1. Worldwide Accounting Diversity and International Standards
Chapter Eleven
Worldwide Accounting Diversity and International Standards
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2. International Accounting Diversity
Chinese companies use the direct method in preparing the statement of cash flows.
Companies in Germany are allowed to report assets on the balance sheet at revalued amounts.
Most companies in the United States and Europe use the indirect method.
Chinese companies use the direct method in preparing the statement of cash flows.
Most companies in the United States and Europe use the indirect method.

3. Explain the major factors influencing the international
Learning Objective 11-1
Explain the major factors
influencing the international
development of accounting
systems.
Explain the major factors influencing the international development of accounting systems.

4. Reasons for Accounting Diversity
Legal
System
Taxation
All these interact!!!
Political
and
Economic
Ties
Culture
Financing
Systems
Inflation

5. Reasons for Accounting Diversity- Legal System
Common Law Found primarily in English-speaking countries, where courts establish precedent. Accounting profession plays a large role in standard setting and tends to be independent. Standards tend to be detailed.
Common Law
Found primarily in English- speaking countries, where courts establish precedent.
Accounting profession plays a large role in standard setting and tends to be independent.
Standards tend to be detailed.

6. Reasons for Accounting Diversity-Legal System
Roman (Codified) Law Based on statute rather than precedent. Laws govern business enterprises. Accounting profession tends to have little influence on standard setting, is frequently an adjunct of the legal system. Accounting law tends to be lacking in detail.
Reasons for Accounting Diversity- Legal System
Roman (Codified) Law
Based on statute rather than precedent.
Laws govern business enterprises.
Accounting profession tends to have little influence on standard setting, is frequently an adjunct of the legal system.
Accounting law tends to be lacking in detail.

7. Reasons for Accounting Diversity- Financing Systems
Major providers of financing:
Family members
Banks
Focus on solvency and liquidity (balance sheet emphasis)
Governments
Shareholders
Focus on profitability (income statement emphasis)
Other creditors
Reasons for Accounting Diversity- Financing Systems
Major providers of financing:
Family members
Banks
Focus on solvency and liquidity (balance sheet emphasis)
Governments
Shareholders
Focus on profitability (income statement emphasis)
Other creditors

8. Reasons for Accounting Diversity- Other Issues
Taxation Financial statements are the basis for taxation in some countries. Others adjust financial statements for tax purposes, and submit separate reports to stockholders’. Inflation High inflation tends to render historical cost useless. High inflation rates force adoption of accounting rules that adjust historical costs to current or market value. Creditors tend to suffer under highly inflationary economies.
Reasons for Accounting Diversity- Other Issues
Taxation
Financial statements are the basis for taxation in some countries.
Others adjust financial statements for tax purposes, and submit separate reports to stockholders’.
Inflation
High inflation tends to render historical cost useless.
High inflation rates force adoption of accounting rules that adjust historical costs to current or market value.
Creditors tend to suffer under highly inflationary economies.

9. Reasons for Accounting Diversity- Political and Economic Ties
Accounting methods are readily conveyed from one country to another, either by trade or conquest:
Britain’s former colonies, such as Australia and Canada, tend toward “common law” systems
Former French colonies, such as Senegal and Congo, base accounting standards on “codified law”
Economic ties with the US have impacted accounting in Canada, Mexico and Israel
Reasons for Accounting Diversity- Political and Economic Ties
Accounting methods are readily conveyed from one country to another, either by trade or conquest:
Britain’s former colonies, such as Australia and Canada, tend toward “common law” systems
Former French colonies, such as Senegal and Congo, base accounting standards on “codified law”
Economic ties with the US have impacted accounting in Canada, Mexico and Israel

10. Reasons for Accounting Diversity- Culture
Societal values found within cultures:
Individualism
Uncertainty Avoidance
Power Distance
Masculinity
These values are thought to shape legal systems and capital markets.
They influence accounting values shared by members of the accounting subculture, which influences the nature of the accounting system.
Reasons for Accounting Diversity- Culture
Societal values found within cultures:
Individualism
Uncertainty Avoidance
Power Distance
Masculinity
These values are thought to shape legal systems and capital markets.
They influence accounting values shared by members of the accounting subculture, which influences the nature of the accounting system.

