Matakuliah
Tahun
: F0142/Akuntansi Internasional
: September 2006
Session 08
International Accounting
Standards and Global
Convergence
1
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
2
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
3
Which groups are interested?
•
•
•
•
•
Governments
Trade Unions
Investors (including financial analysts)
Bankers and lenders
Accountants and Auditors
4
Pressures for Harmonization
5
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
6
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
7
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
8
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
9
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
10
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
11
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
12
Intergovernmental Organizations –
European Union
• Fourth Directive – approved in 1978
– Requirements relate to
• 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
13
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
14
Intergovernmental Organizations –
European Union
• Seventh Directive – adopted in 1983
– Control criteria other than ownership is
applied on an optional basis
– Requirements
• 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
15
Intergovernmental Organizations –
European Union
• Additional Directives
– Eighth Directive – adopted in 1984
• Deals with qualification and work of auditors
– 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
16
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
17
Trade Unions and Employees
• International Trade Union Confederations
– European Trade Unions Confederation
– International Confederation of Free Trade Unions
– World Confederation of Labor
• Industry-specific trade unions
– Deal with individual MNEs
• National Trade Unions
– Influence MNEs on a variety of levels
• Information needs depend on contact with MNEs
and purpose of information
18
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
19
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
20
Investors
• International organizations
– ICCFAA and IOSCO
• IOSCO - works for multilisting and international
trading
• IOSCO is closely associated with the IASB
• Want comparable information
– Interested in segmental information of MNEs
– Interested in consolidated results
21
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.)
22
Accountants and Auditors
• International Accounting Standards Board
– Formerly the IASC
– Governed by 14 board members
– Objectives
• Propose international standards and promote their
acceptance
• Work toward improvement and harmonization of
standards
– Works for comparability of accounting
standards
23
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
24
Figure 7.2: The IASB’s Governance
Structure
25
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
26
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
27
Accountants and Auditors
• IFRS and U.S. GAAP
– Street, Nichols, and Gray (2000) suggest the
gap is narrowing
– Major differences are in the areas of
•
•
•
•
Property, plant and equipment revaluations
Deferred taxes
Goodwill
Capitalized borrowing costs
– SEC desires enforcement of international
standards if they are in place
28
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
29
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
principles-based 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
30
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
31
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)
32
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 IFAC’s 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
33
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
34
Accountants and Auditors
• International Association for Accounting Education
and Research
– Promotes excellence in accounting education
– Contributes to development of international
standards
35
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
36
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
37
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
38