ADVANCED FINANCIAL ACCOUNTING A) Explain the purpose of the Memorandum of Understanding between the IASB and the US national

standard-setter, the Financial Accounting Standards Board (FASB). International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) came into an agreement in September 2002 to collectively work and discuss with other national and regional bodies of accounting how to eradicate the disparity between international standards and US Generally Accepted Accounting Principles (GAAP). The decision came in place through the Norwalk Agreement (Convergence between IFRSs and US GAAP, 2011). Both IASB and FASB agreed on the construction of first rate well suited accounting standards that can be utilized for both domestic and international reporting purposes. They also undertook the task of making the current financial reporting standards well attuned to be practiced and to manage the future work programs in a compatible manner (Norwalk Agreement, n.d.). At the Press Release that pronounced the Agreement, chairman of FASB Robert H. Herz stated "The FASB is committed to working toward the goal of producing high-quality reporting standards worldwide to support healthy global capital markets. By working with the IASB on the short-term convergence project--as well as on longer-term issues--the chances of success are greatly improved. Our agreement provides a clear path forward for working together to achieve our common goal." (AllBusiness.com, 2002).

B) How did IFRSs and US generally accepted accounting principles (GAAP) define fair value prior to the issue of IFRS 13 and what were the disclosure and measurement requirements of IFRSs and US generally accepted accounting principles (GAAP) with regard to fair value prior to the issue of IFRS 13? Fair value was defined as the amount where asset can be purchased and sold among agreeable persons, or reassign to an equal person if not in a bankruptcy. This concept is for assets that the carrying value is based on market to market valuation (Wikipedia n.d.). Prior to the issuance of IFRS 13, the necessity of measuring and disclosing of information on fair value was spread across many standards and mostly they did not coherent a obvious measurement or disclosure objective. The FASB Statement No. 157 reveals the use of fair value to determine assets and liabilities and the effect of these measurements on earnings. Most of the disclosure is aimed at the inputs used to measure fair value, particularly in instances where the measurement uses significant unobservable inputs. As per the IFRS 7 amendments a three level hierarchy has been introduced for fair value measurement disclosures and it needs the entity to give additional disclosures about the relative reliability of fair value measurements. It will make possible and easy the comparison among entities and the effects of fair value measurements. Also existing disclosure of liquidity risk is improved so that it will allow the users to evaluate the nature and extent of liquidity risk that occurs from financial instruments and what steps needs to be taken to manage it (IASB: 03-05-09 New Financial Disclosures (fair-value measurements) 2009). As stated by Metzger, L. (n.d.) IFRSs and GAAP disclosures For assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to initial recognition (for example, trading securities), the reporting entity shall disclose information that enables users of its financial statements to assess the inputs used to develop those measurements and for recurring fair value measurements using significant unobservable inputs (Level 3), and the effect of the measurements on earnings for the period.

C) Identify and explain four reasons as to why the IASB developed IFRS 13, particularly with regard to the global financial crisis. Particular reference should be made to the goals of the fair value measurement project. The guidance for measuring fair value was dispersed among many IFRSs, before IFRS 13 was published. There was no consistency in the standards as some gave limited assistance while the others were others which were quite extensive. Therefore IFRS 13 was created as a remedial measure for this issue. (Thornton, 2011). The four main objectives of producing IFRS 13 are as follows: First the IASB wanted to have one set of guidelines for all fair value measurements as this will cut down the complexity and maintain an enhanced uniformity across all fair value principle applications (Fair Value Measurements: Project Milestones 2011). The synchronization of fair value measurements and disclosure methods were important remedial measured to the global financial crisis. As stated in paragraph 7 of Policy Statement 4 International Harmonization and Convergence Policy having a uniform set of application across all fair value principles will improve the ability to compare financial reports in different countries that participate in the global market. This will provide valuable information to make proper financial analysis and investment decisions (Deegan, 2009 p.31). Next is to establish a clear definition of fair value and to communicate the measurement objective. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price) (The Institute of Charted Accountants in Australia, 2011). It is necessary that there is a common understanding and uniformity across the globe so that it is easy to analyze financial statements in any part of the world.

IFRS 13 also intends to be more transparent by enhancing disclosures about fair value measurements. This includes being visible of the valuation techniques used and the inputs used to derive at the fair value

measurement. The financial statements of super giants such as Enron and WorldCom showed no signs of going into bankruptcy as the values were very attractive, this is due to the errors in measurement. As per Sir David Tweedie, Chairman of the IASB, The financial crisis has shown that a clear understanding of how entities determine the fair value of financial instruments, particularly when only limited information is available, is crucial to maintaining confidence in the financial markets.

Also IASB intends to enhance the convergence of IFRSs and US GAAP through IFRS 13. In a time where international business is moving at a fast pace it is important to a common measurement of fair value so that everyone is on the same page. According to an article in the Australian Financial Review (25 November 1998) When Daimler- Benz was listed on the New York Stock Exchange in October 1993 and the group accountants converted German accounting rules to US GAAP, a DM 168 million profit for the first half year was shown as a DM 949 loss. This clearly shows the discrepancies in measurement techniques and the need for convergence to avoid financial discrepancies in global businesses.

