INTERNATIONAL ACCOUNTING CHAPTER 3 INTERNATIONAL ACCOUNTING 42 42 42

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 43 43 43

International Business Accounting Issues A company’s first exposure to international accounting is frequently the result of a purchase or sale Problems: 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 44 44 44

Factors Influencing the Development of Accounting Systems: Political System Level of Education Legal System Economic Development 45 45 45

Influences on the Development of Financial Reporting Agricultural Resource Based Tourist Based Manufacturing Type of economy Legal System Codified Common Law Political System Democratic Totalitarian Nature of Ownership Private Enterprise Socialist Communist 46 46 46

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 46 46 46

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 47 47 47

Translate language and currency Two sets World-wide standards Approaches to Preparing Financial Statements for Use in Other Countries: Same to all Translate language Translate language and currency Two sets World-wide standards 48 48 48

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 49 49 49

Standard Setting by the IASC Original intent: avoid complex details concentrate on basic standards Steps in the process similar to FASB Steering Committee Identify issues and prepare point outline Board prepares comments Steering Committee prepares final Statement of Principles Exposure Draft Steering Committee reviews comments and prepares final standard 50 50 50

Standard Setting by the IASC Two treatments 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'  51 51 51

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: 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 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: 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 Wider participation in the IASC Board. A wider group of countries and organizations should take part in the IASC Board 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: 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 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 IASC Board expanded from 16 to 25 countries and organizations Without diluting the quality of the Board’s work 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 International Financial Reporting Interpretations Committee (12 members) Advisory Groups For Major Agenda Projects

Revising the IASB’s Constitution Key issues to be reviewed: Whether the objectives of the IASC Foundation should expressly refer to the challenges facing small and medium-sized entities (SMEs) Number of Trustees and their geographical and professional distribution The oversight role of the Trustees Funding of the IASC Foundation The composition of the IASB The appropriateness of the IASB's existing formal liaison relationships Consultative arrangements of the IASB Voting procedures of the IASB Resources and effectiveness of the International Financial Reporting Interpretations Committee (UMC): 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: National requirements Basis for national requirements Benchmark to develop standards By regulatory agencies By companies Also International Organisation of Securities Commissions (IOSCO) looks to the IASC to provide standards that can be used in multinational securities offerings 52 52 52

Current Issues Partnership with the IOSCO December 17, 2003 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 near-completion of the IASBs Improvements project 54 54 54

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: 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? 55 55 55

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: Undertake a short-term project aimed at removing a variety of differences between U. S. GAAP and IFRSs. 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. Continue the progress on the joint projects currently underway. 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 Identify similarities and differences of the IAS standard and U. S. GAAP Assess the impact of these similarities and differences and their relative significance 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: 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 57 57 57

Framework for the Preparation and Presentation of Financial Statement” The Framework specifies: Objective of financial statements Qualitative characteristics Elements The concepts of capital maintenance 58 58

The Objective of Financial Statements Information useful in making economic decisions General purpose financial statements The framework indicated that: Users require evaluation of the ability of an enterprise to generate cash and the timing and certainty of that generation 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 Information on profitability is required to assess changes in the economic resources an enterprise controls in the future Information of the financial position of an enterprise is useful in assessing its investing, financing and operating activities Information about financial position is contained in the balance sheet and information about performance is contained in the income statement 59 59 59

The Objective of Financial Statements Underlying assumptions for the preparation of financial statements Accrual basis Going concern 60 60

The Elements of Financial Statements Asset Liability Equity Income Expense The concept of recognition Probable Measurable 62 62 62

The Concepts of Capital Maintenance Financial capital maintenance 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 63 63 63

Qualitative Characteristics Attributes that make accounting information useful Understandability Relevance Reliability Comparability Also recognized that timeliness and a balance between costs and benefits were constraints 61 61 61

IAS No. 1”Presentation of Financial Statements” Considerations: Fair presentation and compliance with IASC standards Accounting policies Going concern Accrual basis of accounting Consistency of presentation Materiality and aggregation Offsetting Comparative information FASB staff review

Prepared by Kathryn Yarbrough, MBA End of Chapter 3 Prepared by Kathryn Yarbrough, MBA Copyright © 2005 John Wiley & Sons, Inc.  All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful.  Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc.  The purchaser may make back-up copies for his/her own use only and not for distribution or resale.  The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.