11. Gray’s Framework for the Development of Accounting Systems Internationally
Cultural Dimensions
Individualism
Uncertainty Avoidance
Power Distance
Masculinity
Institutional Consequences
Legal system
Corporate Ownership
Capital Markets
Professional Associations
Education & Religion
Cultural Dimensions
Individualism
Uncertainty Avoidance
Power Distance
Masculinity
Accounting Values
Professionalism
Uniformity
Conservatism
Secrecy
Institutional Conseq.
Legal system
Corporate Ownership
Capital Markets
Professional Associations
Education & Religion
Accounting Systems
Authority
Enforcement
Measurement
Disclosure
Accounting Values
Professionalism
Uniformity
Conservatism
Secrecy
Accounting Systems
Authority
Enforcement
Measurement
Disclosure

12. Nobes’ Model of the Reasons for International Accounting Diversity
Nobes’ simplified model has two explanatory factors:
(1) national culture, including institutional structures, (2) the nature of a country’s financing system divided into two classes.
Class A (Strong equity-outsider financing system)
Less conservative
Greater disclosure
Financial and tax accounting separate
Class B (Weak equity-outsider financing system)
More conservative
Less extensive disclosure
Financial reporting follows tax rules
Nobes’ Model of the Reasons for International Accounting Diversity
Nobes’ simplified model has two explanatory factors:
(1) national culture, including institutional structures, (2) the nature of a country’s financing system divided into two classes.
Class A (Strong equity-outsider financing system)
Less conservative
Greater disclosure
Financial and tax accounting separate
Class B (Weak equity-outsider financing system)
More conservative
Less extensive disclosure
Financial reporting follows tax rules

13. Understand the problems created by differences in
Learning Objective 11-2
Understand the problems
created by differences in
accounting standards across
countries and the reasons to
develop a set of internationally
accepted accounting standards.
Understand the problems created by differences in accounting standards across countries and the reasons to develop a set of internationally accepted accounting standards.

14. Problems Caused By Diverse Accounting Standards
Subs use local standards for financial statements. The parent must adjust the subs’ statements to GAAP. Statements must be re-stated in common standards.
To access foreign capital markets, costly measures must be taken to prepare financial statements that comply with local standards.
Financial statements from different countries are simply not comparable. Accounting rules differ from country to country.
Problems Caused By Diverse Accounting Standards
Problems
Subs use local standards for financial statements. The parent must adjust the subs’ statements to GAAP. Statements must be re-stated in common standards.
To access foreign capital markets, costly measures must be taken to prepare financial statements that comply with local standards.
Financial statements from different countries are simply not comparable. Accounting rules differ from country to country.

15. International Harmonization
Harmonization: Reducing differences in accounting practices across countries.
Harmonization efforts have been ongoing for decades, and originally the International Accounting Standards Committee (IASC) led the movement.
In 1987, the International Organization of Securities Commissions (IOSCO) joined the effort.
Since 2001, the process has been led by the International Accounting Standards Board (IASB)
International Harmonization
Harmonization: Reducing differences in accounting practices across countries.
Harmonization efforts have been ongoing for decades, and originally the International Accounting Standards Committee (IASC) led the movement .
In 1987, the International Organization of Securities Commissions (IOSCO) joined the effort.
Since 2001, the process has been led by the International Accounting Standards Board (IASB)

16. List the authoritative pronouncements that constitute
Learning Objective 11-3
List the authoritative
pronouncements that constitute
International Financial
Reporting Standards (IFRS).
List the authoritative pronouncements that constitute International Financial Reporting Standards (IFRS).

17. International Accounting Standards Committee- IASC
International Accounting Standards committee (IASC) established in 1973.
IASB superseded IASC in April 2001.
16-member board
at least 13 full-time
The IASB has sole responsibility for establishing IFRSs (“IASB GAAP”)
IASB has no enforcement authority!!
International Accounting Standards committee (IASC) established in 1973.
IASB superseded IASC in April
16-member board
(13 full-time)
The IASB has sole responsibility for establishing IFRSs (“IASB GAAP”)
IASB has no enforcement authority!!

