Transcript Slide 1

Chapter 3
International
Harmonization of Financial
Reporting
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
International Harmonization of Financial
Reporting
Chapter Topics
 Harmonization: Definition, pros and cons, efforts
toward.
 International Accounting Standards Board
(IASB).
 Other organizations involved in Harmonization.
 Principles-based vs. Rules-based accounting.
 IASB Framework and IFRSs.
 Use of and support for IFRSs.
 Convergence of IAS and U.S. GAAP.
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International Harmonization of Financial
Reporting
Learning Objectives
1. Explain the meaning of harmonization.
2. Identify the arguments for and against
international harmonization of accounting
standards.
3. Discuss major harmonization efforts.
4. Explain the principles-based approach used by
the International Accounting Standards Board
(IASB).
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International Harmonization of Financial
Reporting
Learning Objectives
5. Discuss the IASB’s Framework and Standards
related to the adoption of International Financial
Reporting Standards (IFRSs) and presentation
of financial statements.
6. Examine the support for, and the use of, IFRSs
across countries.
7. Describe the IASB/FASB convergence project.
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Harmonization
What is harmonization?
Harmonization -- the process of increasing the
level of agreement in accounting standards and
practices between countries.
Learning Objective 1
3-5
Harmonization
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.
Learning Objective 1
3-6
Harmonization
Harmonization
 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
Harmonization: The Pros and Cons
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 adoption of high-quality standards
by developing countries.
Learning Objective 2
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Harmonization: The Pros and Cons
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.
Learning Objective 2
3-9
Harmonization Efforts
Organizations involved
 Association of South East Asian Nations
(ASEAN).
 United Nations (UN) / European Union (EU).
 International Organization of Securities
Commissions (IOSCO).
 International Federation of Accountants (IFAC).
 IASB and FASB.
Learning Objective 3
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Harmonization Efforts
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.
Learning Objective 3
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Harmonization Efforts
IOSCO
 Works to achieve improved market regulation
internationally.
 Works to facilitate cross-border listings.
 Advocates for the development and adoption of
a single-set of high quality accounting
standards.
Learning Objective 3
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Harmonization Efforts
IFAC
 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
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Harmonization Efforts
EU
 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.”
 Seventh Directive – requires consolidated
financial statements for company groups of a
certain size.
Learning Objective 3
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Harmonization Efforts
IASB
 Preceded by the IASC (International Accounting
Standards Committee).
 Works toward harmonization of international
accounting standards.
 IASC was established in 1973.
Learning Objective 3
3-15
Harmonization Efforts
IASB
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Comprised of 14 members (12 full, 2 part-time).
7 members are liaison with a national board.
Standard development process is open.
Standards are principles-based.
Since establishment of IASB, focus is on global
standard-setting rather than harmonization per
se.
Learning Objective 3
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Harmonization Efforts
IASB – Major Initiatives
Comparability Project
 Comprehensive review of existing IAS
(International Accounting Standards).
 Begun in 1989.
 In order to increase rigor of IAS.
Learning Objective 3
3-17
Harmonization Efforts
IASB – Major Initiatives
IOSCO Agreement
 Establishment of a core set of 30 accounting
standards.
 Standards agreed upon by IOSCO and IASC.
Learning Objective 3
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Harmonization Efforts
IASB – Revised Structure
The restructured IASB is overseen by the IASC
Foundation which also oversees:
 The International Financial Reporting
Interpretations Committee (IFRIC).
 The Standards Advisory Council (SAC).
 Also, IFRSs are subject to due process and the
IASC Foundation now periodically reviews its
constitution.
Learning Objective 3
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Principles-Based Approach to Accounting
Standard Setting
IASB Perspective
 IASB attempts to follow a Principles-Based
approach to standard setting.
 As such accounting standards are grounded in
the the IASB Framework.
Learning Objective 4
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Principles-Based Approach to Accounting
Standard Setting
A Principles-Based approach
 Represents a contrast to a Rules-Based
Approach.
 Attempts to limit additional accounting guidance
(e.g., FASB EITFs, FASB Interpretations).
 Is designed to encourage professional judgment
and discourage over-reliance on detailed rules.
Learning Objective 4
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Principles-Based Approach to Accounting
Standard Setting
Support for a Principles-Based Approach
from outside the IASB
 FASB – has published a supportive proposal
entitled, “Principles-Based Approach to U.S.
