Transcript Chapter 7
Chapter 7
International Accounting
Standards and Global
Convergence
Comparability of Accounting
Information
International pressure exists for
comparability, especially with MNEs
Different approaches to comparability
Harmonization is more flexible
Standardization suggests a state of uniformity
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Which groups are interested?
Governments
Trade Unions
Investors (including financial analysts)
Bankers and lenders
Accountants and Auditors
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Governments
Government involvement in accounting determination varies
across the world
Do governments really use corporate reports?
Info needed by govt.’s is often extensive to include in the report
More relevant for Govt. involved countries like Germany/France
Governments can demand whatever information they need
Information needs are extensive and confidential
Influenced by government planning and regulation/tax
Power of government to obtain info suggest governments may
not be important users of corporate report
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Government use of annual
reports
Use reports, along with segmental information, to
check performance of local subsidiaries of MNEs
Governments wish to monitor MNE operations as a
whole – their importance to commercial
development
Governmental needs in differing departments can be
accommodated by an annual report
Developing countries would have more information
without bargaining for it with increased corporate
disclosure – but MNE have more power to control
the process – Host govt. fear of losing MNE
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Governmental use of annual
reports
Interest in extranational operations of MNEs
– to some extent information sharing
Intergovernmental organizations use this
information for policy formulation (UN, EU).
Many governments desire increased
bargaining power for information as members
of intergovernmental organizations
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental
Organizations
United Nations
1976 study lack of information / int’l compararbility
1979 – Working Group of Experts established
Emphasis on developing countries
Have different interests from those of OECD and IFRS
Major aim is international disclosure standards
Intergovernmental Working Group of Experts on
International Standards of Accounting and Reporting (ISAR)
established in 1983
Current issues deal with corporate governance
Monitoring role in endorsing desirable standards
UNCTAD – represented in
Standards Advisory Council of the IASB
Advisory Panel of Small and Medium-sized Entities of the IASB
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental
Organizations
Organization for Economic Cooperation and
Development (OECD)
Represents industrialized nations – US, UK, Australia,
Germany, France, Canada, Japan – most MNEs exist here
Issued Guidelines for Multinational Enterprises
Aimed at strengthening confidence between MNEs
and governments
Not required by law – though govt.’s agreed to
recommend guidelines related to financing, taxation,
competition, etc. – as more of benchmark
Aim is to promote improvements in comparability and
harmonization of standards – though not standard setting
Let’s go over exhibit 7.1
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union – 25 countries
Involved in international harmonization of
standards as part of company law
harmonization
Goal is to promote European economic
integration and development
No company should be at a disadvantage
because of legal differences between
countries
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
International Organizations –
European Union
Interests of shareholders, lenders, suppliers,
and other parties are protected
Directives in the EU have the force of law and
must be ratified by member nations
Regulations become law without national
ratification
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
Fourth Directive – approved in 1978
Requirements relate to
Disclosure
Classification and presentation of information
Methods of valuation
Compromise between continental European and
Anglo-American systems
Contains detailed requirements for historical cost
accounting with some flexibility
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
Fourth Directive
Level of disclosure and transparency increased
Historical costing concepts adopted with flexibility in
valuing inventory, goodwill, depreciation.
“true and fair view” concept adopted
Different layouts of financial statements allowed
Starting point for harmonization process
Does not adequately address
Foreign currency translation
Leases and funds
Cash flow statement
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
Seventh Directive (1983) – Consolidated Accounts
Definition of Control Group source of controversy.
UK definition (Share ownership/legal control) v. German
definition of effective control and ownership.
Compromise: control other than ownership could be
applied on optional basis.
Requirements
Worldwide consolidations
“Fair value” approach for assets purchased through
acquisitions
Equity treatment of associated corporations
Segmental disclosures of turnover by line of business and
geographical area
Disclosure has been substantially improved
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
Additional Directives
Eighth Directive – adopted in 1984
Deals with qualification and work of auditors
Includes minimum educational requirements
Encourages mobility of professional auditors
Proposed directive for employee disclosure was
put aside due to MNE and government opposition
Issues readdressed in Charter of Fundamental Social
Rights
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
Harmonization of stock exchange regulations
and securities laws is also a prerogative
Ensure investor access to sufficient information
Promote capital market and stock exchanges
Reaffirmed commitment to harmonization in
2000 requiring all listed companies to adopt
IFRS in 2005
Includes all IAS except IAS 32 and 39 (as these
under revision by IASB)
All Standard Industrial Classifications (SIC)
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Trade Unions and Employees
International Trade Union Confederations
Industry-specific trade unions
Deal with individual MNEs
National Trade Unions
European Trade Unions Confederation
International Confederation of Free Trade Unions
World Confederation of Labor
Influence MNEs on a variety of levels
Information needs depend on contact with MNEs
and purpose of information
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Trade Unions and Employees
Power exists in the nation where they operate –
Striking very powerful tool esp in EU
Unions have not grown beyond national boundaries
as MNEs have
Trade union pronouncements are aimed at
establishing policies concerning MNEs
Main concern centers on subsidiaries
Transfer pricing policies are a major concern
MNE subsidiary transactions have received little attention
to date by regulatory bodies
Information about the terms, conditions, scale,
security, and location of employment are of concern
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Investors
Owners or potential owners of shares in the
MNE parent corp. or a subsidiary
Interests are represented by international
financial analyst organizations and IOSCO
Concerned with current lack of comparability
Some want information approach rather than
a market approach to disclosure
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Investors
International organizations
ICCFAA and IOSCO
IOSCO - works for multilisting and international trading
IOSCO is closely associated with the IASB
Want comparable information
Interested in segmental information of MNEs
Interested in consolidated results
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Bankers and Lenders
Information needs are focused on financial
positions, performance, and future prospects
Concerned with security of loans advanced
Significant impact in France, Germany, Japan
Have more direct access to required info
International banks are involved in
harmonization and often require special
financial reports (IFC, World Bank, etc.)
