Chapter 3: International

Convergence of Financial Reporting

 International Harmonization of
Accounting Standards
• National differences in accounting rules and
practices render financial statements of companies
based in different countries UNCOMPARABLE
• The international movement towards a single set of
worldwide accounting rules is referred to as
Harmonization.
• The process of reducing differences in financial
reporting practices across countries.
• Development of international accounting standards
• International Financial Reporting Standards (IFRS)
and U.S. GAAP are the two most important sets of
accounting rules.
 Harmonization and Convergence
• Harmonization
– Reduction of alternatives while maintaining a
high degree of flexibility in accounting
practices
• Convergence
– Enforcement of single set of accepted
standards by several regulatory bodies
 Harmonization
• Can be considered in two ways
– Harmonization of accounting regulations and
standards
– Harmonization of accounting practice
• Ultimate goal of international harmonization efforts
• Harmonization of standards may or may
not result in harmonization of practice
• Different from standardization
What does "harmonization" mean in the context
of international accounting?

A. Assessing the exposure resulting from

inadequate internal controls
B. The process of combining the financial
statements of foreign subsidiaries into the
parent company's financial statements
C. Disclosing the accounting methods used in
preparing the financial statements
D. The process of reducing accounting
differences across countries
 International Harmonization
• Arguments in favor of harmonization
include:
– Improved comparability aids capital
globalization
– Reduced cost of producing financial
statement information
– Easier to shift accounting staff worldwide
– Simplified auditing
 International Harmonization
• A single set of accounting standards used
worldwide would have the following benefits
for multinational corporations:
– Reduce the cost of preparing consolidated
financial statements
– Reduce the cost of gaining access to capital
in foreign countries
– Facilitate the analysis and comparison of
financial statements of competitors and
potential acquisitions
 International Harmonization
• Arguments opposing harmonization:
– Magnitude of current differences is an
immense obstacle
– Existing differences might be “appropriate and
necessary”
– Unnecessary (a thriving global capital market
already exists)
– High political cost
– Nationalism
 Rules-based or principles-based
standards?
• Rules-based
– Detailed and complex standards
– Resulted in transaction manipulation
– Agency Problem
• Enlarged gap between managers and owners
• Principles-based
– LESS exceptions, bright lines, and loopholes.
– Reflects “true” underlying economic substance
– Problems with principles-based standards
• Comparability – Makes comparability across companies
difficult
• Need guidance for application
– No guidance for complex transactions
Principles-Based Approach to IFRS
• IASB follows a principles-based approach
to standard setting vs a rules-based
approach
• Standards establish general principles
for recognition, measurements, and
reporting requirements for transactions
• Limits guidance and encourages
professional judgment in applying
general principles to entities or industries
Why does the IASB believe that a principles-based
approach to standard setting is superior to a rules-
based approach?

A. Principles-based standard setting is less costly to

undertake than rules-based standard formulation.
B. A conceptual framework for standard setting has
demonstrated to encourage the greatest economic
development.
C. It is desirable to have all corporations in all
countries using the same accounting practice.
D. Detailed guidance or rules encourage accountants
to look for ways around the rules rather than trying to
provide useful information.
Which of the following is generally true
about the differences between U.S. GAAP
and IFRS?

