Harmonisation of Accounting Standards

International Harmonisation of Accounting Standards

Financial Reporting

BM0157-3.5-2 Financial ReportingProvision, Contingent Liabilities and Assets (FRS 137)Slide * of 15 *

Describe how the changing world environment is leading to an increased focus on international accounting standards.Explain some differences in accounting methods as they are applied internationally.List five major classifications of accounting models used in different geographical regions.Learning Outcomes


Describe the role of the International Accounting Standards Committee (IASC) and the International Accounting Standards Board (IASB) in establishing international accounting standards.Describe the advantages of International Harmonisation of Accounting Standards Learning Outcomes


Beginning in 2005, the European Union (EU) mandated that accounting standards for companies listed in its securities markets conform to International Financial Reporting Standards (IFRS).In 2006, the total value of cross-border transactions in bonds and equities was $90 trillion U.S. dollars annually.The Increasing Importance of International Accounting Standards


Composition of the Global Equity and Debt Marketsby Each Countrys Domestic SecuritiesImportance of International Accounting Standards


Composition of the Global Equity and Debt Marketsby Each Countrys Domestic SecuritiesImportance of International Accounting Standards


U.S. holdings of foreign securities (870 billion to 3.5 trillion increase)Foreign holdings of U.S. securities(1.2 to 6 trillion increase)Holdings of U.S. and Foreign Securities, 19942004Market Value of Holdings of U.S. and Foreign Securities, 1994-2004Importance of International Accounting Standards


The demand for uniform international accounting standards has increased because:Investors seek comparable standards to evaluate investment opportunities, Managers seek to evaluate the performance of foreign subsidiaries and competitors, andCreditors and debt capital markets seek comparable standards to determine credit quality and bankruptcy risk.Importance of International Accounting Standards


Financial accounting practices, required disclosures, and auditing requirements which are not uniform across countries. Variations exist in the accounting for: Goodwill.Business combination methods.Tax allocation.LIFO inventory costing.Development costs.Use of reservesHarmonisation of Worldwide Accounting Standards


The International Accounting Standards Committee (IASC) was founded in 1973. 41 standards were issued by January 2001.In 2001, the IASC announced formation of the International Accounting Standards Board (IASB).Goal is to develop high-quality internationally accepted accounting standards.Issues standards known as International Financial Reporting Standards (IFRS).Harmonisation of Worldwide Accounting Standards


Harmonization of accounting standards were enhanced with the formation of this International Accounting Standards Committee (IASC). In 2002, the FASB and IASB agreed to begin converging U.S. GAAP to IFRSs.By 2005, over 90 countries had announced they would be following IFRSs. In 2005, European Union requires publicly traded EU companies to follow IFRSs.Harmonisation of Worldwide Accounting Standards


Advantages of International Harmonisation of Accounting StandardsTo International Investors - Ability to make useful and meaningful comparisons of investments portfolios in different countries. To multi national companies: Easy consolidation of financial statements. Better management control would be improved, because harmonisation would aid internal communication of financial information. Appraisal of foreign enterprise for takeovers and mergers would be more straightforward. It would be easier to comply with the reporting requirements of overseas stock exchanges. A reduction in audit costs might be achieved. Transfer of accounting staff across national boarders would be easier.


Advantages of International Harmonisation of Accounting StandardsGovernments and National standard setting bodies Countries would save time and money as they can just adopt International Accounting Standards in full. Ability to counter transfer pricing by multinational companies as these companies could not hide behind foreign accounting practice which are difficult to understand.Easy to calculate the tax liability of investors, including multinationals who receive income from overseas sources.Ensures availability of high quality and well-researched standards to countries which otherwise could not have afforded to issue standards. Ensures accountability and transparency of operations of enterprises in different countries. Assist governments in attracting international investors as adoption of IAS enables international investors easy monitoring of overseas investments.


Advantages of International Harmonisation of Accounting StandardsRegional economic groups:

Promotion of trade within the region through common accounting practices.

Ability to compile meaningful data on the performance of various enterprises within the region.


