items to be included on face of financial
    statements.
    >Content of notes.
    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 33
    First Time Adoptions of IFRS
    (IFRS 1)
    > Provides guidance for first time adoption.
    > Much used in 2005, particularly in EU.
    > Requires compliance with all effective IFRS.
    > Allows exemptions when costs deemed to
    outweigh benefits.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 34


    Use of IFRS

    Evidence of support for IFRS


    > Adoption by the EU – public companies in the EU were
    required to begin using IFRS in 2005.
    > IOSCO has endorsed IFRS for cross-listings.
    > Many developing nations have adopted IFRS.
    > Some countries disallow IFRS for domestic firms but
    allow foreign companies to use them.
    > U.S. and Japan, for example will allow foreign countries
    listing on their respective exchanges to file financials
    prepared in accordance with IFRS without reconciliation
    to U.S. or Japanese GAAP.

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 35


    International Convergence Issues

    > 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

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 36


    IASB/FASB Convergence

    The Norwalk Agreement


    > Reached in 2002
    > Between the IASB and FASB
    > To work toward accounting standards
    convergence

    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 37


    IASB/FASB Convergence

    FASB’s key initiatives in the Norwalk Agreement

    > 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.
    > IASB liaison – IASB member in residence at FASB.
    > Monitoring IASB projects – FASB monitors IASB projects of most
    interest.
    > Convergence research project – identification of all major
    differences between IFRS and U.S. GAAP.
    > Convergence potential – FASB assesses agenda items for
    possible cooperation with IASB.
    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 38
    Anglo-Saxon Accounting

    > 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 orientation—primary aim is efficient
    operation of capital markets (very transparent)
    > Less emphasis on prudence and measurement of
    taxable income or distributable income—substance
    over form
    ACFN 611: Advanced Financial Accounting/Dr. Laxmikantham 39

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