Transcript ACCOUNTING THEORY: TEXT AND READINGS

CHAPTER 3
INTERNATIONAL
ACCOUNTING
International Accounting
Standards
Financial accounting is influenced
by the environment in which it operates
Companies develop financial reports directed at
their primary users
 Previously most were residents of the same country as the
corporation
 Transnational financial reporting has become more commonplace
because of the European Union, GATT and NAFTA
U. S. companies must be able to compete in
global markets with transnational financial
reporting
International Business
Accounting Issues
A company’s first exposure to
international accounting is
frequently the result of a purchase
or sale
Problems:
1
2
3
Exchange gains or losses
Obtaining credit information
Evaluation of financial statements
Next step may be to open an international division
Another issue is raising capital in foreign markets
 Must prepare financial statements in a format acceptable
by appropriate securities market
Factors Influencing the
Development of Accounting
Systems:
Level of
Education
Legal
System
Political
System
Economic
Development
Influences on the Development of
Financial Reporting
Type of
economy
Agricultural
Resource Based
Tourist Based
Manufacturing
Legal
System
Codified
Common Law
Political
System
Democratic
Totalitarian
Nature of
Ownership
Private Enterprise
Socialist
Communist
Influences on the Development of
Financial Reporting
Growth
Pattern of
economy
Growing
Stable
Declining
Social Climate
Stability of currency
Sophistication of management
Sophistication of financial community
Existence of accounting legislation
Education System
Spheres of Influence of
Current Accounting Practices
Various attempts at groupings
that have changed in response
to changes in the environment
such as NAFTA and EU
Current groupings
United States
UK/Netherlands
Continental/Japan
South American
Third World
Changing Economies
Communist
Approaches to Preparing Financial
Statements for Use in Other
Countries:
1
2
3
4
5
Same to all
Translate language
Translate language and currency
Two sets
World-wide standards
The International Accounting
Standards Committee
The preparation of financial statements for
foreign users under option #5 is being
increasingly advocated
IASC
formed in 1973
to aid in this
process
currently 134
sponsoring
organizations
from 104
countries
International
Accounting
Standards Board
replaced IASC in
2001
Standard Setting by the IASC
Original intent:
avoid complex details
concentrate on basic standards
Steps in the process
similar to FASB
1
Steering Committee
2
Identify issues and prepare point outline
3
Board prepares comments
4
Steering Committee prepares final Statement of Principles
5
Exposure Draft
6
Steering Committee reviews comments and prepares final standard
Standard Setting by the
IASC
Two treatments
1
2
Benchmark - point of reference
Alternative
Improvements Project
2003
Removed some of the existing alternative
accounting treatments
Where an IAS retains alternative treatments
IASB removed references to 'benchmark treatment'
and allowed 'alternative treatment'
using descriptive references

'cost model'

'revaluation model'
Restructuring the IASC
In its early years, IASC acted mainly as a harmonizer
Recently, it has begun to combine that role with the
role of a catalyst
Harmonizer
Catalyst
Coordinator of national initiatives
Initiator of new work
at national level
Restructuring the IASC
Future IASC role as catalyst and initiator should
become more prominent
Important for the IASC to focus objectives more
precisely, as follows:
1. To develop international accounting standards that
require high-quality, transparent, and comparable
information that will help participants in capital markets
and others to make economic decisions; and
2. To promote the use of international accounting
standards by working with national standard setters.
Restructuring the IASC
Structural changes needed
so that IASC can anticipate the new challenges facing it and
meet those challenges effectively.
Issues that need to be addressed:
1. Partnership with national standard setters.
 IASC should enter into a partnership with national standard
setters
 so that IASC can work together with them to accelerate
 convergence between national standards
 and international accounting standards around solutions requiring
high-quality, transparent, and comparable information

that will help participants in capital markets and others to
make economic decisions.
Restructuring the IASC
2.
Wider participation in the IASC Board.

