Chapter Eleven
Worldwide
Accounting
Diversity and
International
Standards
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International Accounting Diversity
Chinese companies
use the direct method
in preparing the
statement of cash
flows.
Companies in
Germany are
allowed to report
assets on the
balance sheet at
revalued amounts.
Most companies in
the United States
and Europe use the
indirect method.
11-2
Learning Objective 11-1
Explain the major factors
influencing the international
development of accounting
systems.
11-3
Reasons for Accounting Diversity
Legal
System
Taxation
All these interact!!!
Political
and
Economic
Ties
Culture
Inflation
Financing
Systems
11-4
Reasons for Accounting Diversity
Legal Systems:
► Common Law
► Roman (Codified) Law
Major providers of financing:
►Family members
► Banks
► Other creditors
► Governments
► Shareholders
► Taxation
► Inflation
►Societal Values
► Individualism
► Power Distance
► Uncertainty Avoidance
► Masculinity
11-5
Gray’s Framework for the Development of
Accounting Systems Internationally
Cultural Dimensions
Individualism
Uncertainty Avoidance
Power Distance
Masculinity
Institutional Consequences
Legal system
Corporate Ownership
Capital Markets
Professional Associations
Education & Religion
Accounting Values
Professionalism
Uniformity
Conservatism
Secrecy
Accounting Systems
Authority
Enforcement
Measurement
Disclosure
11-6
Nobes’ Model of the Reasons for
International Accounting Diversity
Nobes’ simplified model has two explanatory factors:
(1) national culture, including institutional structures,
(2) the nature of a country’s financing system divided into
two classes.
Class A (Strong equity-outsider financing system)
Less conservative
Greater disclosure
Financial and tax accounting separate
Class B (Weak equity-outsider financing system)
More conservative
Less extensive disclosure
Financial reporting follows tax rules
11-7
Learning Objective 11-2
Understand the problems
created by differences in
accounting standards across
countries and the reasons to
develop a set of internationally
accepted accounting standards.
11-8
Harmonization of Diverse
Accounting Standards
Problems Caused by Diverse Accounting Standards
1. Subsidiaries use local standards for financial statements.
2. Costly to prepare financial statements that comply with local
standards.
3. Accounting rules differ from country to country.
Harmonization to reduce differences
1. The International Accounting Standards Committee (IASC)
began the movement.
2. In 1987, the International Organization of Securities
Commissions (IOSCO)
3. 2001, the International Accounting Standards Board (IASB)
11-9
Learning Objective 11-3
List the authoritative
pronouncements that constitute
International Financial
Reporting Standards (IFRS).
11-10
International Accounting Standards
Committee- IASC
 International Accounting Standards committee (IASC)
established in 1973.
 IASB superseded IASC in April 2001.
The IASB has sole responsibility for establishing IFRSs
(“IASB GAAP”)
IASB has no enforcement authority!!
 All of the 41 IASs issued by the IASC were adopted by
the IASB. 28 are currently in effect.
 New standards are called “International Financial
Reporting Standards” (IFRSs).
 As of January 2013, 13 IFRSs have been issued.
11-11
Learning Objective 11-4
Describe the ways and the
extent to which IFRS are used
around the world.
11-12
International Financial Reporting
Standards (IFRSs)
Countries can elect to use IFRS by:
(1) adopting IFRS as its national GAAP
(2) requiring domestic listed companies to use IFRS for their
consolidated financial statements
(3) allowing domestic listed companies to use IFRS
(4) require or allow foreign companies listed on a domestic stock
exchange to use IFRS.
Ninety-two of the 153 countries using IFRS require all domestic
listed companies to use IFRS for consolidated statements.
(2) All publicly traded companies in the EU required to use IFRS.
(3) Two significant exceptions – China and the U.S.
11-13
Learning Objective 11-5
Describe the FASB–IASB
convergence process and the
SEC recognition of IFRS.
11-14
Norwalk Agreement:
FASB-IASB Convergence
In Norwalk, Connecticut, FASB and IASB held a joint meeting in
September 2002 and agreed to “use their best efforts”
1) to make existing financial reporting standards compatible “as
soon as is practicable” and
2) Coordinate efforts to “ensure that once achieved, compatibility
is maintained”
In 2006- Memorandum of Understanding (MoU), FASB and IASB
agreed that trying to eliminate differences between standards and
create identical standards, is not realistic. Instead, they agreed
that standards in need of improvement should be replaced with
new jointly developed standards.
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FASB-IASB Convergence
As of January 2013, the FASB‐IASB convergence process had
resulted in changes made to U.S. GAAP, IFRS, or both:
•
•
•
•
•
•
•
•
Business combinations
Consolidated financial statements
Non‐controlling interests
Acquired in‐process research costs
Non‐monetary asset exchanges
Share‐based payment
Accounting changes
Presentation of (OCI)
∙ Borrowing costs
∙ Derecognition
∙ Post‐employment benefits
∙ Fair value option
∙ Joint ventures
∙ Fair value measurement
∙ Segment reporting
∙ Inventory accounting
11-16
Learning Objective 11-6
Recognize acceptable accounting
treatments under IFRS and
identify key differences between
IFRS and U.S. GAAP.
11-17
Current Differences Between IFRSs and
US GAAP
Recognition:
If recognized, how? When?
Presentation:
Principles? Financial
Statement Components?
Disclosure:
Measurement:
If allowed, How?
How is cost determined?
Discontinued
Operations
Extraordinary
Items
Inventory
Fixed
Assets
11-18
Learning Objective 11-7
Determine the impact that
specific differences between
IFRS and U.S. GAAP have on
the measurement of income
and stockholders’ equity.
11-19
U.S. GAAP Reconciliations
IASB: PrinciplesBased


Provide general
principles with
limited guidance.
Requires greater
professional
judgment.
FASB: Rules-Based

Provide detailed
guidance.

May encourage
mindset of looking
for loop-holes.
11-20