Evolution of International Standards
By:
Associate Professor Dr. GholamReza Zandi
zandi@segi.edu.myc
Topics to Cover
• Background of International Standards
– FASB
– IASB
– IFRS
• Convergence
• Adoption
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Regulation of Economic Activity
• Accounting is a highly regulated area of economic
activity. Governments are directly involved in this
regulation through laws to control the creation of
professional accounting bodies and their rights to
public practice, and also through minimum disclosure
requirements for annual reports and prospectuses.
• Indirect government involvement comes through
securities commissions, etc.
• Professions also have their own regulating by
formulating and monitoring accounting and auditing
standards.
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Standard Setting
• Standard setting involves the regulation of
firms’ external information production
decisions.
• Firms are not completely free to control the
amount and timing of the information they
produce about themselves.
• It must be under a host of regulations that is
called standards, prepared by central
authority.
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MASB
• On 1 August 2008, the FRF and MASB announced
their plan to bring Malaysia to full convergence
with International Financial Reporting Standards
(IFRSs) by 1 January 2012
• Changeover from Financial Reporting Standards
(FRSs) to Malaysian Financial Reporting Standards
(MFRSs), equivalent to IFRSs
– will help place Malaysian businesses on a level playing
field with its international counterparts
5
FASB
• Financial Accounting Standards Board (FASB) in the
United States was established in 1973.
• Purpose- to establish and improve standards of
financial accounting and reporting for the guidance and
education of the public. Such as:
– to improve the usefulness of financial reporting by
focusing on relevance and reliability,
– by updating standards (if necessary) for changes in the
business and economic environment,
– Improving the public understanding of the nature and
purpose of information contained in financial reports,
– Promote international convergence of quality accounting
standards.
6
IASB
• The International Accounting Standards Board
(IASB) was established in 1973 by agreement
between accountancy bodies in Australia,
Canada, France, Germany, Japan, Mexico, the
Netherlands, the United Kingdom and Ireland,
and the United States.
• The parent body is IASC (International Accounting
Standards Committee), is governed by 19
individuals, with geographic representation from
North America, Europe and Asia/Pacific.
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IASC
• The establishment of IASC was part of the
increased globalisation and integration of
economic activity that has taken place in recent
years.
• Concerns? Enforcement of standards.
– Lack of enforcement increases the exposure of the
market adverse selection and moral hazard problems.
• Implications? Large multinational corporations?
• Costs of preparing reports to satisfy the securities
legislation of more than one jurisdiction.
8
IFRS
• IFRS are written standards based on the
practices of the English-speaking countries
with advanced economies.
• Largely derived from the UK and US national
standards.
• Agreement between FASB and IASB commits
the two bodies to work towards a common set
of high quality standards.
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Equity Market
• IFRS account for outside shareholders and are
the right accounting system for a country that
establishes a strong equity-outsider market in
which the control of companies is widely
spread among a large number of outsider
equity holders.
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Convergence of Accounting
Standards
• Work continues towards the achievement of
this goal
• So far 90 countries require publicly quoted
companies to comply with the international
accounting standards in their group accounts
• Mandatory for companies with quoted shares,
what about those unquoted?
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Country
Status for listed companies as of December 2011
Argentina
Required for fiscal years beginning on or after 1 January 2012
Australia
Required for all private sector reporting entities and as the basis for public sector reporting
since 2005
Brazil
Required for consolidated financial statements of banks and listed companies from 31
December 2010 and for individual company accounts progressively since January 2008
Canada
Required from 1 January 2011 for all listed entities and permitted for private sector entities
including not-for-profit organisations
China
Substantially converged national standards
European
Union
All member states of the EU are required to use IFRSs as adopted by 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.
Indonesia
Convergence process ongoing; a decision about a target date for full compliance with IFRSs is
expected to be made in 2012
Italy
Required via EU adoption and implementation process since 2005
Japan
Permitted from 2010 for a number of international companies; decision about mandatory
adoption by 2016 expected around 2012
Malaysia
Entities Other Than Private Entities shall apply for annual periods beginning on or after 1
January 2012
Mexico
Required from 2012
Republic of
Korea
Required from 2011
Russia
Required from 2012
Saudi Arabia
Required for banking and insurance companies; full convergence with IFRSs currently under
consideration
South Africa
Required for listed entities since 2005
Turkey
Required for listed entities since 2005
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Convergence?
Implications?
Multinational large
corporations?
Costs?
IFRS
IFRS Pros and Cons
• Supporters argue that the use of IFRS
increases the quality of financial reporting and
benefits investors.
• Opponents argue that a single set of standards
may not be suitable for all settings and not
uniformly improve
value relevance and
reliability due to differences among countries.
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Adoption
• Question whether IFRS can work properly in
markets that are disciplined mainly by
regulators rather than market mechanisms.
• Mandatory adoption occur in countries with
strong transparent reporting incentives and
legal enforcement.
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Adoption
• First time adoption of IFRS by French firms
was perceived to be a signal of an increase in
the quality of their financial statements.
• Different findings across countries indicate the
significant role of national institutional factors
in framing financial reporting characteristics.
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Adoption
• Relevance of IFRS to developing countries is still
subject of interest; relevance and impact of IFRS
to developing countries of mixed economies with
heavier regulator mechanisms are yet to be
empirically tested.
• Major disadvantages for developing countries to
converge with IFRS such as ‘information
overloads’ and the additional cost of unnecessary
complexity occur when IFRS are unsuited or
irrelevant to national needs.
17
Adoption
• International accounting standard setters and
accounting regulators who plan to converge
with IFRS should assess the relevance of IFRS
to their national needs.
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Relevance
• Based on accounting regulation, the strength
of equity markets and private sectors, suggest
that the degree of similarity in economic and
social environments to developed economies
in which IFRS originated can affect IFRS
relevance to a nation.
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Relevance
• IFRS are expected to be relevant to developing
countries whose national environments
become similar to those of the UK or US.
• Financial reporting practice is also contingent
on the interaction between accounting
standards and preparers’ incentives.
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Adopters
• Voluntary adopters whose incentives are different
from those of the compulsory adopters, shows
improved quality in financial reporting practice.
• Rising importance of private sector calls for
quality improvement to reporting and auditing
standards.
• Economic and political forces, standard
compliance incentives are also reinforced by a
collectivism-oriented culture.
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Collectivism-oriented
• Collectivism-oriented societal value supports
making accounting policy at the national level.
• Increased audit regulation and monitoring
contribute to high compliance with accounting
regulations.
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Quality Accounting Information
• Countries that have experienced significant
industrial growth throughout the past century
have seen far greater advances in the
sophistication of their accounting systems
than those who have not achieved the same
success.
• Quality accounting information is demanded
by credit providers and investors to support
such rapid expansion.
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The End