A wider group of countries and organizations should take part
in the IASC Board

3.
Without diluting the quality of the Board's work
Appointment.


The process for appointments to the IASC Board and key IASC
committees should be the responsibility of a variety of
constituencies
Must that those appointed are competent
Restructuring the IASC
2001:
Responsibility for international
standards-setting was transferred to
the to the International Accounting
Standards Board (IASB)
Restructuring the IASC
The following changes were adopted:
1. Steering Committees replaced by a Standards Development
Committee
 National standard setters will play a major role in developing
international accounting standards for approval by the IASC Board
 Standards Development Committee will also be responsible for
approving the publication of final SIC Interpretations prepared by the
Standing Interpretations Committee
2. Standards Development Committee supported by a Standards
Development Advisory Committee
 Acts as a channel of communication with those national standard
setters who are unable to participate directly in the Standards
Development Committee because of its limited size
Restructuring the IASC
3. IASC Board expanded from 16 to 25 countries and
organizations
 Without diluting the quality of the Board’s work
4. Advisory Council was replaced by 12 Trustees




Three appointed by the International Federation of Accountants
Three by other international organizations
Six by the Trustees to represent the world "at large"
Trustees appoint members of the Standards Development
Committee, the Board, and the Standing Interpretations
Committee
 Trustees also have responsibility for monitoring IASC’s
effectiveness and for financing the IASC’s activities
Restructuring the IASC
The new structure:
The IASC Foundation
The International Accounting
Standards Board
The International Accounting
Standards Advisory Council
International Financial
Reporting Interpretations
Committee
KEY:
New Structure
Appoints
Reports To
Advises
IASC Foundation
19 Trustees Appoint, Oversee, Raise Funds
Board: 12 Full time & 2 Part Time
Set Technical Agenda
Approve Standards, Exposure Drafts, &
Interpretations
Standards
Advisory Council
49 members
Advisory Groups
For Major Agenda Projects
International Financial
Reporting
Interpretations
Committee
(12 members)
Revising the IASB’s
Constitution
Key issues to be reviewed:
1. Whether the objectives of the IASC Foundation should
expressly refer to the challenges facing small and mediumsized entities (SMEs)
2. Number of Trustees and their geographical and
professional distribution
3. The oversight role of the Trustees
4. Funding of the IASC Foundation
5. The composition of the IASB
6. The appropriateness of the IASB's existing formal liaison
relationships
7. Consultative arrangements of the IASB
8. Voting procedures of the IASB
9. Resources and effectiveness of the International Financial
Reporting Interpretations Committee (UMC):
10. The composition, role, and effectiveness of the SAC
The Uses of International
Accounting Standards
IASC noted that its standards are used in a variety
of ways:
1 National requirements
2 Basis for national requirements
3 Benchmark to develop standards
4 By regulatory agencies
5 By companies
Also International Organisation of Securities
Commissions (IOSCO) looks to the IASC to
provide standards that can be used in
multinational securities offerings
Current Issues
Partnership with the IOSCO
Generate standards acceptable to IOSCO
December 17, 2003
IASB published 13 revised International Accounting
Standards
Reissued two others
Gave notice of the withdrawal of its standard on price
level accounting.
Revised and reissued standards mark nearcompletion of the IASBs Improvements project
Issues to Be Addressed by Standard
Setting Bodies in Various Countries
Until recently, little impact in U. S.
Standard setters will need to focus on following
questions:
1
2
3
Can international accounting standards be set voluntarily by
organizations representing a broad set of sovereign nations?
What is the impact on standard setting of differing economies and
social settings in various countries?
Can lessons be learned from other international world bodies with
sovereign members having experience in bringing conflicting
national laws into harmony?
IFRS No. 1: First-time Adoption of
International Financial Reporting
Standards
More than 90 countries will either require or
permit the use of IFRSs during the next
several years.
As a result, thousands of companies throughout
the world will be making a transition in financial
reporting by breaking away from national practices
and changing to accounting standards
set by the IASB.
The IASB issued IFRS No 1 to aid
in this process
FASB Short-term International
Convergence Project
The goal of this project is to remove a
