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International Accounting Standards
Financial accounting is influenced by the environment in which it operates
Companies develop financial reports directed at their primary users Previously most were residents of the same country as the
corporation Transnational financial reporting has become more commonplace
because of the European Union, GATT and NAFTA
U. S. companies must be able to compete in global markets with transnational financial reporting
International Business Accounting Issues
A company’s first exposure to international accounting is frequently the result of a purchase or sale
Problems: 1 Exchange gains or losses 2 Obtaining credit information3 Evaluation of financial statements
Next step may be to open an international divisionAnother issue is raising capital in foreign markets Must prepare financial statements in a format acceptable
by appropriate securities market
Factors Influencing the Development of Accounting Systems:
Level of Education
Political System
Legal System
Economic Development
Influences on the Development of Financial Reporting
Type of economy
Agricultural Resource Based Tourist Based
Manufacturing
Legal System
CodifiedCommon Law
Political System
DemocraticTotalitarian
Nature of Ownership
Private Enterprise Socialist
Communist
Influences on the Development of Financial Reporting
Growth Pattern of economy
GrowingStable
Declining
Social ClimateStability of currency
Sophistication of managementSophistication of financial community
Existence of accounting legislationEducation System
Spheres of Influence of Current Accounting Practices
Various attempts at groupings that have changed in response to changes in the environment such as NAFTA and EUCurrent groupings
United StatesUK/NetherlandsContinental/JapanSouth AmericanThird WorldChanging EconomiesCommunist
Approaches to Preparing Financial Statements for Use in Other Countries:
1 Same to all
2 Translate language
3 Translate language and currency
4 Two sets
5 World-wide standards
The International Accounting Standards Committee
The preparation of financial statements for foreign users under option #5 is being increasingly advocated
IASCformed in 1973 to aid in this process currently 134 sponsoring organizations from 104 countries
International Accounting Standards Board
replaced IASC in 2001
Standard Setting by the IASC
Original intent:
avoid complex details
concentrate on basic standards
Steps in the process
similar to FASB
1 Steering Committee
2 Identify issues and prepare point outline
3 Board prepares comments
4 Steering Committee prepares final Statement of Principles
5 Exposure Draft
6 Steering Committee reviews comments and prepares final standard
Standard Setting by the IASC
Two treatments1 Benchmark - point of reference2 Alternative
Improvements Project2003Removed some of the existing alternative accounting treatments Where an IAS retains alternative treatments
IASB removed references to 'benchmark treatment' and allowed 'alternative treatment'
using descriptive references 'cost model' 'revaluation model'
Restructuring the IASC
In its early years, IASC acted mainly as a harmonizerRecently, it has begun to combine that role with the role of a catalyst
Harmonizer Catalyst
Coordinator of national initiatives
Initiator of new work at national level
Restructuring the IASC
Future IASC role as catalyst and initiator should become more prominent
Important for the IASC to focus objectives more precisely, as follows: 1. To develop international accounting standards that
require high-quality, transparent, and comparable information that will help participants in capital markets and others to make economic decisions; and
2. To promote the use of international accounting standards by working with national standard setters.
Restructuring the IASC
Structural changes needed so that IASC can anticipate the new challenges facing it and meet those challenges effectively.
Issues that need to be addressed: 1. Partnership with national standard setters.
IASC should enter into a partnership with national standard setters
so that IASC can work together with them to accelerate convergence between national standards and international accounting standards around solutions requiring
high-quality, transparent, and comparable information that will help participants in capital markets and others to
make economic decisions.
Restructuring the IASC
2. Wider participation in the IASC Board. A wider group of countries and organizations should take part
in the IASC Board Without diluting the quality of the Board's work
3. Appointment. The process for appointments to the IASC Board and key IASC
committees should be the responsibility of a variety of constituencies
Must that those appointed are competent
Restructuring the IASC
2001: Responsibility for international standards-setting was transferred to the to the International Accounting Standards Board (IASB)
Restructuring the IASC
The following changes were adopted:1. Steering Committees replaced by a Standards Development
Committee National standard setters will play a major role in developing
international accounting standards for approval by the IASC Board Standards Development Committee will also be responsible for
approving the publication of final SIC Interpretations prepared by the Standing Interpretations Committee
2. Standards Development Committee supported by a Standards Development Advisory Committee Acts as a channel of communication with those national standard
setters who are unable to participate directly in the Standards Development Committee because of its limited size
Restructuring the IASC
3. IASC Board expanded from 16 to 25 countries and organizations Without diluting the quality of the Board’s work
4. Advisory Council was replaced by 12 Trustees Three appointed by the International Federation of
Accountants Three by other international organizations Six by the Trustees to represent the world "at large" Trustees appoint members of the Standards Development
Committee, the Board, and the Standing Interpretations Committee
Trustees also have responsibility for monitoring IASC’s effectiveness and for financing the IASC’s activities
Restructuring the IASC
The new structure:The IASC Foundation
The International Accounting Standards Board
The International Accounting Standards Advisory Council
International Financial Reporting Interpretations Committee
New StructureIASC Foundation
19 Trustees Appoint, Oversee, Raise Funds
International Financial Reporting Interpretations
Committee (12 members)
Board: 12 Full time & 2 Part TimeSet Technical Agenda
Approve Standards, Exposure Drafts, & Interpretations
Standards Advisory Council
49 members
Advisory GroupsFor Major Agenda Projects
Appoints
Reports To
Advises
KEY:
Revising the IASB’s Constitution
Key issues to be reviewed:1. Whether the objectives of the IASC Foundation should expressly
refer to the challenges facing small and medium-sized entities (SMEs)
2. Number of Trustees and their geographical and professional distribution
3. The oversight role of the Trustees 4. Funding of the IASC Foundation 5. The composition of the IASB 6. The appropriateness of the IASB's existing formal liaison
relationships 7. Consultative arrangements of the IASB 8. Voting procedures of the IASB 9. Resources and effectiveness of the International Financial
Reporting Interpretations Committee (UMC):10. The composition, role, and effectiveness of the SAC
The Uses of International Accounting Standards
IASC noted that its standards are used in a variety of ways:
1 National requirements
2 Basis for national requirements
3 Benchmark to develop standards
4 By regulatory agencies
5 By companies
Also International Organisation of Securities Commissions (IOSCO) looks to the IASC to provide standards that can be used in multinational securities offerings
Current Issues
Partnership with the IOSCOGenerate standards acceptable to IOSCO
December 17, 2003IASB published 13 revised International Accounting Standards
Reissued two others
Gave notice of the withdrawal of its standard on price level accounting.