A. IFRS tends to be more rules-based and

U.S. GAAP tends to be principles-based.
B. More professional judgment is required to
apply U.S. GAAP than is required for
implementing IFRS.
C. In all cases, U.S. GAAP is more detailed
than the IFRS.
D. IFRS is more flexible than U.S. GAAP.
 IFRS
• It’s the benchmark GAAP around the world
– International Financial Reporting Standards (IFRS) are
gaining momentum as the global norm in financial reporting.
– More than 120 countries permit, require or base (most)
national standards on IFRSs.
• As of January 2021, 131 out of 173 jurisdictions permit or require
IFRS for domestic listed companies.
• Including the members of the European Union, Israel and Australia.
• Many other countries, such as Canada, Mexico, India and Brazil
recently adopted or converged with IFRS.
– The globalization of business and finance has led to the
successful mass adoption of IFRS by more than 12,000
companies in over 120 countries.
• Around 40% of the top 500 corporations (Fortune 500 companies)
worldwide by revenue prepared its 2009 consolidated financial
statements in accordance with IFRS. (from 22 countries)
Country Status (for listed companies)
Argentina Required for fiscal years beginning on or after 1 January 2012
Required for all private sector reporting entities and as the basis for
Australia public sector reporting since 2005
Required for consolidated financial statements of banks and listed
companies from 31 December 2010 and for individual company
Brazil accounts progressively since January 2008
Required from 1 January 2011 for all listed entities and permitted for
Canada private sector entities including not-for-profit organisations
China Substantially converged national standards
All member states of the EU are required to use IFRSs as adopted by
European Union the EU for listed companies since 2005
France Required via EU adoption and implementation process since 2005
Germany Required via EU adoption and implementation process since 2005
India India is converging with IFRSs at a date to be confirmed.
Convergence process ongoing; a decision about a target date for full
Indonesia compliance with IFRSs is expected to be made in 2012
Italy Required via EU adoption and implementation process since 2005
Permitted from 2010 for a number of international companies; decision
Japan about mandatory adoption by 2016 expected around 2012
Mexico Required from 2012
Republic of Korea Required from 2011
Russia Required from 2012
Required for banking and insurance companies. Full convergence with
Saudi Arabia IFRSs currently under consideration.
South Africa Required for listed entities since 2005
Turkey Required for listed entities since 2005
United Kingdom Required via EU adoption and implementation process since 2005
 Brief History of IFRS
• Historically, multinational and global
companies were required to prepare separate
financial statements for each country in which
they did business, in accordance with each
country’s GAAP.
• In 1973, the International Accounting
Standards Committee (IASC) was formed in
response to the growing need to develop a
set of common financial standards to address
the global nature of corporate financing.
 Brief History of IFRS
• In 2000, the IASC received support from the
International Organization of Securities
Commissioners (IOSCO), the primary forum for
international cooperation among securities
regulator.
– The IOSCO recommended its members (currently 181
organizations including the U.S. SEC and the
Committee of European Securities Regulators) permit
multinational companies to use IASC standards along
with a reconciliation to national GAAP.
• In 2001, the IASC reorganized as the IASB to
incorporate representatives from national
standard-setting organizations.
 Introduction to IFRS
• The term IFRS refers to all publications
approved by the IASB, including
standards and interpretations issued by its
predecessor (IASC)
• There is no hierarchy to IFRS guidance.
• All standards and interpretations have equal
levels of authoritativeness.
 Introduction to IFRS
• Issued by the IASB:
– International Financial Reporting Standards
(IFRS)
– Interpretations originated from the
International Financial Reporting
Interpretations Committee (IFRIC)
• Issued by its predecessor, the IASC, prior
to 2001:
– International Accounting Standards (IAS)
– Standing Interpretations Committee (SIC)
 Introduction to IFRS
• Set out recognition, measurement, presentation
& disclosure for general purpose F/S

• IFRSs ASC
Financial Reporting
• IASs Standards (SFAS, APB Opinions etc.)

Financial Reporting
• IFRICS Interpretations
• SIC EITFs

• Developed in accordance with Conceptual

Framework
International Financial Reporting Standards is
generally comprised of which of the following?

A. International Financial Reporting Standards

B. International Accounting Standards
C. Interpretations from the International
Financial Reporting Interpretations Committee
D. Interpretations from Standing
Interpretations Committee
E. A and B
F. A, B, and C
G. A, B, C, and D
 Introduction to IFRS
• Still much variance in how corporations apply IFRS.
– IFRS as national standards, with explanatory material
added
– IFRS used as national standards, plus national standards
for topics not covered by IFRS
– IFRS modified for national conditions
– National standards “similar to”, “based on”, or “converged
with” IFRS
• The IASB has no authority to enforce IFRS, and
must rely on regulatory bodies of individual countries
or regions.
– One possible method of enforcement lies in the IOSCO.
How are International Financial Reporting
Standards enforced?
A. Enforcement Committee of the
International Accounting Standards Board
B. International Securities and Exchange
Commission
C. Regulatory bodies of individual countries
D. A and B
E. All of the above
F. None of the above
 IASB
IASB: International Accounting Standards Board
• Objective
– To develop a single set of high quality, understandable,
enforceable and globally accepted financial reporting standards
based upon clearly articulated accounting principles.
• How do they do this?
– An independent standard-setting board, overseen by a
geographically and professionally diverse body of trustees, publicly
accountable to a Monitoring Board of public capital market authorities
– Supported by an external IFRS Advisory Council and an IFRS
Interpretations Committee to offer guidance where divergence in
practice occurs
– A thorough, open, participatory and transparent due process
– Engagement with investors, regulators, business leaders and the
global accountancy profession at every stage of the process
– Collaborative efforts with the worldwide standard-setting community
Which of the following is NOT an objective
of the International Accounting Standards
Board (IASB)?

