1. The Move to International Financial Reporting Standards
Chapter 2

2. Learning Objectives
Recognize the arguments for and against harmonization.
Identify the pressures for and the obstacles to harmonization.
Become familiar with the main organizations involved in harmonization.
Examine some previous harmonization efforts.
Compare harmonization approaches in EU and ASEAN.

3. Introduction
With the dramatic growth in global trade and the accelerated internationalization of capital markets, financial statements produced in one country are used in other countries more frequently.
Accounting harmonization is an important issue in international business.

4. Rationale for Harmonization
The debate over the need for and desirability of accounting harmonization began in 1960s.
The economic rationale for harmonization is that major differences in accounting practices act as a barrier to capital flow.

5. Harmonization can enhance comparability of financial statements, thus making them easier to use across countries.
Former members of the U.S. Financial Accounting Standards Board (FASB), Arthur Wyatt and Dennis Beresford, stressed the need for harmonization due to the growth in international capital markets and cross-border financing.
They asserted that harmonization is necessary to produce comparable and credible data for use across borders.

6. Barry C. Melancon, President and CEO of AICPA, expressed the Institute’s support of harmonization.
He said that a common financial reporting language would aid investors, along with issuers and capital markets, because it would enable comparison of reporting entities located in various nations.

7. Opponents of harmonization say:
it is unnecessary
it is harmful
It is neither practical nor valuable
Opponents predict that global GAAP (i.e., international accounting standards) will not be achieved due to institutional impediments in the standard-setting process.

8. Opponents of harmonization cite differences in the economic, political, legal, & cultural environment in countries as justification for financial reporting differences.
They are concerned that the accounting regimes in developed Western countries will dominate global harmonization efforts.
Imposing Western accounting practices on developing non-Western countries may do more harm than good

9. As companies switch to international standards or U. S
As companies switch to international standards or U.S. GAAP to gain entry to global capital markets, there is concern whether non-domestic GAAP adequately reflects the financial performance and position of companies.
Example:
In 2002, Deutsche Bank switched to U.S. GAAP in preparing its financial statements as part of its stock listing on the New York Stock Exchange (NYSE). Analysts said the switch confused investors, reduced transparency, and increased earnings volatility.

10. Pressures for Harmonization
Initially, harmonization was pushed by political bodies and accounting organizations.
Current pressures to harmonize come from:
investor groups who use financial statements,
multinational companies that prepare financial statements,
regulators who monitor capital markets,
the securities industry (including stock exchanges) which is impacted by the global diversity in financial reporting requirements,
developing countries that lack resources to develop indigenous accounting standards.

11. Investors
The acceleration in the globalization of capital markets that started in the 1980s has shifted sentiment among financial statement users towards an organized effort aimed at harmonizing accounting principles.

12. Multinational Companies
As capital, product, and labor markets become increasingly globalized, most large companies find themselves having to diversify geographically (their input and output) in order to compete effectively in their industry.

13. Regulators
With the increase in cross-border listings by companies, regulators face higher costs since they now have to monitor compliance not just by domestic firms but also by foreign firms that are listed in their jurisdiction.

14. The Securities Industry and Stock Exchanges
With the increase in cross-border listings, many stock exchanges now look to foreign companies for growth in listings and the volume of securities transactions within their market.
For example, the number of non-U.S. firms listed on NYSE increased from 59 in 1986 to 421 in 2007.

15. Emerging Economics
With the fall of communism in Eastern Europe and the former Soviet Union, and the move towards market-oriented economic policies in emerging economies there is a growing call for convergence in accounting.
Emerging economies like Brazil, Russia, India, & China.

16. Obstacles to Harmonization
A number of obstacles to global accounting harmonization remain that have thus far prevented it from becoming a reality.
Some obstacles are economic, while others are political.
Harmonization is often opposed due to its economic impact on countries or segments of society within countries

17. Measuring Harmonization
The movement toward harmonization has evolved into one of convergence in nations around the globe. Over 120 countries now accept or require the International Financial Reporting Standards issued by the International Accounting Standards Board to be used for financial reporting by publicly traded companies listed on their stock exchanges.

18. Supra-National Organizations Engaged in Accounting Harmonization

19. International Accounting Standards Committee
The International Accounting Standards Committee (IASC), the predecessor of the current International Accounting Standards Board (IASB), was established in 1973 by professional accounting organizations from ten countries:
Australia, Canada, France, Germany, Ireland, Japan, Mexico, Netherlands, UK, and US.
The IASC, now IASB, evolved into the most visible international accounting standard- setting organization.

20. IASC
The IASC’s early standards were criticized for being too broad and allowing too many alternative accounting treatments.
Critics charged that comparability was lacking in financial statements that claimed to be in compliance with IASC standards.
This was a serious weakness with comparability being at the heart of any harmonization effort.

