McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Topics
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Convergence—the buzz word in international financial reporting.
Other organizations involved in harmonization.
The International Accounting Standards Committee.
Evolution of the International Accounting Standards Board (IASB).
IASB framework and IFRS.
Use of and support for IFRS.
Principles-based vs. rules-based accounting.
IAS 1 and IFRS 1.
Arguments for and against convergence.
International convergence towards and the adoption of IFRS.
3-2
Learning Objectives
1. Explain the meaning of convergence.
2. Identify the arguments for and against international
convergence of accounting standards.
3. Discuss major harmonization efforts.
4. Explain the principles-based approach used by the
International Accounting Standards Board (IASB).
5. Describe the proposed changes to the IASB’s
Framework.
3-3
Learning Objectives
6. Discuss the IASB’s Standards related to first-time adoption
of IFRS and the presentation of financial statements.
7. Describe the support for and the use of IFRS across
countries.
8. Examine the issues related to international convergence.
9. Describe the progress made in the IASB/FASB convergence
project.
10. Explain the meaning of “Anglo-Saxon” accounting.
3-4
Harmonization
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The process of reduction of alternatives while maintaining a
high degree of flexibility in accounting practices.
Term is now becoming “antiquated.”
Convergence -- the adoption of one set of standards
internationally. This is the main objective of the IASB.
Learning Objective 1
3-5
The two “levels” of harmonization
Harmonization in accounting standards, which is increased
agreement in accounting rules.
 Harmonization in practice, which is increased agreement in
actual accounting practices.
 Harmonization in standards may or may not result in
harmonization in practice.
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Learning Objective 1
3-6
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Is different from standardization.
Harmonization allows for different standards in different
countries as long as there are not logical conflicts.
Standardization involves using the same standards in
different countries.
Learning Objective 1
3-7
Pros:
Expedite the integration of global capital markets and make
easier the cross-listing of securities.
 Facilitate international mergers and acquisitions.
 Reduce investor uncertainty and the cost of capital.
 Reduce financial reporting costs.
 Allow for easy and cost effective adoption of high-quality
standards by developing countries.
 Easier to transfer accounting staff internationally.
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Learning Objective 2
3-8
Cons:
Significant differences in standards currently exist.
 The political cost of eliminating differences.
 Overcoming “Nationalism” and traditions.
 Perhaps it will not provide significant benefits.
 Will cause “Standards Overload” for some firms.
 Diverse standards for diverse places is acceptable.
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Learning Objective 2
3-9
Organizations involved
Association of South East Asian Nations (ASEAN)
 United Nations (UN)
 European Union (EU)
 International Accounting Standards Committee(IASC)—
dissolved in 2001
 International Organization of Securities Commissions
(IOSCO)
 International Federation of Accountants (IFAC)
 IASB (successor to IASC) and FASB
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Learning Objective 3
3-10
Organizations involved
IOSCO – is essentially the international equivalent of the
U.S. Securities and Exchange Commission (SEC).
 IFAC – is similar, at the international level, to the American
Institute of Certified Public Accountants (AICPA).
 IASB – is essentially the international equivalent of FASB.
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Learning Objective 3
3-11
IOSCO
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Works to achieve improved market regulation
internationally.
Works to facilitate cross-border listings.
Advocates for the development and adoption of a singleset of high quality accounting standards.
Learning Objective 3
3-12
IFAC
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Works to develop international standards of auditing,
ethics, and education.
Began International Forum on Accountancy Development
(IFAD) to enhance the accounting profession in emerging
countries.
Started the Forum of Firms to raise global standards of
accounting and auditing.
Learning Objective 3
3-13
EU
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Has worked to harmonize accounting standards within the
EU, primarily by way of two directives.
Fourth Directive – a set of comprehensive accounting rules
built on the principle of a “true and fair view.”---valuation
rules, disclosure and format.
Seventh Directive – requires consolidated financial
statements for company groups of a certain size.
Learning Objective 3
3-14
IASB
Preceded by the IASC (International Accounting Standards
Committee).
 Works toward convergence of national and international
accounting standards.
 IASC was established in 1973.
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Learning Objective 3
3-15
IASB
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Comprised of 16 members (13 full, 3 part-time).
Represents a geographical mix.
Develops IFRS and Exposure Drafts using due process.
Approves IFRIC (International Financial Reporting
Interpretations Committee) Interpretations.
Standards are principles-based.
Since establishment of IASB, focus is on global standardsetting rather than harmonization per se.
Learning Objective 3
3-16
IASB – Major Initiatives
Comparability Project (through IASC)
Comprehensive review of existing IAS (International
Accounting Standards).
 Begun in 1989.
 In order to eliminate most of the choices permitted under
IAS.
 eg IAS 11 requiring use of percentage of completion
method when certain criteria are met.
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Learning Objective 3
3-17
IASB – Major Initiatives
IOSCO Agreement
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Establishment of a core set of 30 accounting standards.
Standards agreed upon by IOSCO and IASC.
Learning Objective 3
3-18
IASB Perspective
Follows a principles-based approach to standard setting vs
a rules-based approach.
 As such, accounting standards are grounded in the IASB
Framework.
 Limits guidance and encourages professional judgment in
applying general principles to entities or industries.
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Learning Objective 4
3-19
IASB Framework
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Created to develop accounting standards systematically.
Provides the basis for financial statements presented in
accordance with IFRS.
Similar to the relationship between U.S. GAAP financial
statements and the FASB Conceptual Framework.
