1. Chapter 3: International Convergence of Financial Reporting

2. International Accounting Standard-setting
Evolution of IASC and IASB shows international accounting standard-setting in the private sector:
With the support of the accounting bodies, standard-setters, capital market regulators, government authorities, and financial statement preparers
Harmonization allows countries to have different standards as long as they do not conflict

3. International Accounting Standard-setting
Accounting harmonization considered in two ways
Harmonization of accounting regulations or standards
Harmonization of accounting practices

4. International Accounting Standard-setting
Other factors leading to non comparable accounting numbers despite similar accounting standards
Quality of audits
Enforcement mechanisms
Culture
legal requirements
Socioeconomic and political systems
International convergence of accounting standards refers to both a goal and the process adopted to achieve it

5. Harmonization and Convergence
Reduction of alternatives while maintaining a high degree of flexibility in accounting practices
Convergence
Enforcement of single set of accepted standards by several regulatory bodies

6. Harmonization Can be considered in two ways
Harmonization of accounting regulations and standards
Harmonization of accounting practice
Ultimate goal of international harmonization efforts
Harmonization of standards may or may not result in harmonization of practice
Different from standardization
Standardization involves using the same standards in different countries
Allows for different standards in different countries as long as they do not conflict

7. Arguments for Convergence
Facilitate better comparability of financial statements
Easier evaluation of companies
Facilitate international mergers and acquisitions
Reduce financial reporting costs
Cost-listing would allow access to less expensive capital
Reduce investor uncertainty and the cost of capital

8. Arguments for Convergence
Reduce cost of preparing worldwide consolidated financial statements
Simplify auditing
Easy transfer of accounting staff internationally
Raise the quality level of accounting practices internationally
Increase credibility of financial information
Enable developing countries to adopt a ready-made set of high-quality standards with minimum cost and effort

9. Arguments against Convergence
Significant differences in existing standards
Enormous political cost of eliminating differences
Nationalism and traditions
Arriving at universally accepted principles is difficult
Need for common standards is not universally accepted
Well-developed global capital market exists already
May cause standards overload
Differences in accounting across countries might be necessary

10. Harmonization Efforts
Several organizations were involved at global and regional levels
International Organization of Securities Commissions (IOSCO)
International Federation of Accountants (IFAC)
European Union (EU)
International Forum on Accountancy Development (IFAD)
International Accounting Standards Committee (IASC)
International Accounting Standard Board (IASB)

11. International Organization of Securities Commissions (IOSCO)
Established in 1974
Initially limited its membership to regulatory agencies in America
Opened membership to agencies in other parts of the world in 1986
Aims at ensuring a better regulation of markets on both domestic and international levels
Works to facilitate cross-border securities offering and listings by multinational issuers
Advocates the adoption of a set of high-quality accounting standards

12. International Federation of Accountants (IFAC)
Established in October1977 at 11th World Congress of Accountants in Munich
Promotes adherence to high-quality professional standards of auditing, ethics, education, and training
Launched International Forum on Accountancy Development (IFAD) to
Enhance the accounting profession in emerging nations
Promote transparent financial reporting
Established the Forum of Firms with an aim of
Protecting the interests of cross-border investors
Promoting international flows of capital

13. European Union (EU)
Founded in March 1957 with the signing of the Treaty of Rome by six European nations
Issued two directives aimed at harmonizing accounting
Fourth Directive: Dealt with valuation rules, disclosure requirements, and the format of financial statements
Established the true and fair view principle
Provided considerable flexibility
Allowed countries to choose from among acceptable alternatives
Opened the door for non comparability in financial statements
Seventh Directive: Dealt with consolidated financial statements

14. European Union (EU)
Directives helped reduce differences in financial statements
Complete comparability was not achieved
European Commission decided not to issue additional accounting directives
Associated itself with efforts undertaken by the IASC toward a broader international harmonization of accounting standards

15. International Forum on Accountancy Development (IFAD)
Mission was to improve the market security and transparency, and financial stability on a global basis
Assists in defining expectations from accountancy profession
Encourages governments to focus on the needs of developing economies in transition
Harness funds and expertise to build accounting and auditing capacity in developing countries

16. International Accounting Standards Committee (IASC)
Established in 1973 by leading professional accounting bodies in 10 countries
Broad objective of formulating international accounting standards
Harmonization efforts evolved in three mail phases
Lowest-common-denominator approach
Issuance of 26 generic International Accounting Standards
Comparability project
Publication of Framework for the Preparation and Presentation of Financial Statements
Comparability of Financial Statements Project
IOSCO agreement

17. International Accounting Standards Board (IASB)
Replaced IASC in 2001
IFRS Foundation appoints board of 16 members
13 full and 3 part-time
Board approves standards, exposure drafts, and interpretations
Shift in emphasis from harmonization to global standard-setting or convergence
Main aim is to develop a set of high-quality financial reporting standards for global use

18. EXHIBIT 3.2—The Structure of the IASB

19. Principles-Based Approach to International Financial Reporting Standards
IASB follows a principles-based approach to standard setting vs a rules-based approach
Standards establish general principles for recognition, measurements, and reporting requirements for transactions
Limits guidance and encourages professional judgment in applying general principles to entities or industries