18. International Accounting Standards Board (IASB)
All of the 41 IASs issued by the IASC were adopted by the IASB.
28 are currently in effect.
New standards are called “International Financial Reporting Standards” (IFRSs).
As of January 2013, 13 IFRSs have been issued.
International Accounting Standards Board (IASB)
All of the 41 IASs issued by the IASC were adopted by the IASB.
28 are currently in effect.
New standards are called “International Financial Reporting Standards” (IFRSs).
As of July 2011, 13 IFRSs have been issued.

19. Describe the ways and the extent to which IFRS are used
Learning Objective 11-4
Describe the ways and the
extent to which IFRS are used
around the world.
Describe the ways and the extent to which IFRS are used around the world.

20. International Financial Reporting Standards (IFRSs)
Countries can elect to use IFRS by: (1) adopting IFRS as its national GAAP (2) requiring domestic listed companies to use IFRS in preparing their consolidated financial statements (3) allowing domestic listed companies to use IFRS (4) requiring or allow foreign companies listed on a domestic stock exchange to use IFRS.
International Financial Reporting Standards (IFRSs)
Countries can elect to use IFRS by:
(1) adopting IFRS as its national GAAP
(2) requiring domestic listed companies to use IFRS in preparing their consolidated financial statements
(3) allowing domestic listed companies to use IFRS
(4) requiring or allow foreign companies listed on a domestic stock exchange to use IFRS.

21. International Financial Reporting Standards (IFRSs)
Of the 153 countries using IFRS as of June 2012: (1) 92 require all domestic listed companies to use IFRS in preparing their consolidated financial statements. (2) All publicly traded companies in the EU are required to use IFRS. (3) Two significant exceptions – China and the U.S.
International Financial Reporting Standards (IFRSs)
Of the 153 countries using IFRS as of June 2012:
(1) 92 require all domestic listed companies to use IFRS in preparing their consolidated financial statements.
(2) All publicly traded companies in the EU have been required to use IFRS since January 1, 2005.
(3) Two significant exceptions – China and the U.S.

22. Describe the FASB–IASB
Learning Objective 11-5
Describe the FASB–IASB
convergence process and the SEC recognition of IFRS.
Describe the FASB–IASB convergence process and the SEC recognition of IFRS.

23. Norwalk Agreement: FASB-IASB Convergence
In Norwalk, Connecticut, FASB and IASB held a joint meeting in September 2002.
The “Norwalk Agreement” states that the two bodies will “use their best efforts” to:
1. Make existing financial reporting standards compatible “as soon as is practicable” and
2. Coordinate efforts to “ensure that once achieved, compatibility is maintained”
Norwalk Agreement: FASB-IASB Convergence
In Norwalk, Connecticut, FASB and IASB held a joint meeting in September 2002.
The “Norwalk Agreement” states that the two bodies will “use their best efforts” to:
1. Make existing financial reporting standards compatible “as soon as is practicable” and
2. Coordinate efforts to “ensure that once achieved, compatibility is maintained”

24. Norwalk Agreement: FASB-IASB Convergence
2006- Memorandum of Understanding (MoU) FASB and IASB agreed that trying to eliminate differences between standards and create identical standards, even if jointly developed, is not realistic. Instead, they agreed that standards in need of improvement should be replaced with new jointly developed standards. The idea behind convergence is to have similar, but not necessarily identical standards.
Memorandum of Understanding (MoU) developed in 2006, the FASB and IASB agreed that trying to eliminate differences between two standards that are in need of significant improvement is not a good use of resources. Instead, standards in need of improvement should be replaced with new jointly developed standards. The idea behind convergence is to have similar, but not necessarily
identical standards. Indeed, the boards acknowledge that the development of identical standards, even if jointly developed, is not realistic.