Learning Objective 5
3-20
IASB Framework
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The objective and underlying assumptions of financial
statements.
Qualitative characteristics of information.
Definition, recognition, and measurement of elements in
financial statements.
Concepts of capital and capital maintenance.
Learning Objective 5
3-21
IASB Framework
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Primary objective is to provide information useful to
decision making.
Underlying assumptions include accrual basis and going
concern.
Learning Objective 5
3-22
Qualitative characteristics of information
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Understandability – should be understandable to people
with reasonable financial knowledge.
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Comparability – allows for meaningful comparisons to
financial statements of previous periods and other
companies.
Learning Objective 5
3-23
Qualitative characteristics of information
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Relevance – useful for making predictions and confirming
existing expectations.
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Reliability – free from bias (neutral) and represents that
which it claims to represent (representational faithfulness).
Learning Objective 5
3-24
Elements of Financial Statements
Definition – assets, liabilities, and other financial statement
elements are defined.
 Recognition – guidelines as to when to recognize revenues
and expenses.
 Measurement – various bases are allowed: historical cost,
current cost, realizable value, and present value.
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Learning Objective 5
3-25
Concepts of capital maintenance
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Financial capital maintenance.
Physical capital maintenance.
Learning Objective 5
3-26
Phases:
Objectives and qualitative characteristics.
 Elements and recognition.
 Measurement.
 Reporting entity.
 Presentation and disclosure.
 Purpose and status.
 Application to not-for-profits.
 Finalization.
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Learning Objective 5
3-27
Proposed Changes:
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Decision-useful objective encompassing information
relevant to assessing stewardship (actually two parallel
objectives with different emphases).
Stakeholder approach (vs. U.S. framework— shareholder
approach)--users other than capital providers explicitly
acknowledged.
Asset of an entity = present economic resource to which,
through an enforceable right or other means, entity has
access or can limit others’ access.
Emphasis on fair value measurements in IFRS—exit price as
measurement base, or, if not—develop additional
guidance.
Learning Objective 5
3-28
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Joint statement in November 2009 affirmed June 2011 as
target date for completing major projects.
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March 2010—joint exposure draft issued— “Conceptual
Framework for Financial Reporting: The Reporting Entity”
GOAL: to significantly improve and converge IFRS and U.S.
GAAP.
3-29
This standard provides guidance in the following areas
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Purpose of financial statements – to provide decision-useful
information.
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Components of financial statements – balance sheet,
statements of income, cash flows, changes in equity, and
notes to the financial statements.
Learning Objective 6
3-30
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Fair presentation – the overriding principle of financial
statement presentation.
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Accounting policies
 Should be consistent with all IASB standards.
 When specific guidance is lacking, use standards on similar issues,
and definitions of the financial statement elements.
Learning Objective 6
3-31
Basic principles and assumptions
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Reiteration of underlying assumptions.
 Accrual basis/going concern/comparability.
Structure and content of financial statements
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Provides information on presentation format:
 Current/noncurrent.
 Items to be included on face of financial statements.
 Content of notes.
Learning Objective 6
3-32
Provides guidance for first time adoption.
 Requires compliance with all effective IFRS.
 Allows exemptions when costs deemed to outweigh
benefits.
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Learning Objective 6
3-33
Evidence of support for IFRS
Adoption by the EU – public companies in the EU were
required to begin using IFRS in 2005.
 IOSCO has endorsed IFRS for cross-listings.
 IFAC G20 accountancy summit in July 2009 issued renewed
mandate for adoption of global accounting standards.
 Latest IFAC Global Leadership Survey—emphasized that
investors and consumers deserve simpler and more useful
information.
 Adoption of IFRS in 2011: Japan, Canada, India, Brazil and
Korea.
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Learning Objective 7
3-34
The complicated nature of standards such as financial
instruments and fair value accounting.
 The tax-driven nature of the national accounting regime.
 Disagreement with significant IFRS, such as financial
statements and fair value accounting.
 Insufficient guidance on first time application of IFRS.
 Limited capital markets = little benefit.
 Investor satisfaction with national accounting standards.
 IFRS difficulties in language translation.
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Learning Objective 8
3-35
The Norwalk Agreement
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Reached in 2002.
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Between the IASB and FASB.
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To work toward accounting standards convergence.
Learning Objective 9
3-36
FASB’s key initiatives in the Norwalk Agreement :
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Joint projects – boards will work together to address some issues
(e.g., revenue recognition).
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Short-term convergence – to remove differences between IFRS
and U.S. GAAP for issues where convergence is deemed most
likely.
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IASB liaison – IASB member in residence at FASB.
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Monitoring IASB projects – FASB monitors IASB projects of most
interest.
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Convergence research project – identification of all major
differences between IFRS and U.S. GAAP.
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Convergence potential – FASB assesses agenda items for possible
cooperation with IASB.
Learning Objective 9
3-37
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Following global financial crisis both groups formed
Financial Crisis Advisory Group (FCAG).
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July 2009 FCAG report addresses:
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Effective financial reporting.
Limitations of financial reporting.
Convergence of accounting standards.
Standard-setting independence and accountability.
3-38
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Countries include U.S., U.K., Canada, Australia and New
Zealand.
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Accounting systems not identical but share fundamental
features:
 Micro orientation (firm level) with emphasis on professional rules
and self-regulation.
 Investor orientation—primary aim is efficient operation of capital
markets (very transparent).
 Less emphasis on prudence and measurement of taxable income or
distributable income—substance over form.
Learning Objective 10
3-39