International Accounting ACGB 7136 John Shon. Role of financial accounting Financial accounting: Information system that translates economic activity.

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Presentation transcript:

International Accounting ACGB 7136 John Shon

Role of financial accounting Financial accounting: Information system that translates economic activity into financial reports that stakeholders use to make decisions Objectives: –Provide information to current (and potential) investors to make rational investment decisions –Provide information to creditors to make rational credit decisions –Provide information to employees and other stakeholders –Help assess amount, timing, and uncertainty of future cash flows –Provide information about firm’s economic resources, claims on those resources Effects of transactions and events that change resources –Conform to regulatory requirements –Facilitates contracting

Accounting standards In general, accounting standards –Provide structure to managers and financial statement preparers –Provide confidence to financial statement users Accounting standards, set at the national level, can differ because of: –Legal systems –Political systems –Type and scale of economic activity –Corporate governance –Stability of economy

International scope requires comparability Pre-1990s: Borders relatively closed –Thus, differences in standards across different countries did not matter much Present day: Borders are wide open, and stakeholders demand improved comparability in accounting standards to help make decisions about: –Capital formation –Resource allocation –Wealth distribution

Harmonization vs. Convergence Harmonization –Set limits on country-specific standards to improve comparability Convergence –Change country-specific standards to better-align with international standards; with ultimate goal to replace country-specific standards with international standards With widespread adoption of IFRS, it is clear now that Convergence has won. But: –Less than “full adoption” –Inconsistent practical application –Inconsistent regulatory oversight –Cultural differences in similar economic transactions

IASB and IFRS IASB: International Accounting Standards Board IFRS: International Financial Reporting Standards –“Principles based” Vs. FASB: Financial Accounting Standards Board U.S. GAAP: Generally Accepted Accounting Principles –“Rules based”