Introduction to International
Financial Reporting Standards
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GAAP
Traditional Sources:
AICPA – ARBs (AICPA Committee on
Accounting Procedures) and ABPOs (AICPA
Accounting Principles Board)
FASB – Statements of Financial Accounting
Standards, Financial Interpretations,
Emerging Issues Task Force (EITF)
Abstracts, etc.
Securities and Exchange Commission (SEC)
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Should have said sources of US GAAP
• GAAP for the most part has been country specific
– Differences between countries may be cosmetic or
substantive
• Example: In UK balance sheet presentation has traditionally been
A – L = OE and also in reverse order of liquidity. These are
cosmetic differences.
• Again in the UK when Glaxo Wellcome plc merged with SmithKline
Beecham plc to form GlaxoSmithKline they used the pooling
method for the consolidation. This method combines the two
companies utilizing historical costs rather than the US approach
which uses fair market values and records goodwill. Pooling has
not be allowed per US GAAP for decades. This is an example of
substantive difference.
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Why Rules Differ Internationally
• Short answer – rules are established by governments
or accounting bodies that have jurisdiction only
within their respective borders.
• One still might think that given the desire for orderly
capital markets and efficient allocation of scarce
resources the rules would end up virtually the same.
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Factors Affecting Standards
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Sources of capital
Inflation
Taxation
Culture
Legal system, code vs. common law
– Code countries such as France and Germany tend to have
detailed, comprehensive accounting regulations. Common
law countries like the UK and US typically have accounting
rules that are less detailed and require higher levels of
professional judgment in their application.
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More Factors Affecting Standards
• Accidents of history – war, conquest, and colonialism
(http://en.wikipedia.org/wiki/Commonwealth_of_Nations)
• Business complexity
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Other Types of Differences Between Countries
• Tax-based accounting
– In some countries the tax treatment for a transaction must
also be used in financial reporting. Hence tax revenue
considerations drive standards rather than a
comprehensive body of accounting theory.
• Asset revaluations
– Some countries allow periodic revaluation of assets. This
leads to a lack of comparability for assets and equity as
compared to an entity that did not revalue.
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Other Types of Differences Between Countries
• Form over substance –
– an underlying concept in US and many other countries’
accounting standards.
• If a lease appears to transfer the risks and rewards of ownership its
treated as a sale/purchase (capital lease).
– Some countries rely on the form of the transaction
only
• If it is a lease it is accounted for as a (operating) lease.
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Demand for International Accounting Standards
• Prior to the 1970’s cross-country accounting
differences didn’t much matter.
– Most businesses and capital transactions did not cross
international borders.
• Multinational companies
• Growth of global capital markets
• Economic interdependence and the rise in
multinational political organizations (EU)
• Reduction of costs
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Impediments to International Standards
• Who is going to make up the rules and who is going
to pay for the process?
• What will the rules be like (uncertainty)?
• Significant transitional costs.
• How will rules be enforced?
• Nationalism.
– Carve outs.
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