INTERNATIONAL CONVERGENCE OF

FINANCIAL REPORTING

Chapter 3

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

International Convergence of
Financial Reporting
Chapter Topics
Harmonization and convergence
Evolution of the International Accounting Standards
Board (IASB)
Other organizations involved in harmonization
IASB framework and IFRS
Use of and support for IFRS
Principles-based vs. rules-based accounting
Convergence of IAS and U.S. GAAP
3-2

International Convergence of
Financial Reporting
Learning Objectives
1. Explain the differences between harmonization and
convergence.
2. Identify the arguments for and against
international harmonization of accounting standards.
3. Discuss major harmonization efforts.
4. Explain the principles-based approach used by the
International Accounting Standards Board (IASB).
3-3

International Convergence of
Financial Reporting
Learning Objectives
5. Describe the proposed changes to the IASBs
Framework.
6. Discuss the IASBs Standards related to IFRS and the
presentation of financial statements.
7. Describe the support for and the use of IFRS across
countries.
8. Examine the issues related to international convergence.
9. Describe the IASB/FASB convergence project.
10. Explain the meaning of Anglo-Saxon accounting.
3-4

Harmonization and
Convergence
Harmonization -- the process of increasing the
level of agreement in accounting standards and
practices between countries.
Convergence -- the adoption of one set of
standards internationally. This is the main
objective of the IASB.
Learning Objective 1

3-5

Harmonization
The two levels of harmonization
Harmonization in accounting standards, which is
increased agreement in accounting rules
Harmonization in practice, which is increased
agreement in actual accounting practices
Harmonization in standards may or may not
result in harmonization in practice.

Learning Objective 1

3-6

Harmonization
Is different from standardization
Harmonization allows for different standards in
different countries as long as there are not
logical conflicts.
Standardization involves using the same
standards in different countries.

Learning Objective 1

3-7

Harmonization: The Pros and

Cons
Pros:
Expedite the integration of global capital markets
and make easier the cross-listing of securities.
Facilitate international mergers and acquisitions.
Reduce investor uncertainty and the cost of capital.
Reduce financial reporting costs.
Allow for easy and cost effective adoption of highquality standards by developing countries.
Easier to transfer accounting staff internationally
Learning Objective 2

3-8

Harmonization: The Pros and

Cons
Cons:
Significant differences in standards currently exist.
The political cost of eliminating differences
Overcoming Nationalism and traditions
Perhaps it will not provide significant benefits.
Will cause Standards Overload for some firms
Diverse standards for diverse places is acceptable.
Learning Objective 2

3-9

Harmonization Efforts
Organizations involved
Association of South East Asian Nations
(ASEAN)
United Nations (UN)
European Union (EU)
International Organization of Securities
Commissions (IOSCO)
International Federation of Accountants (IFAC)
IASB and FASB
Learning Objective 3

3-10

Harmonization Efforts
Organizations involved
IOSCO is essentially the international
equivalent of the U.S. Securities and Exchange
Commission (SEC).
IFAC is similar, at the international level, to the
American Institute of Certified Public
Accountants (AICPA).
IASB is essentially the international equivalent
of FASB.
Learning Objective 3

3-11

Harmonization Efforts
IOSCO
Works to achieve improved market regulation
internationally
Works to facilitate cross-border listings
Advocates for the development and adoption of
a single-set of high quality accounting standards

Learning Objective 3

3-12

Harmonization Efforts
IFAC
Works to develop international standards of
auditing, ethics, and education
Began International Forum on Accountancy
Development (IFAD) to enhance the accounting
profession in emerging countries
Started the Forum of Firms to raise global
standards of accounting and auditing
Learning Objective 3

3-13

Harmonization Efforts
EU
Has worked to harmonize accounting standards
within the EU, primarily by way of two directives
Fourth Directive a set of comprehensive
accounting rules built on the principle of a true
and fair view.
Seventh Directive requires consolidated
financial statements for company groups of a
certain size.
Learning Objective 3

3-14

Harmonization Efforts
IASB
Preceded by the IASC (International Accounting
Standards Committee).
Works toward convergence of national and
international accounting standards
IASC was established in 1973.

Learning Objective 3

3-15

Harmonization Efforts
IASB
Comprised of 14 members (12 full, 2 part-time)
7 members are liaisons with a national board.
Standard development process is open.
Standards are principles-based.
Since establishment of IASB, focus is on global
standard-setting rather than harmonization per
se.
Learning Objective 3

3-16

Harmonization Efforts
IASB Major Initiatives
Comparability Project
Comprehensive review of existing IAS
(International Accounting Standards)
Begun in 1989
In order to increase rigor of IAS
eg IAS 11 requiring use of percentage of
completion method when certain criteria are met
Learning Objective 3

3-17

Harmonization Efforts
IASB Major Initiatives
IOSCO Agreement
Establishment of a core set of 30 accounting
standards
Standards agreed upon by IOSCO and IASC

Learning Objective 3

3-18

Harmonization Efforts
IASB Revised Structure
The restructured IASB is overseen by the IASC
Foundation which also oversees:
The International Financial Reporting
Interpretation Committee (IFRIC).
The Standards Advisory Council (SAC).
Also, IFRS are subject to due process and the
IASC Foundation now periodically reviews its
constitution.
Learning Objective 3

3-19

Principles-Based Approach to
Accounting Standard Setting
IASB Perspective
IASB attempts to follow a principles-based
approach to standard setting.
As such, accounting standards are grounded in
the IASB Framework.