At the press release of IASB and FASB issue common fair value measurement and disclosure requirements Sir David Tweedie, Chairman of the IASB, stated The finalization of this project marks the completion of a major convergence project and is a fundamentally important element of our joint response to the global financial crisis. The result is clearer and more consistent guidance on measuring fair value, where its use is already required. This reveals the importance that is been placed on IFRS 13 project as a response to the global financial crisis.

D) Identify and explain the main differences between IFRS 13 and the exposure draft proposal that precluded the issuing of IFRS 13. There are many differences between the exposure draft and IFRS 13. This is mainly due to the changes that have been done to the exposure draft and it is enhanced in IFRS 13. The fair value measurement requirement is different in the exposure draft and IFRS 13. In the exposure draft is measured using the price which is most advantageous market price for the asset or liability and in IFRS 13 the price of the principle market is used to measure the fair value of the asset or liability and only in the absence of principle market the advantageous market will be considered. Even though the exposure draft states guidance for measuring liability values, IFRS 13 gives a detailed guidance and a description of obligations that a market participant can demand for compensation. Financial assets are calculated based on each instrument as per the exposure draft and IFRS 13 allows the financial assets and liabilities with counterpart credit risk can be calculated based on the net risk exposure of the entity. In the exposure draft there is no direction given to establish classes of assets or liabilities for the purpose of disclosure but the classes of assets or liabilities for the purpose of disclosure is determined on nature, characteristics, risks of the asset or liability and the level of the fair value hierarchy in IFRS 13. A quantitative sensitivity analysis is needed to be there for all assets and liabilities and it has to be grouped according to the level 3 of the fair value hierarchy in the exposure draft. As per the IFRS 13 a quantitative sensitivity analysis is needed to be there for all assets and liabilities and it has to be grouped according to the level 3 of the fair value hierarchy to change the important unobservable inputs and any interrelationships between them. Also a quantitative sensitivity analysis is needed for financial instruments measured by fair value.

The exposure draft does not request an entity to give information on its valuation process. But the IFRS 13 requires information on the valuation process for the measurements of fair value in level 3 of the fair value hierarchy.

E) How, and to what extent, did the IASB seek to ensure comparability between IFRS 13 and US GAAP? A common view on the exposure draft was that IASB and FASB must work in unison to have similar requirements as in IFRSs and US GAAP for fair value measurement and information disclosure. As a result the measurement of fair value became a joint project with FASB in October 2009 and made necessary amendments. Due to the joint efforts IFRSs and US GAAP have one fair value definition and requirement for measurements and disclosure are the same. In regard to the exposure draft and discussion paper many feedback was received. Amongst them face-toface meetings, conference calls and user surveys were done. The main concern was to understand the ideas of users of financial statements on the fair value measurement disclosures in IFRSs and US GAAP and how they could be improved. They focused on the need to align the wording of the requirements to advance uniformity in application across field, also the helpfulness of the current disclosures. Also on information that will be helpful in aiding the fair value measurements classified within Level 3 of the fair value hierarchy. ISAB also discussed with prepares and auditors of financial statements and with auditors and found out how they use fair value information in IFRSs and US GAAP in work. In The Australian Financial Review, 2011 states After the financial crisis, no accounting issue has been more critical than the valuation of financial assets. This emphasizes the importance of fair value measurement as the figures on the financial statements and its conclusion is dependant on the measurements.

Also ISAB made sure to have discussions with financial institutions on their practices of risk management and their effect on financial instrument valuation within a portfolio. They were considered as the base for the measurement of fair value on financial assets and liabilities taking into consideration the market risks and counterparty credit risk. There was a round table conferences held across the globe in Europe, Asia and the US with preparers, auditors and users of financial statements. Through these meetings ideas were gathered on the exposure draft and also the participants expressed their apprehension on the relevance of the proposals in the exposure draft to entities in emerging and transition economies. A Fair Value Expert Advisory Panel was formed to look at the issues that were brought up during the global financial crisis on the methods of measuring fair value when the market activity for an asset or a liability goes down and how to enhance transparency about those measurements. Also all relevant parties such as preparers, auditors and users of financial statements were invited to participate in the standard-bystandard review to determine if fair value used in IFRSs, is consistent with an exit price measurement objective and the relevant measurement guidance. (IFRS 13 Fair Value Measurement, 2011 by International Accounting Standards Board (IASB))