A. To develop a single set of enforceable

global accounting standards
B. To promote the use and application of
global accounting standards
C. To encourage convergence of national
accounting standards and international
accounting standards
D. To establish worldwide uniformity of
accounting practice
 IASB
• The IASB consists of 16 Board members
(currently 14 members), each with one vote.
– The Board members currently come from nine countries
and have a variety of functional backgrounds.
– IASB board members are selected by the trustees of the
IFRS Foundation (IFRSF), an independent organization.
• There are 22 trustees (currently 21 trustees) of the IFRSF.
• To ensure adequate geographic representation, North America,
Europe and the Asia/Oceanic region each have 6 trustees.
• The remaining 4 trustees are appointed from any geographic
area, in such a way that maintains balance both geographically
and by professional background.
• Each trustee serves for a term of three years, renewable once.
• Vacancies are filled by vote of the existing trustees.
IASC Funding
IFRS Foundation Financing
Budget (Gross income without expenses)
In millions (British pounds) £M

2005 13.9
2006 15.5
2007 16.3
2008 19.3
2009 22.3
2010 22.5
2011 26.1
2012 25.5
2013 27.4
 Where the money came from
(FOR THE 2013 BUDGET):

Amount in '000
Largest sources of British pounds
operating income £'000 %
Contributions 21,372 78.1%
Other income 374 1.4%
Publications and related
activities 5,621 20.5%
 Where the Contribution came from
(FOR THE 2012 BUDGET):

Amount in '000
British pounds
Sources of contributions £'000 %
National funding regimes 14,704 71.5%
(USA) (1,737) (8.5%)
International accounting firms 5,825 28.3%
Trustees 33 0.2%
 Development of IFRS
• The IASB board members develop accounting
standards in the following process designed to be
transparent and accessible to all interested
parties:
– Potential agenda items are discussed in IASB meetings.
• IASB meetings are open to the public, as well as broadcast and
archived on the IASB website.
– Discussion Papers and Exposure Drafts are published
and posted on the IASB website for public comment.
• Public comments are also available on the IASB website.
– The IASB solicits comments from numerous standard-
setting organizations and regulatory bodies.
• It also holds numerous meetings to obtain feedback from
preparers, users, academics and other affected parties.
Development of IFRS
 FASB’s Standard-Setting Process
• Board receives recommendations for projects.
• FASB Chairman decides whether to add a project to
its agenda.
• Board deliberates the issues at a series of public
meetings.
• Board issues an Exposure Draft (ED).
• Board holds a public roundtable meeting on the ED.
• Staff analyzes feedback and the Board re-deliberates
the proposed revisions at public meetings .
• Board issues a Standards Update describing
amendments to the Codification.
 IFRS
• Substantially similar to U.S. GAAP.
• However, significant differences do exist.
• An effective way to understand IFRSs is to
compare to U.S. GAAP.
– Describe IFRSs in terms of significant differences
from U.S. GAAP.
• 41 IAS standards, 17 IFRS standards
– IASC (1973-2000) issued:
• 41 International Accounting Standards (25 still effective)
• 32 SICs (Standards Interpretation Committee statements – 5 still
effective)
– IASB replaced IASC in 2001 and has issued:
• 17 IFRSs (International Financial Reporting Standards – 16 still
effective)
• 23 IFRICs (International Financial Reporting Interpretations
Committee – 15 still effective)
 IFRS Web Resources
• IASB (www.ifrs.org)
– eIFRS ($$$)
– IFRS Technical Summaries (Free)
• AICPA – IFRS Resources (www.ifrs.com)
– IFRS news, updates, and resources
– IFRS publications ($$$)
 IFRSs Web Resources
• Deloitte – IAS PLUS (www.iasplus.com)
– Standards
– Interpretations
– IFRSs vs. US GAAP
• Ernst & Young
– http://www.ey.com
– US GAAP vs. IFRS: The Basics
(Convergence)
– Other practical materials (by industry, hot
topics)
 IASB Framework
• Created to develop accounting standards
systematically
• Framework for Preparation and Presentation of
Financial Statement adopted by IASB in 2001 from
IASC
• Scope of Framework
– Objective of financial statements and underlying
assumptions
– Qualitative characteristics that affect the usefulness of
financial statements
– Definition, recognition, and measurement of the
financial statements elements
– Concepts of capital and capital maintenance
 Qualitative Characteristics of Financial
Statements
• Understandability: Understandable to people
with reasonable financial knowledge
• Relevance: Useful for making predictions and
confirming existing expectations
– Affected by nature and materiality of information
• Reliability: Neutral and represents faithfully
what it purports to
– Reflecting items based on economic substance
rather than their legal form
• Comparability
Which of the following qualitative
characteristics make financial statement
information useful?