Learning Objective 4

3-20

Principles-Based Approach to
Accounting Standard Setting
A principles-based approach
Represents a contrast to a rules-based
approach
Attempts to limit additional accounting guidance
(e.g., FASB, EITFs, FASB Interpretations)
Is designed to encourage professional judgment
and discourage over-reliance on detailed rules

Learning Objective 4

3-21

IASB Framework and IFRS

IASB Framework
Created to develop accounting standards
systematically
Provides the basis for financial statements
presented in accordance with IFRS
Similar to the relationship between U.S.
GAAP financial statements and the FASB
Conceptual Framework
Learning Objective 5

3-22

IASB Framework and IFRS

IASB Framework
The objective and underlying assumptions of
financial statements
Qualitative characteristics of information
Definition, recognition, and measurement of
elements in financial statements
Concepts of capital and capital maintenance

Learning Objective 5

3-23

IASB Framework and IFRS

IASB Framework
Primary objective is to provide information
useful to decision making.
Underlying assumptions include accrual-basis
and going concern.

Learning Objective 5

3-24

IASB Framework and IFRS

Qualitative characteristics of information
Understandability should be understandable
to people with reasonable financial knowledge.
Comparability allows for meaningful
comparisons to financial statements of previous
periods and other companies.

Learning Objective 5

3-25

IASB Framework and IFRS

Qualitative characteristics of information
Relevance useful for making predictions and
confirming existing expectations.
Reliability free from bias (neutral) and
represents that which it claims to represent
(representational faithfulness).

Learning Objective 5

3-26

IASB Framework and IFRS

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.
Learning Objective 5

3-27

IASB Framework and IFRS

Concepts of capital maintenance
Financial capital maintenance
Physical capital maintenance

Learning Objective 5

3-28

Proposed Changes to IASB

Framework by IASB and FASB
Phases:
Objectives and qualitative characteristics
Elements and recognition
Measurement
Reporting entity
Presentation and disclosure
Purpose and status
Application to not-for-profits
Finalization
Learning Objective 5
3-29

Proposed Changes to IASB

Framework by IASB and FASB
Proposed Changes:
Decision-useful objective encompassing information relevant to
assessing stewardship (actually two parallel objectives with
different emphases)
Stakeholder approach (vs. U.S. frameworkshareholder
approach)--users other than capital providers explicitly
acknowledged
Asset of an entity=present economic resource to which,
through an enforceable right or other means, entity has access
or can limit others access
Emphasis on fair value measurements in IFRSexit price as
measurement base, or, if notdevelop additional guidance
Learning Objective 5
3-30

Presentation of Financial
Statements (IAS 1)
This standard provides guidance in the
following areas
Purpose of financial statements to provide
decision-useful information.
Components of financial statements
balance sheet, statements of income, cash
flows, changes in equity, and notes to the
financial statements.
Learning Objective 6

3-31

Presentation of Financial
Statements (IAS 1)
Fair presentation the overriding principle of financial
statement presentation.
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.

Learning Objective 6

3-32

Presentation of Financial
Statements (IAS 1)
Basic principles and assumptions
Reiteration of underlying assumptions.
Accrual basis/going concern/comparability.
Structure and Content of Financial Statements
Provides information on presentation format:
Current/noncurrent.
Items to be included on face of financial
statements.
Content of notes.
Learning Objective 6

3-33

First Time Adoptions of IFRS

(IFRS 1)
Provides guidance for first time adoption.
Much used in 2005, particularly in EU.
Requires compliance with all effective IFRS.
Allows exemptions when costs deemed to
outweigh benefits.

Learning Objective 6

3-34

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.
Many developing nations have adopted IFRS.
Some countries disallow IFRS for domestic firms but
allow foreign companies to use them.
U.S. and Japan, for example will allow foreign countries
listing on their respective exchanges to file financials
prepared in accordance with IFRS without reconciliation
to U.S. or Japanese GAAP.
Learning Objective 7

3-35

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 = little benefit
Investor satisfaction with national accounting standards
IFRS difficulties in language translation
Learning Objective 8

3-36

IASB/FASB Convergence
The Norwalk Agreement
Reached in 2002
Between the IASB and FASB
To work toward accounting standards
convergence

Learning Objective 9

3-37

IASB/FASB Convergence
FASBs key initiatives in the Norwalk Agreement
Joint projects boards will work together to address some issues
(e.g., revenue recognition).
Short-term convergence to 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.

Learning Objective 9

3-38

Anglo-Saxon Accounting
Countries include U.S., U.K., Canada, Australia
and New Zealand
Accounting systems not identical but share
fundamental features:
Micro orientation (firm level) with emphasis on
professional rules and self-regulation
Investor orientationprimary aim is efficient
operation of capital markets (very transparent)
Less emphasis on prudence and measurement of
taxable income or distributable incomesubstance
over form

Learning Objective 10

3-39