International Financial Reporting Standards

Appendix E
International Financial
Reporting Standards
© The McGraw-Hill Companies, Inc.
The Globalization of Accounting
o The U.S. Securities and Exchange Commission
votes to accept from “foreign private issuers”
financial statements that are prepared using
International Financial Reporting Standards
(IFRS) without reconciliation to U.S. Generally
Accepted Accounting Principles.
o The United States moving toward converging
U.S. GAAP with the IFRS that are followed by
most of the rest of the world.
o Convergence refers to the process by which U.S.
GAAP and IFRS will eventually merge to become
a single set of accounting standards.
Critical Questions: Status and Timing
of the Convergence process
o Why are these changes taking place?
o Who are the key players?
o What critical differences between U.S. and
international GAAP exist currently?
o How can we keep up-to-date with this changing
landscape of converging accounting standards?
LO1 Differences in Accounting
Further Explanation
1. Legal system
Common law countries (the United States, the United
Kingdom, and Canada) place greater emphasis on public
information, while code law countries (Germany and
France) rely more heavily on private information.
2. Tax laws
For countries whose tax standards are closely tied
to financial reporting standards (Continental Europe
and Japan), accounting earnings tend to be lower so
companies can minimize tax payments.
3. Sources of financing
In countries where debt financing is more common
(Germany and Japan) compared to equity financing,
there is greater emphasis on reporting the ability of the
company to repay debt rather than earn profits for its
Differences in Accounting Practices
4. Inflation
Historically high inflation in some countries (Argentina
and Brazil) has created a need to account for the effect
of inflation on assets and liabilities.
5. Culture
Some countries (Brazil and Switzerland) are more
secretive, leading to fewer financial disclosures.
6. Political and economic ties
Countries that share strong political and/or economic
ties (British colonies) often have similar accounting
7. Economic development
More economically developed economies (the United
States and the United Kingdom) have a need for more
complex accounting standards.
LO2 International Financial Reporting
o The International Accounting Standards
Committee (IASC) was formed in 1973 to
develop a single set of global accounting
o The IASC in 2001 created a new standardsetting body called the International
Accounting Standards Board (IASB).
o The IASB has two objectives:
1) To develop a single set of high-quality, understandable
and enforceable global accounting standards, and
2) To cooperate with national accounting standard-setters
to achieve convergence in accounting standards around
the world.
International Financial Reporting
Standards (Contd.)
o The IASB endorsed the 41 International
Accounting Standards (IAS) issued by IASC
when it was formed in 2001.
o IASB has revised many of the previous
standards and has issued standards of its own,
called International Financial Reporting
Standards (IFRS) and often pronounced “eyefurs.”
o Compliance to IFRS is voluntary as IASB has
no enforcement authority.
o The International Organization of Securities
Commissions (IOSCO) now permits itsE-7
International Financial Reporting
Standards (Contd.)
o -members to use these standards to prepare
their financial statements for cross-border
offerings and listings.
o Over 100 jurisdictions, including China,
Australia, and all of the countries in the
European Union (EU), either require or permit
the use of IFRS or a local variant of IFRS.
Norwalk Agreement
o The FASB and IASB signed the Norwalk
Agreement (2002), formalizing their
commitment to the convergence of U.S. GAAP
and IFRS.
o The two boards pledge to remove existing
differences between their standards and
coordinate their future standard-setting agendas
so that major issues are worked on together.
o Arguments Against Convergence to IFRS
o U.S. standards should remain customized to fit the
stringent legal and regulatory requirements of the U.S.
business environment.
Norwalk Agreement (Contd.)
o The differences in implementation and enforcement will
make accounting appear more uniform than actually is
the case.
o A competition between alternative standard-setting
regimes is healthy and can lead to improved standards.
o Where convergence currently stands?
o Active efforts being taken since 2002.
o Requirement for foreign companies to include in
financial statements a reconciliation of IFRS to
U.S.GAAP eliminated by SEC.
o Discussion on to allow U.S. companies to prepare their
financial statements according to U.S. GAAP or IFRS.
LO3 Differences between U.S.
Consider the major differences between U. S. GAAP
and IFRS in the context of the chapters of this book
The FASB and the IASB are working together to
develop a common conceptual framework that would
underlie a uniform set of standards internationally.
End of Appendix E