A. Relevance
B. Understandability
C. Reliability
D. All of the above
 Proposed Changes to existing
frameworks by IASB and FASB
• IASB and FASB will work on existing frameworks to
provide basis for developing future standards by
boards
• Phases of project
– Objectives and qualitative characteristics
– Elements and recognition
– Measurement
– Reporting entity
– Presentation and disclosure
– Purpose and status
– Application to not-for-profits
– Finalization
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
 The Norwalk Agreement
• Proposed Changes as per the discussion paper
published jointly by two boards:
– Decision-useful objective encompassing information
relevant to assessing stewardship
– Stakeholder approach (vs. U.S. framework of
shareholder approach) — users other than capital
providers explicitly acknowledged
– Asset of an entity would be present economic
resource to which, through an enforceable right or
other means, entity has access or can limit others’
access
– Emphasis on principle and guidance development for
fair value measurements in IFRS — exit price as
measurement base, or, if not—develop additional
guidance
 Presentation of Financial Statements
(IAS 1)
• Single standard providing guidelines for the
presentation of financial statements
• Guidance areas
– Purpose of financial statements
– Components of financial statements
– Overriding principle of fair presentation
• Requires the faithful representation of the effects of
transactions and events
– 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
 Presentation of Financial Statements
(IAS 1)
• Basic principles and assumptions
– Adds to the guidance provided in the Framework
• Immaterial items should be aggregated
• Assets and liabilities, and income and expenses should
NOT be offset
• Structure and content of financial
statements
– Current/noncurrent
– Items to be included on face of financial statements
– Items to be disclosed in the notes
First Time Adoptions of IFRS (IFRS 1)
• Provides guidance to companies that are
adopting IFRS for the first time
• Requires compliance with all effective
IFRS at the reporting date of an entity’s
first IFRS financial statements
– Allows exemptions when costs outweigh
benefits
Disclosures – First IFRS financial
statements
Jan 1, 2019 Jan 1, 2020 Dec 31, 2020
Previous GAAP
restated to IFRS IFRS

Profit
reconciliation
IFRS opening Current balance
balance sheet sheet date

Equity reconciliations
What is the intent of IFRS 1?

A. To provide the framework for setting

international accounting standards
B. To establish the guidelines for financial
statement presentation
C. To provide the working definitions of
accounting elements
D. To provide guidance on first-time
application of IFRS
 International Convergence Issues
• IFRS difficulties in language translation
• Insufficient guidance on first time application of
IFRS
• The complicated nature of standards such as
financial instruments and fair value accounting
• Disagreement with significant IFRS, such as
financial statements and fair value accounting
• Investor satisfaction with national accounting
standards
• Limited capital markets are less beneficial
• The tax-driven nature of the national accounting
regime
 IASB/FASB Convergence
• The Norwalk Agreement reached in 2002
between the IASB and FASB pledged
– For compatible financial reporting standards
– Proper coordination of work program to
maintain compatibility
 IASB/FASB Convergence
• IASB’s and FASB’s key initiatives in the Norwalk
Agreement
– Joint projects – boards work jointly to address issues
(e.g., revenue recognition)
– Short-term convergence –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