25. FASB-IASB Convergence
As of January 2013, the FASB‐IASB convergence process had resulted in changes made to U.S. GAAP, IFRS, or both:
Business combinations ∙ Borrowing costs
Consolidated financial statements ∙ Derecognition
Non‐controlling interests ∙ Post‐employment benefits
Acquired in‐process research costs ∙ Fair value option
Non‐monetary asset exchanges ∙ Joint ventures
Share‐based payment ∙ Fair value measurement
Accounting changes ∙ Segment reporting
Presentation of (OCI) ∙ Inventory accounting
As of January 2013, the FASB‐IASB convergence process had resulted in changes made to U.S. GAAP,
IFRS, or both in the following areas:
 Business combinations
 Consolidated financial statements
 Non‐controlling interests
 Acquired in‐process research costs
 Joint ventures
 Share‐based payment
 Accounting changes
 Inventory accounting
 Borrowing costs
 Derecognition
 Post‐employment benefits
 Non‐monetary asset exchanges
 Fair value option
 Fair value measurement
 Segment reporting
 Presentation of other comprehensive income

26. FASB-IASB Convergence
As part of its technical agenda at the beginning of 2013, the FASB listed the following on‐going joint convergence projects with either an Exposure Draft or final standard expected to be issued in 2013:
Leases
Insurance contracts
Financial instruments
Revenue recognition
As part of its technical agenda at the beginning of 2013, the FASB listed the following ongoing joint convergence projects with either an Exposure Draft or final standard expected to be issued in 2013:
• Leases • Insurance contracts • Financial instruments • Revenue recognition

27. IFRS Roadmap IFRS Roadmap:
In November 2008, SEC issued a proposed rule that set milestones toward the use of IFRS by U.S. public companies by 2014.
In February 2010, SEC pushed that date back to “approximately 2015 or 2016.”
In reaction to the support expressed for IFRS, the SEC issued a proposed rule for the potential
use of IFRS by U.S. public companies in November This so-called IFRS
Roadmap sets forth several milestones that, if achieved, could lead to the required use
of IFRS by U.S. issuers. The SEC indicated that it would monitor these milestones until
2011, and if significant progress had been made at that time the SEC would then require
the mandatory adoption of IFRS by U.S. public companies over a three-year phase-in
period. The roadmap indicated 2014 as the first year of IFRS adoption, but a subsequent SEC Release in
February 2010 pushed that date back to “approximately 2015 or 2016.”

28. IFRS Framework
In May 2011, the SEC published a suggested framework for an “endorsement process” incorporating IFRS into U.S. GAAP. The two components of the framework are:
(1) FASB continues to participate in the process of developing new IFRSs and incorporates those standards into U.S. GAAP by means of an endorsement process.
(2) The FASB would incorporate existing IFRSs into U.S. GAAP over a defined period of time, e.g., five to seven years, with a focus on minimizing transition costs for U.S. companies.
However, in May 2011, the SEC published a suggested framework for an “endorsement process” incorporating IFRS into U.S. GAAP.
The two components of the framework are:
(1) FASB continues to participate in the process of developing new IFRSs and incorporates those standards into U.S. GAAP by means of an endorsement process.
(2) The FASB would incorporate existing IFRSs into U.S. GAAP over a defined period of time, e.g., five to seven years, with a focus on minimizing transition costs for U.S. companies.

29. IFRS Framework This approach would:
maintain U.S. GAAP, which could continue to be used by both public and nonpublic companies.
achieve the objective of having a single set of high- quality, globally accepted accounting standards.
retain the FASB’s authority for establishing financial reporting standards in the United States, and provide the flexibility to modify the requirements of IFRS.
This approach would maintain U.S. GAAP, which could continue to be used by both
public and nonpublic companies. It would achieve the objective of having a single set of
high-quality, globally accepted accounting standards. At the same time, it would retain
the FASB’s authority for establishing financial reporting standards in the United States,
and provide the flexibility to modify the requirements of IFRS

30. IFRS Framework Modifications could include:
Requiring additional disclosures beyond what is required by an IFRS.
Prescribing which of two or more alternative accounting treatments allowed by IFRS should be followed by U.S. issuers.
Promulgating standards on issues not specifically addressed in IFRS.
. These modifications could include:
• Requiring additional disclosures beyond what is required by an IFRS.
• Prescribing which of two or more alternative accounting treatments allowed by IFRS
should be followed by U.S. issuers.
• Promulgating standards on issues not specifically addressed in IFRS.