variety of individual differences between
U.S. GAAP and International Financial
Reporting Standards that are not within the
scope of other major projects.
The project scope is limited to those differences in which
convergence around a high-quality solution would appear
to be achievable in the short-term, usually by selecting
between existing IFRS and U.S. GAAP.
The Norwalk Agreement
12/18/2002:
FASB and IASB held joint meeting in Norwalk,
Connecticut
Both standard setting bodies acknowledged…
their commitment to the development of high-quality
compatible accounting standards that can be used for both
domestic and cross-border financial reporting.
Also committed to use their best efforts to make their
existing financial reporting standards compatible as
soon as practicable and to coordinate their future
work programs to help ensure that once compatibility
is achieved, it will be maintained.
The Norwalk Agreement
Both Boards agreed to:
1. Undertake a short-term project aimed at removing a
variety of differences between U. S. GAAP and IFRSs.
2. Remove any other differences between IFRSs and U.
S. GAAP that may remain on January 1, 2005 by
undertaking projects that both Boards would address
concurrently.
3. Continue the progress on the joint projects currently
underway.
4. Encourage their respective interpretative bodies to
coordinate their activities.
International vs. National
Accounting Standards
Question: Should foreign
companies be allowed to list
their securities in United States
markets
Form 20-F reconciliations
Pressure on the SEC to accept
international accounting rules
The Financial Statement Impact
of International Accounting
Standards
FASB project:
Purpose of analysis
1 Identify similarities and differences of
the IAS standard and U. S. GAAP
2 Assess the impact of these similarities
and differences and their relative
significance
3 Include examples wherever possible
Framework for the Preparation and
Presentation of Financial Statements
Purpose - to set out concepts that underlie the
preparation and presentation of financial
statements by:
1
2
3
4
5
6
7
Assisting the IASC in developing future standards
Promoting harmonization of accounting standards
Assisting national standard setters
Assisting preparers in applying international standards
Assisting auditors in forming an opinion as to
whether financial statements conform to
international standards
Assisting users in interpreting financial
statements prepared in conformity with
international standards
Providing interested parties with information
about the IASC’s approach to the formation
of international accounting standards
Framework for the Preparation
and Presentation of Financial
Statement”
The Framework specifies:
1
2
3
4
Objective of financial statements
Qualitative characteristics
Elements
The concepts of capital maintenance
The Objective of Financial
Statements
Information useful in making economic decisions
General purpose financial statements
The framework indicated that:
1
Users require evaluation of the ability of an enterprise to generate cash and
the timing and certainty of that generation
2
The financial position of an enterprise is affected by the economic
resources it controls, its financial structure, its liquidity and solvency and
its capacity to adapt to change
3
Information on profitability is required to assess changes in the economic
resources an enterprise controls in the future
4
Information of the financial position of an enterprise is useful in assessing
its investing, financing and operating activities
5
Information about financial position is contained in the balance sheet and
information about performance is contained in the income statement
The Objective of Financial
Statements
Underlying assumptions for the
preparation of financial statements
1 Accrual basis
2 Going concern
The Elements of Financial
Statements
Asset
Liability
Equity
Income
Expense
The concept of recognition
– Probable
– Measurable
The Concepts of Capital
Maintenance
Concepts:
1 Financial capital maintenance
2 Physical capital maintenance
Selection of the measurement
bases and the concept of capital
maintenance chosen will determine
the accounting model
IASC does not intend to prescribe a
model
Qualitative
Characteristics
Attributes that make accounting
information useful
1
2
3
4
Understandability
Relevance
Reliability
Comparability
Also recognized that timeliness and
a balance between costs and
benefits were constraints
IAS No. 1”Presentation of
Financial Statements”
Considerations:
a Fair presentation and compliance with IASC
standards
b Accounting policies
c Going concern
d Accrual basis of accounting
e Consistency of presentation
f Materiality and aggregation
g Offsetting
h Comparative information
FASB staff review
Prepared by Kathryn Yarbrough, MBA
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