Evolution of International Standards By: Associate Professor Dr. GholamReza Zandi

Topics to Cover 2 Background of International Standards – FASB – IASB – IFRS Convergence Adoption

Regulation of Economic Activity Accounting is a highly regulated area of economic activity. Governments are directly involved in this regulation through laws to control the creation of professional accounting bodies and their rights to public practice, and also through minimum disclosure requirements for annual reports and prospectuses. Indirect government involvement comes through securities commissions, etc. Professions also have their own regulating by formulating and monitoring accounting and auditing standards. 3

Standard Setting Standard setting involves the regulation of firms’ external information production decisions. Firms are not completely free to control the amount and timing of the information they produce about themselves. It must be under a host of regulations that is called standards, prepared by central authority. 4

MASB 5 On 1 August 2008, the FRF and MASB announced their plan to bring Malaysia to full convergence with International Financial Reporting Standards (IFRSs) by 1 January 2012 Changeover from Financial Reporting Standards (FRSs) to Malaysian Financial Reporting Standards (MFRSs), equivalent to IFRSs – will help place Malaysian businesses on a level playing field with its international counterparts

FASB Financial Accounting Standards Board (FASB) in the United States was established in Purpose- to establish and improve standards of financial accounting and reporting for the guidance and education of the public. Such as: – to improve the usefulness of financial reporting by focusing on relevance and reliability, – by updating standards (if necessary) for changes in the business and economic environment, – Improving the public understanding of the nature and purpose of information contained in financial reports, – Promote international convergence of quality accounting standards. 6

IASB The International Accounting Standards Board (IASB) was established in 1973 by agreement between accountancy bodies in Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United States. The parent body is IASC (International Accounting Standards Committee), is governed by 19 individuals, with geographic representation from North America, Europe and Asia/Pacific. 7

IASC The establishment of IASC was part of the increased globalisation and integration of economic activity that has taken place in recent years. Concerns? Enforcement of standards. – Lack of enforcement increases the exposure of the market adverse selection and moral hazard problems. Implications? Large multinational corporations? Costs of preparing reports to satisfy the securities legislation of more than one jurisdiction. 8

IFRS IFRS are written standards based on the practices of the English-speaking countries with advanced economies. Largely derived from the UK and US national standards. Agreement between FASB and IASB commits the two bodies to work towards a common set of high quality standards. 9

Equity Market IFRS account for outside shareholders and are the right accounting system for a country that establishes a strong equity-outsider market in which the control of companies is widely spread among a large number of outsider equity holders. 10

Convergence of Accounting Standards 11 Work continues towards the achievement of this goal So far 90 countries require publicly quoted companies to comply with the international accounting standards in their group accounts Mandatory for companies with quoted shares, what about those unquoted?

12 CountryStatus for listed companies as of December 2011 Argentina Required for fiscal years beginning on or after 1 January 2012 Australia Required for all private sector reporting entities and as the basis for public sector reporting since 2005 Brazil Required for consolidated financial statements of banks and listed companies from 31 December 2010 and for individual company accounts progressively since January 2008 Canada Required from 1 January 2011 for all listed entities and permitted for private sector entities including not-for-profit organisations China Substantially converged national standards European Union All member states of the EU are required to use IFRSs as adopted by the EU for listed companies since 2005 France Required via EU adoption and implementation process since 2005 Germany Required via EU adoption and implementation process since 2005 India India is converging with IFRSs at a date to be confirmed. Indonesia Convergence process ongoing; a decision about a target date for full compliance with IFRSs is expected to be made in 2012 Italy Required via EU adoption and implementation process since 2005 Japan Permitted from 2010 for a number of international companies; decision about mandatory adoption by 2016 expected around 2012 Malaysia Entities Other Than Private Entities shall apply for annual periods beginning on or after 1 January 2012 Mexico Required from 2012 Republic of Korea Required from 2011 Russia Required from 2012 Saudi Arabia Required for banking and insurance companies; full convergence with IFRSs currently under consideration South Africa Required for listed entities since 2005 TurkeyRequired for listed entities since 2005

Implications? Multinational large corporations? Costs? Convergence? IFRS

IFRS Pros and Cons Supporters argue that the use of IFRS increases the quality of financial reporting and benefits investors. Opponents argue that a single set of standards may not be suitable for all settings and not uniformly improve value relevance and reliability due to differences among countries. 14

Adoption Question whether IFRS can work properly in markets that are disciplined mainly by regulators rather than market mechanisms. Mandatory adoption occur in countries with strong transparent reporting incentives and legal enforcement. 15

Adoption First time adoption of IFRS by French firms was perceived to be a signal of an increase in the quality of their financial statements. Different findings across countries indicate the significant role of national institutional factors in framing financial reporting characteristics. 16

Adoption Relevance of IFRS to developing countries is still subject of interest; relevance and impact of IFRS to developing countries of mixed economies with heavier regulator mechanisms are yet to be empirically tested. Major disadvantages for developing countries to converge with IFRS such as ‘information overloads’ and the additional cost of unnecessary complexity occur when IFRS are unsuited or irrelevant to national needs. 17

Adoption International accounting standard setters and accounting regulators who plan to converge with IFRS should assess the relevance of IFRS to their national needs. 18

Relevance Based on accounting regulation, the strength of equity markets and private sectors, suggest that the degree of similarity in economic and social environments to developed economies in which IFRS originated can affect IFRS relevance to a nation. 19

Relevance IFRS are expected to be relevant to developing countries whose national environments become similar to those of the UK or US. Financial reporting practice is also contingent on the interaction between accounting standards and preparers’ incentives. 20

Adopters Voluntary adopters whose incentives are different from those of the compulsory adopters, shows improved quality in financial reporting practice. Rising importance of private sector calls for quality improvement to reporting and auditing standards. Economic and political forces, standard compliance incentives are also reinforced by a collectivism-oriented culture. 21

Collectivism-oriented Collectivism-oriented societal value supports making accounting policy at the national level. Increased audit regulation and monitoring contribute to high compliance with accounting regulations. 22

Quality Accounting Information Countries that have experienced significant industrial growth throughout the past century have seen far greater advances in the sophistication of their accounting systems than those who have not achieved the same success. Quality accounting information is demanded by credit providers and investors to support such rapid expansion. 23

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