31. First-time Adoption of IFRS
Large US publicly-traded companies may be required to adopt IFRS someday.
What does this mean?
The company would prepare an opening balance sheet at the “transition date” and present re-stated comparative statements also prepared under IFRS.
Large US publicly-traded companies may be required to adopt IFRS someday.
What does this mean?
The company would prepare an opening balance sheet the “transition date” and present re-stated comparative statements also prepared under IFRS.

32. First-time Adoption of IFRS
Steps To prepare opening IFRS balance sheet:
Determine the applicable IFRS.
Recognize assets and liabilities not recognized under GAAP and derecognize those not allowed under IFRS.
Measure the balance sheet accounts under IFRS at the balance sheet date.
Reclassify certain assets and liabilities in accordance with IFRS.
Comply with disclosure and presentation requirements.
Steps To prepare opening IFRS balance sheet:
Determine the applicable IFRS.
Recognize assets and liabilities not recognized under GAAP and derecognize those not allowed under IFRS.
Measure the balance sheet accounts under IFRS at the balance sheet date.
Reclassify certain assets and liabilities in accordance with IFRS.
Comply with disclosure and presentation requirements.

33. IFRS Accounting Policy Hierarchy
IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, establishes the hierarchy that firms must follow when dealing with an accounting issue:
1. Apply specifically relevant standards (IASs, IFRSs, or Interpretations).
2. Refer to other IASB standards.
3. Refer to the IASB Framework for guidance.
4. Consider the most recent pronouncements of other standard-setting bodies
IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, establishes the hierarchy that firms must follow when dealing with an accounting issue:
1. Apply specifically relevant standards (IASs, IFRSs, or Interpretations).
2. Refer to other IASB standards.
3. Refer to the IASB Framework for guidance.
4. Consider the most recent pronouncements of other standard-setting bodies

34. IFRS Accounting Policy Hierarchy
In establishing accounting policies to be followed under IFRS, the two extreme approaches that companies can follow are:
1. Minimize change. Under this approach a company would adopt accounting policies consistent with IFRS that are most consistent with current accounting policies.
2. Fresh start. Under this approach a company would ignore current accounting policies and adopt accounting policies consistent with the IFRS that best reflect economic reality.
In establishing accounting policies to be followed under IFRS, the two extreme approaches
that companies can follow are:
1. Minimize change. Under this approach a company would adopt accounting policies
consistent with IFRS that are most consistent with current accounting policies.
2. Fresh start. Under this approach a company would ignore current accounting policies
and adopt accounting policies consistent with the IFRS that best reflect economic
reality.

35. Recognize acceptable accounting treatments under IFRS and
Learning Objective 11-6
Recognize acceptable accounting
treatments under IFRS and
identify key differences between
IFRS and U.S. GAAP.
Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS and U.S. GAAP.

36. Current Differences Between IFRSs and US GAAP
Recognition:
If recognized, how? When?
Presentation:
Principles? Financial
Statement Components?
Disclosure:
If allowed, How?
Measurement:
How is cost determined?
n a comparison of IFRS and U.S. GAAP published by the SEC in November 2011, the SEC Staff identified numerous differences in the two sets of standards across a wide range of topics. E xhibit 11.8 summarizes some of the key differences between IFRS and U.S. GAAP. Note that a number of these differences are within the scope of the FASB– IASB convergence projects and therefore are likely to be eliminated over time. The types of differences that exist between IFRS and U.S. GAAP can be generally classified as follows:
1. Recognition differences Measurement differences Presentation and disclosure differences.
Discontinued Operations
Extraordinary Items
Inventory
Fixed Assets

37. Current Differences Between IFRSs and US GAAP
There are differences in nearly every area of financial accounting including:
Inventory -- cost flow and write-offs
PP&E-- measurement and subsequent costs
Asset Impairment – measurement and subsequent reversals
Construction contracts – recognition method
R&D – capitalization vs expense
Operating Leases – gain recognition
Pensions – vested benefits
There are differences in nearly every area of financial accounting including:
Inventory -- cost flow and write-offs
PP&E-- measurement and subsequent costs
Asset Impairment – measurement and subsequent reversals
Construction contracts – recognition method
R&D – capitalization vs expense
Operating Leases – gain recognition