20. IASB Framework Created to develop accounting standards systematically
Framework for Preparation and Presentation of Financial Statement adopted by IASB in 2001 from IASC
Scope of Framework
Objective of financial statements and underlying assumptions
Qualitative characteristics that affect the usefulness of financial statements
Definition, recognition, and measurement of the financial statements elements
Concepts of capital and capital maintenance

21. Qualitative Characteristics of Financial Statements
Understandability: Understandable to people with reasonable financial knowledge
Relevance: Useful for making predictions and confirming existing expectations
Affected by nature and materiality of information
Reliability: Neutral and represents faithfully what it purports to
Reflecting items based on economic substance rather than their legal form
Comparabilty

22. Proposed Changes to existing frameworks by IASB and FASB
IASB and FASB will work on existing frameworks to provide basis for developing future standards by boards
Phases of project
Objectives and qualitative characteristics
Elements and recognition
Measurement
Reporting entity
Presentation and disclosure
Purpose and status
Application to not-for-profits
Finalization

23. Elements of Financial Statements
Definition
Assets, liabilities, and other financial statement elements are defined
Recognition
Guidelines as to when to recognize revenues and expenses
Measurement
Various bases are allowed: historical cost, current cost, realizable value, and present value

24. The Norwalk Agreement
Proposed Changes as per the discussion paper published jointly by two boards:
Decision-useful objective encompassing information relevant to assessing stewardship
Stakeholder approach (vs. U.S. framework of shareholder approach) — users other than capital providers explicitly acknowledged
Asset of an entity would be present economic resource to which, through an enforceable right or other means, entity has access or can limit others’ access
Emphasis on principle and guidance development for fair value measurements in IFRS—exit price as measurement base, or, if not—develop additional guidance

25. Presentation of Financial Statements (IAS 1)
Single standard providing guidelines for the presentation of financial statements
Guidance areas
Purpose of financial statements
Components of financial statements
Overriding principle of fair presentation
Requires the faithful representation of the effects of transactions and events
Accounting policies
Should be consistent with all IASB standards
When specific guidance is lacking, use standards on similar issues, and definitions of the financial statement elements

26. Presentation of Financial Statements (IAS 1)
Basic principles and assumptions
Adds to the guidance provided in the Framework
Immaterial items should be aggregated
Assets and liabilities, and income and expenses should not be offset
Structure and content of financial statements
Current/noncurrent
Items to be included on face of financial statements
Items to be disclosed in the notes

27. First Time Adoptions of IFRS (IFRS 1)
Provides guidance to companies that are adopting IFRS for the first time
Requires compliance with all effective IFRS at the reporting date of an entity’s first IFRS financial statements
Allows exemptions when costs outweigh benefits

28. The Adoption of IFRS
There are a number of ways in which a country might adopt IFRS.
1. Replace national GAAP with IFRS.
2. Require parent companies to use IFRS in preparing consolidated financial statements.
3. Require stock exchange listed companies to use IFRS in preparing consolidated financial statements.
4. Require foreign companies listed on a domestic stock exchange to use IFRS.
5. Require domestic companies listing on a foreign stock exchange to use IFRS.

29. Use of IFRS Evidence of support for IFRS
Adoption by the EU – public companies in the EU were required to begin using IFRS in 2005
IOSCO has endorsed IFRS for cross-listings
IFAC G20 accountancy summit in July 2009 issued renewed mandate for adoption of global accounting standards
Latest IFAC Global Leadership Survey—emphasized that investors and consumers deserve simpler and more useful information
Adoption of IFRS in 2011: Japan, Canada, India, Brazil and Korea

30. International Convergence Issues
The complicated nature of standards such as financial instruments and fair value accounting
The tax-driven nature of the national accounting regime
Disagreement with significant IFRS, such as financial statements and fair value accounting
Insufficient guidance on first time application of IFRS
Limited capital markets are less beneficial
Investor satisfaction with national accounting standards
IFRS difficulties in language translation

31. IASB/FASB Convergence
The Norwalk Agreement reached in 2002 between the IASB and FASB pledged
For compatible financial reporting standards
Proper coordination of work program to maintain compatibility

32. IASB/FASB Convergence
IASB’s and FASB’s key initiatives in the Norwalk Agreement
Joint projects – boards work jointly to address issues (e.g., revenue recognition)
Short-term convergence –remove differences between IFRS and U.S. GAAP for issues where convergence is deemed most likely
IASB liaison – IASB member in residence at FASB
Monitoring IASB projects – FASB monitors IASB projects of most interest
Convergence research project – identification of all major differences between IFRS and U.S. GAAP
Convergence potential – FASB assesses agenda items for possible cooperation with IASB

33. IASB/FASB Convergence
Following global financial crisis both groups formed Financial Crisis Advisory Group (FCAG)
July 2009 FCAG report addresses:
Effective financial reporting
Limitations of financial reporting
Convergence of accounting standards
Standard-setting independence and accountability

34. End of Chapter 3