Transcript International Accounting, 6/e

International Accounting, 6/e
Frederick D.S. Choi
Gary K. Meek
Chapter 8: Global Accounting
and Auditing Standards
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Learning Objectives
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Define and understand the distinction between “harmonization”
and “convergence” as they apply to accounting standards.
State the pros and cons of adopting international accounting
standards.
Understand what is meant by “reconciliation” and “mutual
recognition” of different sets of accounting standards.
Identify the six organizations that have leading roles in setting
international accounting standards and promoting international
accounting convergence.
Describe the structure of the International Accounting
Standards Board and how it sets International Financial
Reporting Standards.
Understand the major provisions of the U.S. Sarbanes-Oxley
Act and why similar legislation is being enacted in other
countries.
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Standardization, Harmonization,
and Convergence
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Standardization
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Harmonization
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Rigid, narrow set of rules
One-size-fits-all approach
Less flexible than harmonization or convergence
Not the current thinking
Standards that are compatible – no logical conflicts
Means the elimination of differences among existing accounting standards
Convergence
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Means the gradual elimination of differences in accounting standards
But might also involve a new accounting treatment not in any current
standard
Involves cooperative efforts of IASB and national standard-setters
Now the preferred term over harmonization
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A Survey of International
Convergence
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Advantages of international convergence
 Investor understanding and confidence is improved.
 Investor decision making is improved.
 Capital is allocated more efficiently around the world.
 Financial risk and cost of capital are reduced.
 Strategic decision making in mergers and acquisition is
improved.
Criticisms of international standards
 Solution is too simple for such a complex problem.
 Strips accounting of its flexibility to adapt to different situations.
 Challenges national sovereignty.
 A tactic of large accounting firms to expand their market share.
 May create standards overload.
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A Survey of International
Convergence (contin)
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Reconciliation and mutual recognition
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Reconciliation
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Mutual recognition (reciprocity)
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Financial statements based on home GAAP, but net income and stockholders’
equity reconciled to another GAAP.
This is the SEC requirement for foreign filers.
Less costly than preparing complete financial statements based on another
GAAP.
But a summarized, incomplete picture.
Jurisdictions accept financial statements based on each other’s GAAP.
Does not improve comparability.
Can create an unlevel playing field.
Evaluation
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Arguments on both sides have merit.
But convergence and international standards are a reality.
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Some Significant Events in the History
of International Accounting Standard
Setting
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1959 – Jacob Kraayenhof issues first significant proclamation that work
on international standards should begin
1973 – IASC created
1977 – IFAC founded
1978 – EU Fourth Directive issued
1987 – IOSCO resolves to promote common, international accounting
and auditing standards
1989 – IASC issues Exposure Draft 32
1995 – IASC and IOSCO agree on core standards work plan
1995 – EU adopts New Accounting Strategy
2000 – IOSCO accepts IASC’s core standards
2001 – EC proposes that EU-listed companies use IAS by 2005
2001 – IASB succeeds IASC
2002 – Norwalk Agreement signed between IASB and FASB
2005 – SEC “roadmap” to eliminate IFRS reconciliation requirement
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International Accounting
Standards Board
Overview
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Independent private-sector standard-setting body
Objectives
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To develop, in the public interest, a single set of high-quality,
understandable, and enforceable global accounting standards that require
high-quality, transparent, and comparable information in financial statements
and other financial reporting to help participants in the world’s capital
markets and other users make economic decisions
To promote the use and rigorous application of those standards
In fulfilling the objectives associated with (1) and (2), to take account of, as
appropriate, the special needs of small and medium-sized entities and
emerging economies
To bring about convergence of national accounting standards, and
International Accounting Standards and International Financial Reporting
Standards to high-quality solutions
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Represents accounting organizations from approximately 100 countries
Standards follow fair presentation and full disclosure
Standards are principles-based
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International Accounting
Standards Board (contin)
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IASC’s core standards and the IOSCO
agreement
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IOSCO agreed to IASC’s core standards plan in
1995
IOSCO’s agreement was a major boost to IASC’s
credibility
Core standards completed in 1998
IOSCO approved core standards in 2000
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International Accounting
Standards Board (contin)
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The new IASB structure
 IASC was restructured as IASB in 2001
 Bodies
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Trustees
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IASB Board
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Advises IASB Board on agenda and priorities
International Financial Reporting Interpretations Committee
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Issues International Financial Reporting Standards
14 members – 12 full-time and 2 part-time
Actively partners with national standard setters to promote convergence
Follows due process in setting IFRS
Standards Advisory Council
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Representatives from entire world
Appoints members of Board
Raises funds and oversees IASB activities
Issues interpretations of IFRS
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International Accounting
Standards Board (contin)
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Recognition and support for IASB
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IFRS are widely accepted around the world
Significant events that boosted IASB’s credibility
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IOSCO endorsement of (IASC’s) work plan
EC proposal that EU-listed companies use IFRS by 2005
Norwalk Agreement between IASB and FASB
SEC response to IFRS
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Supports work of IASB but does not yet accept IFRS filings by
foreign companies
2005 – Issued “roadmap” setting out the steps for eliminating
requirement to reconcile IFRS to US GAAP
2007 – Proposed eliminating reconciliation requirement by 2009
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European Union
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Overview
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Company law harmonization designed to integrate
European financial markets
European Commission has full enforcement
powers for accounting directives
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European Union (contin)
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Fourth, Seventh, and Eighth Directives
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Fourth Directive (1978)
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Broad, comprehensive set of accounting rules
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Individual company accounts
Applies to public and private companies
True and fair view is overriding requirement
Requires audits of financial statements
Seventh Directive (1983)
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Consolidated financial statements
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Required for groups of companies above a certain size
Specifies
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Valuation rules
Disclosure requirements
Format rules for financial statements
Note disclosures
Director’s report
Requires audits of financial statements
Member states have wide latitude in incorporating provisions
Eighth Directive (1984)
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Specifies qualifications for statutory auditors
Revised in 2006 and now called Statutory Audit Directive
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Requirements for appointment and removal of auditors
Audit standards
Continuing professional education
Auditor rotation
Public oversight
Audits must follow International Standards on Auditing
Established European Group of Oversight Bodies
A response to European accounting scandals similar to those in the U.S.