21. International Accounting Standards Board
In March 2001, the IASC Foundation was formed as a not-for-profit entity incorporated in Delaware, USA.
The IASC Foundation is the parent entity of the IASB, an independent accounting standard-setter based in London.
Effective April 2001, the IASB assumed accounting standard-setting responsibilities from the IASC.
IASB

22. Objectives of the IASB
To develop in the public interest, a single set of quality, understandable & enforceable global accounting standards that require 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.

23. Objectives of the IASB
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 the convergence of national accounting standards and International Accounting Standards and International Financial Reporting Standards to high quality solutions.

24. International Federation of Accountants
The International Federation of Accountants (IFAC) is comprised of national professional accounting organizations that represent accountants employed in public practice, business and industry, the public sector, and education, as well as some specialized groups that interface frequently with the profession.

25. International Federation of Accountants
Formed in 1977, its primary activities are to serve the public interest, to facilitate cooperation among member and regional accounting bodies, and to speak out on behalf of the international profession.
In 2012, IFAC had 167 member and associate member organizations in 127 countries, representing over 2.5 million accountants

26. International Federation of Accountants
The International Auditing and Assurance Standards Board or IAASB is an independent standard-setting board formed by IFAC to produce International Standards on Auditing.
The IAASB promulgates International Standards on Auditing encompassing various services provided by professional accountants worldwide such as auditing, review, other assurance, quality control, and related services.

27. International Organization of Securities Commissions
The International Organization of Securities Commissions (IOSCO) was formed in and is comprised of securities regulators from more than 190 securities regulatory agencies from around the world, representing coverage of 90 percent of the world’s capital markets.

28. United Nations
The United Nations (UN) has been involved in international accounting harmonization.
In the 1970s, its Group of Experts on International Standards of Accounting and Reporting produced a list of financial and non-financial disclosures to be provided by multinational corporations.

29. Organization for Economic Cooperation and Development
The Organization for Economic Cooperation and Development (OECD) comprises 30 member countries that produce two-thirds of the world’s goods and services.
It is often called the “rich man’s club.” However, the OECD maintains that it welcomes all countries with a commitment to a market economy and a pluralistic democracy.

30. Other Harmonization Effects

31. Bilateral or Mutual Agreements
This approach consists of two or more countries negotiating agreements that involve mutual recognition of each other’s standards with certain additional disclosures or reconciliations as part of the arrangement.

32. World-Class Issuer
This harmonization approach was primarily advocated by the New York Stock Exchange (NYSE). It involved establishing specific quantitative criteria to define a special category of companies as “world-class issuers.”

33. The IASC/IOSCO Initiative
Until the restructuring of the IASC into the IASB, the most promising scenario for the global harmonization of accounting principles appeared to be that of the standards issued by the IASC and endorsed by the IOSCO.

34. Transition to IFRS in the US
The recent pronouncements by the SEC give reason to believe that the US has accepted the need to support and participate in the global convergence effort and that public companies in the US will be required to transition to IFRS.

35. Evidence on Harmonization

36. Global
There has been limited empirical research to measure the success of harmonization at the global level.
There is some anecdotal evidence which suggests that there has been a surge in harmonization globally in the past decade.
One measure of this is the number of stock exchanges that accept financial statements prepared using international accounting standards in lieu of the stock exchange’s domestic standards.

37. Regional
European Union. The EU has its origins in three pan-European treaties from the 1950s.
The Treaty of Rome in 1957, regarded as the most important of these agreements, was signed by 6 countries—Belgium, France, Germany, Italy, Luxembourg, & Netherlands.
Before adopting IFRS in 2005, the EU had made its own regional efforts at accounting harmonization.

38. A Tale of Two Regions
Evidence indicates that ASEAN countries have followed the global paradigm of harmonization.
They have unilaterally adopted the accounting standards issued by the IASC (now IASB) rather than follow the regional approach attempted by the EU.

39. Summary
The primary economic rationale in favor of harmonization is that major differences in accounting practices act as a barrier to capital flowing to the most efficient users.
Opponents of harmonization argue that differences in the economic, political, and legal environments of countries justify financial reporting differences between countries.

40. Summary - Continued
Current pressures to harmonize are driven by investor groups who use financial statements, multinational companies that prepare financial statements, regulators who monitor capital markets, the securities industry (including stock exchanges) which views itself as being significantly impacted by the global diversity in financial reporting requirements, and developing countries that often lack the resources to develop indigenous accounting standards.

41. Summary - Continued
The current evidence on harmonization is mixed. There appears to be more harmonization with a number of countries adopting international accounting standards. However, the level of de facto harmonization is very modest with evidence of considerable differences in the financial statements of companies claiming to use international accounting standards.