Matakuliah
Tahun
: F0142/Akuntansi Internasional
: 2006
Session 09
International Accounting
Harmonization
1
Pressures for Harmonization
2
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
3
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
4
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
5
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
6
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
7
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
8
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
9
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
10
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
11
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
12
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
13
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
14
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
15
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
16
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
17
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
18
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.)
19
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
20
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
21
Figure 7.2: The IASB’s Governance
Structure
22
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
23
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
24
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
25
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
26
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
27
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
28
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)
29
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
30
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
31
Accountants and Auditors
• International Association for Accounting Education
and Research
– Promotes excellence in accounting education
– Contributes to development of international
standards
32
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
33
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
34
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
35