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
International Accounting Standards Board
Formerly the IASC
Governed by 14 board members
Objectives
Propose international standards and promote their
acceptance
Work toward improvement and harmonization of
standards
Goal achieve comparability while minimizing cost
of MNE to comply with accounting standards
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
IASB
Adopted 41 IAS standards, completed 5 new standards, and
revised 15 existing standards
Achievements
Completed a core set of standards in 2000 as agreed with IOSCO for
cross-board and national listings
Recent efforts are focused on EU compliance with IFRS in 2005
Endorsement by IOSCO was limited
Members of IOSCO are permitted to require reconciliation of certain
items, supplementary information, and eliminate some options
existing in IAS
Members will individually determine whether or not to endorse IFRS
for cross-boarder listings
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
IFRS and U.S. GAAP
IASB and FASB are working toward similar
accounting standards
FASB is researching international convergence
Objectives include
Identify every substantive difference between U.S. GAAP
and IFRS
Catalog those differences according to the strategy for
resolving them
Recommend further agenda decisions to the Board to
further the objective of convergence with IFRS
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
IFRS and U.S. GAAP
Benefits of convergence according to the FASB
Increased efficiency in capital markets by increased
comparability and transparency from nation to nation
Reducing the administrative burden for MNEs by
allowing only one set of financials to be prepared
Enable U.S. companies access to capital markets
throughout the world without reconciling U.S. GAAP to
IFRS
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
IFRS and U.S. GAAP
Street, Nichols, and Gray (2000) suggest the gap
is narrowing
Major differences are in the areas of
Property, plant and equipment revaluations
Deferred taxes
Goodwill
Capitalized borrowing costs
SEC desires enforcement of international
standards if they are in place
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
Rules versus Principles
Recent scandals and aftermath perhaps show a
need for principle-based standards – Rules often
lend more opportunity to form over substance
Sarbanes-Oxley requires the SEC to examine the
feasibility of principles-based standards
Problems with principles-based standards
Guidance for application
Comparability
No guidance for complex transactions
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
Rules versus Principles
Survey by Mike Ng (2004)
93% of companies surveyed reported that is was
possible to apply rules-based standards but not reflect
the economic substance of the transaction
Only 7% of companies surveyed believed principlesbased standards would lead to a better reflection of
economic reality
Results show that neither approach will ensure that
companies report the economic reality of transactions
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
Noncompliance with IFRS is problematic
IASI states that compliance means following IFRS and
each interpretation of IFRS
Improper accounting treatment is not condoned by
explaining accounting treatments applied or by footnotes
(paraphrase IASI).
Street and Gray (2000) found that only 77% of the 162
companies in their sample stated they were fully compliant
with IAS.
International accounting firms are not supporting the
enforcement of IAS
New structure of the IASB should help with compliance –
raising standards of accounting and auditing worldwide
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
International Federation of Accountants
Sets international auditing guidelines
Promotes international convergence of standards
International Auditing and Assurance
Standards Board
Independent body under the IFAC that creates
International Auditing Standards (ISA)
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accounting and Auditors
Reforms by the IFAC in cooperation with accounting
firms, member bodies, regulators, and accounting
organizations include:
Establishment of the Public Interest Oversight Board to
oversee IFAC’s standard setting process
Increased transparency with regard to IFAC governance
and international standard setting
Public participation in the standard-setting process
A more formal process of communicating with international
regulators
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
International Forum on Accountancy Development (IFAD)
Created after the Asian financial crisis to aid developing nations
Encourages conformity with IFRS
Developed the International Financial Framework to aid in
improving standards within national financial frameworks
Conducted a GAAP Convergence Survey (2002)
90% of countries surveyed plan to convert to IFRS
Majority of countries surveyed plan to converge with IFRS by
establishing a government regulation or a standard-setting body
Half of the countries surveyed see a barrier to convergence in the
complication of standards
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
International Association for Accounting Education and
Research
Promotes excellence in accounting education
Contributes to development of international standards
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
The International Harmonization
and Disclosure Debate
Some see harmonization and disclosure as a means
to create a balance of power between MNEs and
domestic corporations
More industrialized nations will not be totally
supportive of increased regulation
Regional integration
Long-term goal to remove market imperfections and
eliminate regulatory barriers (EU)
Many countries are more concerned with protecting
their own business community at the expense of
others
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
The International Harmonization
and Disclosure Debate
Differences in reporting are due to
differences in domestic needs
With domestic corporations, there is little
concern for international standards
Natural accounting coordination will be a
lengthy process according to research
Regional economic groupings (EU) and
intergovernmental organizations (UN) will
help
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
The International Harmonization
and Disclosure Debate
Future developments will be centered on
MNEs
May be less disclosure now in practice
because of the complex nature of MNEs
National reporting requirements may limit
disclosure
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black