38. Current Differences Between IFRSs and US GAAP
Continued…
Income taxes – deferred tax assets
Classification of deferred taxes
Consolidated financial statements –
Parent vs. Subsidiary
Interim reporting –
Discrete vs. integral
Presentation of “extraordinary” items
Definition of a “discontinued operation”
Statement of Cash Flows –
Interest classification
Continued…
Pensions – vested benefits
Income taxes – deferred tax assets
Classification of deferred taxes
Consolidated financial statements –
Parent vs. Subsidiary
Interim reporting –
discrete vs. integral
Statement of Cash Flows –
interest classification

39. IAS 1: Presentation of Financial Statements
IFRSs contain this single standard governing the presentation of financial statements. There is no US GAAP equivalent.
Key guidance elements:
Purpose
Overriding principle of fair presentation
Basic principles and assumptions
Components of financial statements
Structure and content of financial statements
IAS 1, “Presentation of Financial Statements”
IFRSs contain this single standard governing the presentation of financial statements. There is no US GAAP equivalent.
Key guidance elements:
Purpose
Overriding principle of fair presentation
Basic principles and assumptions
Components of financial statements
Structure and content of financial statements

40. Presentation of Financial Statements
IFRS COMPANY Income Statement
IAS 1 requires an entity to classify assets and liabilities as current and noncurrent unless
presentation according to liquidity provides more reliable information. The income
statement can be presented using either a function of expenses (cost of sales) format or a
nature of expenses format. Exhibit 11.9 illustrates of the alternative formats for
classifying expenses on the income statement. Note that the amount reported as Operating
income (loss) is the same under both formats. Additional required disclosures must
be made either on the face of the income statement or in the notes. For example, a company
using the function of expenses format must disclose additional information on the
nature of expenses, including depreciation and amortization expense and employee benefits
expense. For both formats, the total amount distributed as dividends as well as dividends
per share must be disclosed. In addition, IAS 33, “Earnings per Share,” requires
basic and diluted earnings per share to be reported on the face of the income statement.

41. Determine the impact that specific differences between
Learning Objective 11-7
Determine the impact that
specific differences between
IFRS and U.S. GAAP have on
the measurement of income
and stockholders’ equity.
Determine the impact that specific differences between IFRS and U.S. GAAP have on the measurement of income and stockholders’ equity.

42. U.S. GAAP Reconciliations
Interest Capitalization
Business Combinations
Purchase vs. Pooling Methods
Goodwill
Amortization vs. Impairment
Leases
Revaluation of Fixed Assets
Fixed Asset Impairment Losses
U.S. GAAP Reconciliations:
Interest Capitalization
Business Combinations
Purchase vs. Pooling Methods
Goodwill
Amortization vs. Impairment
Leases
Revaluation of Fixed Assets
Fixed Asset Impairment Losses

43. U.S. GAAP Reconciliations
IASB: Principles- Based
Provide general principles with limited guidance.
Requires greater professional judgment.
FASB: Rules-Based
Provide detailed guidance.
May encourage mindset of looking for loop-holes.
IASB: Principles-Based
Provide general principles with limited guidance.
Requires greater professional judgment.
FASB: Rules-Based
Provide detailed guidance.
May encourage mindset of looking for loop-holes.

44. U.S. GAAP Reconciliations
Translation of IFRS into other languages
IFRS are drafted in English, then translated into other languages. Time has already proven that some terms (“probable” or “remote”) are not translating with the same meaning.
The impact of Culture
Using professional judgment under IFRS, an accountant in one country may reach a different conclusion than an accountant in another part of the world.
Translation of IFRS into other languages
IFRS are drafted in English, then translated into other languages. Time has already proven that some terms (“probable” or “remote”) are not translating with the same meaning.
The impact of Culture
Using professional judgment under IFRS, an accountant in one country may reach a different conclusion than an accountant in another part of the world.