1. International Accounting, 6/e
Frederick D.S. Choi
Gary K. Meek
Chapter 8: Global Accounting and Auditing Standards
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2. Learning Objectives
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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3. Standardization, Harmonization, and Convergence
Rigid, narrow set of rules
One-size-fits-all approach
Less flexible than harmonization or convergence
Not the current thinking
Harmonization
Standards that are compatible – no logical conflicts
Means the elimination of differences among existing accounting standards
Convergence
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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4. A Survey of International Convergence
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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5. A Survey of International Convergence (contin)
Reconciliation and mutual recognition
Reconciliation
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.
Mutual recognition (reciprocity)
Jurisdictions accept financial statements based on each other’s GAAP.
Does not improve comparability.
Can create an unlevel playing field.
Evaluation
Arguments on both sides have merit.
But convergence and international standards are a reality.
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6. Some Significant Events in the History of International Accounting Standard Setting
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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7. International Accounting Standards Board
Overview
Independent private-sector standard-setting body
Objectives
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
Represents accounting organizations from approximately 100 countries
Standards follow fair presentation and full disclosure
Standards are principles-based
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8. International Accounting Standards Board (contin)
IASC’s core standards and the IOSCO (International Organization of Securities Commissions) agreement
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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9. International Accounting Standards Board (contin)
The new IASB structure
IASC was restructured as IASB in 2001
Bodies
Trustees
Representatives from entire world
Appoints members of Board
Raises funds and oversees IASB activities
IASB Board
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
Advises IASB Board on agenda and priorities
International Financial Reporting Interpretations Committee
Issues interpretations of IFRS
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10. International Accounting Standards Board (contin)
Recognition and support for IASB
IFRS are widely accepted around the world
Significant events that boosted IASB’s credibility
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
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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11. European Union Overview
Company law harmonization designed to integrate European financial markets
European Commission has full enforcement powers for accounting directives
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12. European Union (contin)
Fourth, Seventh, and Eighth Directives
Fourth Directive (1978)
Broad, comprehensive set of accounting rules
Valuation rules
Disclosure requirements
Format rules for financial statements
Individual company accounts
Applies to public and private companies
True and fair view is overriding requirement
Requires audits of financial statements
Seventh Directive (1983)
Consolidated financial statements
Required for groups of companies above a certain size
Specifies
Note disclosures
Director’s report
Member states have wide latitude in incorporating provisions
Eighth Directive (1984)
Specifies qualifications for statutory auditors
Revised in 2006 and now called Statutory Audit Directive
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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14. European Union (contin)
Have EU harmonization efforts been successful?
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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15. European Union (contin)
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
European Financial Reporting Advisory Group (EFRAG)
Provides technical review and opinion of the IFRS
Standards Advice Review Group
Assesses whether EFRAG’s advice is well balanced and objective
Accounting Regulatory Committee
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
Adoption completes the process
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16. International Organization of Securities Commissions (IOSCO)
Securities regulators from over 100 countries
Responsible for over 90 percent of global securities markets
Objectives of member agencies
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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17. International Federation of Accountants
Worldwide organization representing the accountancy profession
160 member organizations
120 countries
2.5 million accountants
Mission
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
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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18. International Federation of Accountants (contin)
Organizational structure
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
Standard-setting boards
International Accounting Education Standards Board
International Auditing and Assurance Standards Board
Issues International Standards on Auditing
International Ethics Standards Board for Accountants
International Public Sector Accounting Standards Board
Standing committees
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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19. Discusses and publishes worldwide best practices Recent initiatives
UN Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR)
Only intergovernmental working group devoted to corporate accounting and auditing
Objective
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
Corporate governance
Accounting by small and medium-sized businesses
Technical assistance in emerging economies
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20. Organization for Economic Cooperation and Development (OECD)
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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21. Conclusion
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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22. Other Chapter Exhibits
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23. Other Chapter Exhibits (contin)
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24. Exhibit 8-2 (contin)
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25. Exhibit 8-2 (contin)
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26. Exhibit 8-2 (contin)
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27. Chapter Exhibits (contin)
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28. Exhibit 8-3 (contin)
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29. Other Chapter Exhibits (contin)
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30. Exhibit 8-5 (contin)
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31. Other Chapter Exhibits (contin)
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32. Exhibit 8-6 (contin)
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