F) Explain how, and to what extent, we can expect there to be differences between IFRS 13 and US GAAP. Particular reference should be made to theoretical reasons as to why international differences are expected to exist, and perhaps should still exist. IFRS 13 and US GAAP, although they have the same definition of fair value still there are a few differences. The disclosure requirements on fair value measurements are different in IFRS 13 in relation to US GAAP. IFRSs need a quantitative sensitivity analysis for financial instruments and are measured at fair value and categorized within Level 3 of the fair value hierarchy where as in US GAAP they do not need a quantitative sensitivity analysis disclosure. The requirements also differ on which circumstances the entity with an investment in a company can use the reported net asset value as a measure of fair value. The key reason for international differences in financial reporting is the difference in providers of finance such as creditors and owner (Nobes & Parker, 1998). Each organizations respond to the increased need of financial information is different depending on the country in which it operates. In Europe the additional funds were mostly given by banks and therefore the companies relied a lot on debt financing in contrast to it in the US the extra funds were provided by shareholders which gave rise to stock exchanges. The common law system originated in the UK and in countries which it is practiced the accounting regulations are monitored by professional organizations within the private sector. Company law is kept to a minimum and detailed regulation is produced by the private standard setter. In the code law, which is mostly used in continental Europe the company law is very detailed and accounting standards are often embodied in the company law. Accounting regulation in code law countries is in the hands of the government and financial reporting is in those circumstances often reduced to complying with a set of very detailed legal rules. (Alexander et al, 2003). The relation between accounting income and tax income differs over time. In some countries financial institutes use information given in the financial statements to determine taxable income. In some countries

the costs are only tax deductible if they are also recognized in the P&L account. This can be misleading as financial reporting becomes tax biased. As the businesses become more globalised it seems that the differences play a less significant role in financial reporting. For large companies the location of the company is no longer the sole influencing factor on the reporting behavior of the company. The recent global economic crisis suggests that the differences in provision of finance, the legal system, the link between accounting and taxation can lead to the differences in financial reporting, accounting and economic behavior of companies around the world. The longitudinal approach to the development of differences after the institution of accounting harmonization is a concern to businesses.

References Alexander, D, Britton, A, and Jorissen A (2003) International Financial Reporting and Analysis, Thomson Learning, London Convergence between IFRSs and US GAAP 2011, International Financial Reporting Standards, viewed 18 September 2011, http://www.ifrs.org/Use+around+the+world/Global+convergence/Convergence+with+US+GAAP/Convergen ce+with+US+GAAP.htm Deegan, C. Financial Accounting Theory, Edition 3, McGraw Hill 2009. FASB and IASB Agree to Work Together toward Convergence of Global Accounting Standards 2002, all business.com, viewed 18 September 2011, http://www.allbusiness.com/company-activities-management/company-strategy/6001983-1.html Fair Value n.d., viewed 18 September 2011 http://en.wikipedia.org/wiki/Fair_value#International_standards_.28IFRS.29 Fair Value Measurements: Project Milestones 2011, International Financial Reporting Standards, viewed 18 September 2011, http://www.ifrs.org/Current+Projects/IASB+Projects/Fair+Value+Measurement/Fair+Value+Measurement.htm Fair value measurement, 2011, The Institute of Charted Accountants in Australia, viewed 18 September 2011, http://www.charteredaccountants.com.au/Industry-Topics/Reporting/Currentissues/Convergence/News-and-updates/Fair-value-measurement IASB: 03-05-09 New Financial Disclosures (fair-value measurements) 2009, viewed 17 September 2011, http://www.ifrs.org/NR/rdonlyres/04E9F096-B1F8-410A-B1E92E61003BADFA/0/FairValueMeasurementFeedbackstatement_May2011.pdf IASB and FASB issue common fair value measurement and disclosure requirements, 2011, International Financial Reporting Standards, viewed 18 September 2011, http://www.ifrs.org/News/Press+Releases/IFRS+13+FVM+May+2011.htm IFRS 13 Fair Value Measurement, 2011 by International Accounting Standards Board, viewed 18 September 2011, http://www.ifrs.org/NR/rdonlyres/04E9F096-B1F8-410A-B1E92E61003BADFA/0/FairValueMeasurementFeedbackstatement_May2011.pdf Summary of FASB Statement No. 157, Fair Value Measurements n.d., Financial Accounting Standards Board, http://www.fasb.org/summary/stsum157.shtml Thornton G, 2011Technical Accounting Alert, viewed 17 September 2011, http://www.grantthornton.com.au/files/ta_alert_201106_iasb_publishes_ifrs13_fair_value_measurements.pdf

Memorandum of Understanding : Norwalk Agreement n.d., Financial Accounting Standards Board, viewed 18 September 2011, www.fasb.org/news/memorandum.pdf Metzger, L. (n.d.) GAAP and IFRS: Reconciling Fair Value Measurements, FSA Times, Loyola University Chicago, viewed 17 September 2011, http://www.theiia.org/fsa/2011-features/gaap-and-ifrs-reconciling-fair-value-measurements/

Norris, F 2011, Regulator cracks down on US auditors, Australian Financial Review, 15 April, p.52 Nobes, W and Parker, R (1998), Comparative International Accounting. 5 ed, Prentice Hall, London
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