Revised and reissued standards mark near-completion of the IASBs Improvements project
Issues to Be Addressed by Standard Setting Bodies in Various Countries
Until recently, little impact in U. S.
Standard setters will need to focus on following questions:1 Can international accounting standards be set voluntarily by
organizations representing a broad set of sovereign nations?2 What is the impact on standard setting of differing economies and
social settings in various countries?3 Can lessons be learned from other international world bodies with
sovereign members having experience in bringing conflicting national laws into harmony?
IFRS No. 1: First-time Adoption of International Financial Reporting Standards
More than 90 countries will either require or permit the use of IFRSs during the next several years.
As a result, thousands of companies throughout the world will be making a transition in financial reporting by breaking away from national practices and changing to accounting standards set by the IASB.
The IASB issued IFRS No 1 to aid in this process
FASB Short-term International Convergence Project
The project scope is limited to those differences in which convergence around a high-quality solution would appear to be achievable in the short-term, usually by selecting between existing IFRS and U.S. GAAP.
The goal of this project is to remove a variety of individual differences between U.S. GAAP and International Financial Reporting Standards that are not within the scope of other major projects.
The Norwalk Agreement
12/18/2002:FASB and IASB held joint meeting in Norwalk, ConnecticutBoth standard setting bodies acknowledged…
their commitment to the development of high-quality compatible accounting standards that can be used for both domestic and cross-border financial reporting.
Also committed to use their best efforts to make their existing financial reporting standards compatible as soon as practicable and to coordinate their future work programs to help ensure that once compatibility is achieved, it will be maintained.
The Norwalk Agreement
Both Boards agreed to:1. Undertake a short-term project aimed at removing a
variety of differences between U. S. GAAP and IFRSs.2. Remove any other differences between IFRSs and U.
S. GAAP that may remain on January 1, 2005 by undertaking projects that both Boards would address concurrently.
3. Continue the progress on the joint projects currently underway.
4. Encourage their respective interpretative bodies to coordinate their activities.
International vs. National Accounting Standards
Question: Should foreign companies be allowed to list their securities in United States marketsForm 20-F reconciliationsPressure on the SEC to accept international accounting rules
The Financial Statement Impact of International Accounting Standards
FASB project:
Purpose of analysis1 Identify similarities and differences of
the IAS standard and U. S. GAAP2 Assess the impact of these similarities
and differences and their relative significance
3 Include examples wherever possible
Framework for the Preparation and Presentation of Financial Statements
Purpose - to set out concepts that underlie the preparation and presentation of financial statements by:1 Assisting the IASC in developing future standards2 Promoting harmonization of accounting standards3 Assisting national standard setters4 Assisting preparers in applying international standards5 Assisting auditors in forming an opinion as to
whether financial statements conform to international standards
6 Assisting users in interpreting financial statements prepared in conformity with international standards
7 Providing interested parties with information about the IASC’s approach to the formation of international accounting standards
Framework for the Preparation and Presentation of Financial Statement”
The Framework specifies:1 Objective of financial statements2 Qualitative characteristics3 Elements4 The concepts of capital maintenance
The Objective of Financial Statements
Information useful in making economic decisions
General purpose financial statements
The framework indicated that:
1 Users require evaluation of the ability of an enterprise to generate cash and the timing and certainty of that generation
2 The financial position of an enterprise is affected by the economic resources it controls, its financial structure, its liquidity and solvency and its capacity to adapt to change
3 Information on profitability is required to assess changes in the economic resources an enterprise controls in the future
4 Information of the financial position of an enterprise is useful in assessing its investing, financing and operating activities
5 Information about financial position is contained in the balance sheet and information about performance is contained in the income statement
The Objective of Financial Statements
Underlying assumptions for the preparation of financial statements1 Accrual basis2 Going concern
The Elements of Financial Statements
Asset
Liability
Equity
Income
Expense
The concept of recognition– Probable– Measurable
The Concepts of Capital Maintenance
Concepts:1 Financial capital maintenance2 Physical capital maintenance
Selection of the measurement bases and the concept of capital maintenance chosen will determine the accounting model
IASC does not intend to prescribe a model
Qualitative Characteristics
Attributes that make accounting information useful 1 Understandability2 Relevance3 Reliability4 Comparability
Also recognized that timeliness and a balance between costs and benefits were constraints
IAS No. 1”Presentation of Financial Statements”
Considerations:a Fair presentation and compliance with IASC
standardsb Accounting policiesc Going concernd Accrual basis of accountinge Consistency of presentationf Materiality and aggregationg Offsettingh Comparative information
FASB staff review
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the
express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions
Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale.
The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the
information contained herein.
Prepared by Kathryn Yarbrough, MBA