Standard Setting”
(www.fasb.org/proposals/principlesbased_approach.pdf).
 SEC – has recommended adoption of this
approach
(www.sec.gov/news/studies/principlesbasedstan
d.htm).
Learning Objective 4
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IASB Framework and IFRSs
IASB Framework
 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
3-23
IASB Framework and IFRSs
IASB Framework
 The objective and underlying assumptions of
financial statements.
 Qualitative characteristics of information.
 Definition, recognition, and measurement of
elements in financial statements.
 Concepts of capital maintenance.
Learning Objective 5
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IASB Framework and IFRSs
IASB Framework
 Possesses objective and underlying
assumptions of financial statements.
 Primary objective is to provide information useful
to decision making.
 Underlying assumptions include accrual-basis
and going concern.
Learning Objective 5
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IASB Framework and IFRSs
Qualitative characteristics of information
 Understandability – should be understandable
to people with reasonable financial knowledge.
 Comparability – allows for meaningful
comparisons to financial statements of previous
periods and other companies.
Learning Objective 5
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IASB Framework and IFRSs
Qualitative characteristics of information
 Relevance – useful for making predictions and
confirming existing expectations.
 Reliability – free from bias (neutral) and
represents that which it claims to represent
(representational faithfulness).
Learning Objective 5
3-27
IASB Framework and IFRSs
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.
Learning Objective 5
3-28
IASB Framework and IFRSs
Concepts of Capital maintenance
Financial capital maintenance
 One approach to income measurement.
 Net income represents the increase in net
financial assets, excluding owner transactions.
 The approach in U.S. GAAP.
Learning Objective 5
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IASB Framework and IFRSs
Concepts of Capital maintenance
Physical capital maintenance
 Another approach to income measurement.
 Net income represents increase in physical
productive capacity.
 Excluding owner transactions.
 Requires current costs for measurement of
certain physical assets.
Learning Objective 5
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Presentation of Financial Statements (IAS 1)
This standard provides guidance in the
following areas
 Purpose of financial statements – to provide
decision-useful information.
 Components of financial statements –
balance sheet, statements of income, cash
flows, changes in equity, and notes to the
financial statements.
Learning Objective 5
3-31
Presentation of Financial Statements (IAS 1)
 Fair presentation – the overriding principle of financial
statement presentation.
 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 5
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Presentation of Financial Statements (IAS 1)
Basic principles and assumptions
 Reiteration of underlying assumptions.
 Accrual basis/going
concern/comparability.
Structure and Content of Financial Statements
 Provides information on presentation format:
 Current/noncurrent.
 Items to be included on face of financial
statements.
 Content of notes.
Learning Objective 5
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First Time Adoptions of IFRSs (IFRS 1)
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Provides guidance for first time adoption.
Much used in 2005, particularly in EU.
Requires compliance with all effective IFRSs.
Allows exemptions when costs deemed to
outweigh benefits.
Learning Objective 5
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Use of IFRSs
Evidence of support for IFRSs
 Adoption by the EU – public companies in the
EU were required to begin using IFRSs in 2005.
 IOSCO has endorsed IFRSs for cross-listings.
 Many developing nations have adopted IFRSs.
 Some countries disallow IFRSs for domestic
firms but allow foreign companies to use them.
 U.S. is a major exception, does not allow use of
IFRSs.
Learning Objective 6
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IASB/FASB Convergence
The Norwalk Agreement
 Reached in 2002.
 Between the IASB and FASB.
 To work toward accounting standards
convergence.
Learning Objective 7
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IASB/FASB Convergence
FASB’s key initiatives in the Norwalk
Agreement
 Joint projects – boards will work together to
address some issues (e.g., revenue
recognition).
 Short-term convergence – to remove
differences between IFRSs and U.S. GAAP for
issues where convergence is deemed most
likely.
 IASB liaison – IASB member in residence at
FASB.
Learning Objective 7
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IASB/FASB Convergence
 Monitoring IASB projects – FASB monitors
IASB projects of most interest.
 Convergence research project – identification
of all major differences between IFRSs and U.S.
GAAP.
 Convergence potential – FASB assesses
agenda items for possible cooperation with
IASB.
Learning Objective 7
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