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European Union (contin)
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Have EU harmonization efforts been successful?
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Yes:
 Directives improved financial reporting practices and
brought about harmonization
 Directives accelerated accounting development in many EU
countries
No:
 EU countries mostly adapted the new rules to their existing
ones
 Enforcement was uneven
 Some difficult issues weren’t dealt with
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European Union (contin)
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The EU’s new approach and the integration of European financial
markets
 Requirement that EU companies listed on regulated markets
prepare consolidated financial statements using IFRS
 To become legally binding, IFRS must be adopted by the
European Commission
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European Financial Reporting Advisory Group (EFRAG)
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Standards Advice Review Group
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Recommends that the IFRS be adopted (or not)
 Is the IFRS compatible with European directives?
 Is the IFRS conducive to the European public interest?
European Commission
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Assesses whether EFRAG’s advice is well balanced and objective
Accounting Regulatory Committee
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Provides technical review and opinion of the IFRS
Adoption completes the process
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International Organization of
Securities Commissions (IOSCO)
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Securities regulators from over 100 countries
Responsible for over 90 percent of global securities markets
Objectives of member agencies
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To cooperate together to promote high standards of regulation in order to
maintain just, efficient, and sound markets
To exchange information on their respective experiences in order to promote
the development of domestic markets
To unite their efforts to establish standards and an effective surveillance of
international securities transactions
To provide mutual assistance to promote the integrity of the markets by a
rigorous application of the standards and by effective enforcement against
offenses
Extensive work on international accounting and disclosure standards
Cooperates with IASB
Has endorsed IFRS for cross-border securities offerings
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International Federation of
Accountants
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Worldwide organization representing the accountancy profession
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Mission
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160 member organizations
120 countries
2.5 million accountants
To strengthen the accountancy profession worldwide
To contribute to the development of strong international economies by establishing and
promoting adherence to high-quality professional standards, furthering the international
convergence of such standards
To speak out on public interest issues where the profession’s expertise is most relevant
Aim is to harmonize and converge auditing standards and professional
practice worldwide
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Auditing adds credibility to external financial reports
High-quality auditing standards are necessary to ensure that accounting standards are
rigorously interpreted and applied
If auditor training and audit standards vary, the reliability of financial statements will
also vary
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International Federation of
Accountants (contin)
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Organizational structure
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IFAC council elects the IFAC board
IFAC board sets policies and oversees IFAC operations
Public Interest Oversight Board provides additional oversight
Work done through standard-setting boards and standing committees
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Standard-setting boards
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Standing committees
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International Accounting Education Standards Board
International Auditing and Assurance Standards Board
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Issues International Standards on Auditing
International Ethics Standards Board for Accountants
International Public Sector Accounting Standards Board
Compliance Advisory Panel
Developing Nations Committee
Nominating Committee
Professional Accountants in Business Committee
Small and Medium Practices Committee
Transnational Auditors Committee
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UN Intergovernmental Working Group of Experts
on International Standards of Accounting and
Reporting (ISAR)
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Only intergovernmental working group devoted to
corporate accounting and auditing
Objective
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To promote the transparency, reliability, and comparability
of corporate accounting and reporting
To improve disclosures on corporate governance by
enterprises in developing countries and countries with
economies in transition
Discusses and publishes worldwide best practices
Recent initiatives
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Corporate governance
Accounting by small and medium-sized businesses
Technical assistance in emerging economies
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Organization for Economic
Cooperation and Development
(OECD)
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International organization of 30 (mostly
industrialized) market-economy countries
Promotes good governance in public and
private sectors
A voice for larger, industrialized countries
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Conclusion
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Debate is no longer whether to converge, nor
even how to converge
Financial reporting systems are converging,
as international capital markets become more
investor oriented
International Accounting Standards Board is
at the center of the convergence movement
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Other Chapter Exhibits
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Other Chapter Exhibits (contin)
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Exhibit 8-2 (contin)
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Exhibit 8-2 (contin)
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Exhibit 8-2 (contin)
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Chapter Exhibits (contin)
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Exhibit 8-3 (contin)
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Other Chapter Exhibits (contin)
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Exhibit 8-5 (contin)
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Other Chapter Exhibits (contin)
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Exhibit 8-6 (contin)
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