Chapter 7
International Accounting
Standards and Global
Convergence
Strategic Decision Point
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Rules-based or principles-based standards?
Rules-based
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Detailed and complex standards
Resulted in transaction manipulation
Enlarged gap between managers and owners
Principles-based
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Reflects “true” underlying economic substance
Provides increased protection for companies
Makes comparability across companies difficult
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Comparability of Accounting
Information
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International pressure exists for
comparability, especially with MNEs
Different approaches to comparability
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Harmonization is more flexible
Standardization suggests a state of uniformity
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Which groups are interested?
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Governments
Trade Unions
Investors (including financial analysts)
Bankers and lenders
Accountants and Auditors
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Pressures for Harmonization
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Governments
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Government involvement in accounting determination varies
across the world
Do governments really use corporate reports?
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Information needed by governments is often too extensive to
include in the report
Governments can demand whatever information they need
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Information needs are extensive and confidential
These things suggest governments may not be important users
of corporate reports
Is this a paradox?
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Explained by situations where governments might be users
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Government use of annual
reports
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Governmental use of annual
reports
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental
Organizations
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United Nations
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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
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Standards Advisory Council of the IASB
Advisory Panel of Small and Medium-sized Entities of the IASB
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental
Organizations
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Organization for Economic Cooperation and
Development (OECD)
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
International Organizations –
European Union
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
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Fourth Directive – approved in 1978
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Requirements relate to
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
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Fourth Directive
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Level of disclosure and transparency increased
“true and fair view” concept adopted
Does not adequately address
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Foreign currency translation
Leases and funds
Cash flow statement
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
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Seventh Directive – adopted in 1983
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Control criteria other than ownership is applied on
an optional basis
Requirements
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
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Additional Directives
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Eighth Directive – adopted in 1984
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Deals with qualification and work of auditors
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Includes minimum educational requirements
Encourages mobility of professional auditors
Proposed directive for employee disclosure was
put aside due to MNE and government opposition
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Issues readdressed in Charter of Fundamental Social
Rights
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
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Harmonization of stock exchange regulations
and securities laws is also a prerogative
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Trade Unions and Employees
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International Trade Union Confederations
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Industry-specific trade unions
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Deal with individual MNEs
National Trade Unions
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European Trade Unions Confederation
International Confederation of Free Trade Unions
World Confederation of Labor
Influence MNEs on a variety of levels
Information needs depend on contact with MNEs
and purpose of information
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Trade Unions and Employees
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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
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Investors
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Investors
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International organizations
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ICCFAA and IOSCO
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IOSCO - works for multilisting and international trading
IOSCO is closely associated with the IASB
Want comparable information
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Interested in segmental information of MNEs
Interested in consolidated results
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Bankers and Lenders
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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.)
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
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International Accounting Standards Board
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Formerly the IASC
Governed by 14 board members
Objectives
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Propose international standards and promote their
acceptance
Work toward improvement and harmonization of
standards
Works for comparability of accounting standards
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
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IASB
 Adopted 41 IAS standards, completed 5 new standards, and
revised 15 existing standards
 Achievements
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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
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Figure 7.2: The IASB’s
Governance Structure
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
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IFRS and U.S. GAAP
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IASB and FASB are working toward similar
accounting standards
FASB is researching international convergence
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Objectives include
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
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IFRS and U.S. GAAP
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Benefits of convergence according to the FASB
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
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IFRS and U.S. GAAP
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Street, Nichols, and Gray (2000) suggest the gap
is narrowing
Major differences are in the areas of
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Property, plant and equipment revaluations
Deferred taxes
Goodwill
Capitalized borrowing costs
SEC desires enforcement of international
standards if they are in place
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
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Rules versus Principles
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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
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Guidance for application
Comparability
No guidance for complex transactions
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
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Rules versus Principles
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Survey by Mike Ng (2004)
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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 principlesbased 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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
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Noncompliance with IFRS is problematic
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
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International Federation of Accountants
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Sets international auditing guidelines
Promotes international convergence of standards
International Auditing and Assurance
Standards Board
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Independent body under the IFAC that creates
International Auditing Standards (ISA)
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accounting and Auditors
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Reforms by the IFAC in cooperation with accounting
firms, member bodies, regulators, and accounting
organizations include:
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
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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)
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
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International Association for Accounting Education and
Research
 Promotes excellence in accounting education
 Contributes to development of international standards
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
The International Harmonization
and Disclosure Debate
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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
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
The International Harmonization
and Disclosure Debate
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
The International Harmonization
and Disclosure Debate
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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
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black