Advantages of International Harmonisation of Accounting StandardsStandardisationDevelop, in the public interest, a single set of high quality understandable and enforceable global accounting standards that require high quality transparent and capable information in financial statements and other financial reporting to help the participants in the various capital markets of the world and other users of the information to make economic decisions. Promote the use and rigorous application of those standards.Work actively with national standards-setters to bring convergence of national accounting standards and International Financial Reporting Standards (IFRS) to high quality solution.


Obstacles of International Harmonisation of Accounting Standards the size of the present differences between the accounting practices of different countries.

lack of strong professional accountancy bodies in some countries, and the differences in political and economic systems.

Nationalism poses a threat to harmonisation as countries are wary of possibility of control of their accounting regulation to outsiders, especially if it is perceived as replacing their own accounting regulations with those of other countries.


Obstacles of International Harmonisation of Accounting StandardsDifference in accounting measurement rules provide insufficient information to enable reports to be universally understood and interpreted.

Countries have substantial economic and cultural differences that preclude simple interpretations, even when the figures are generated using the same accounting principles because accounting standards in any society are an outgrowth of that society's needs and perspectives.


Obstacles of International Harmonisation of Accounting Standards

Coordination of their accounting policies with policies prevailing in other countries in order to minimize negative externalities and to maximize positive externalities.

users might have different needs in different nations (e.g., debtor vs. creditor nations; countries that have very active stock markets and those where banks primarily accumulate and invest capital; investor vs. investee countries; etc.).


Obstacles of International Harmonisation of Accounting Standards

divergence between the needs of large multinationals and smaller business entities in developing countries might spoil the harmonisation of accounting standards.

different levels of sophistication and influence among different national accounting professions.

high cost of requiring issuers to change accounting principles, or to keep a "separate set of books" for multinational offerings.


Differing accounting practices could result in the same economic event being reported differently.Differences in Net Income and Equity due to Differing GAAP= ROEComparative Accounting Models


Format and Terminology DifferencesSome non-U.S. companies prepare statements in: English still using their national GAAP.Their local currency with a column that is translated into U.S. dollars.English conforming to U.S. GAAP or the IFRS. The first step is to determine which GAAP is being used.Comparative Accounting Models


Format and Terminology DifferencesExamples of terminology differences:Comparative Accounting Models


Format and Terminology DifferencesVarious formats are allowed in presenting financial statements in different countries.In the UK:Noncurrent assets are listed first in the balance sheets.Current assets listed second and in order of increasing liquidity (i.e., the most liquid assets are listed last). Assets and liabilities are combined to compute total net assets.Comparative Accounting Models


A company located in Japan prepares an annual report denominated in U.S. dollars. Any report denominated in U.S. dollars is always prepared in accordance with U.S. GAAP.Review:FalseComparative Accounting Models


In the United Kingdom, stock refers to common stock.Review:False, stock refers to inventoryComparative Accounting Models


Since 2005, all European Union companies listed on a regulated market are required to prepare consolidated accounts in accordance IFRS accounting standards.Review:TrueComparative Accounting Models


Five Major Geographical Classifications:Type of Accounting Practice RegionAnglo-Saxon United StatesAnglo-Saxon United KingdomGerman Germany, SwitzerlandLatin France, Italy, BrazilAsia-Pacific Japan, ChinaClassification of International Accounting Models


Standards referred to as Financial Reporting Standards (FRS).Issued by the Accounting Standards Board (ASB).The ASB strongly supports the IASB.ASB is considering a full conversion to IFRS implementation that would require companies to comply completely by January 1, 2009.Accounting Standards in the United KingdomClassification of International Accounting Models


Historically, standard setting has been the responsibility of the Federal Ministry of Justice (FMJ).In 1998, FMJ recognized a new independent body, the German Accounting Standards Board (GASB).As of 2005, preparation of financial statements according to IFRS became mandatory for public companies. Accounting Standards in GermanyClassification of International Accounting Models


In February 2001, the Financial Accounting Standards Foundation (FASF) and Accounting Standards Board (ASB), were formed to develop accounting standards.Accounting Standards Board has been working with the IASB in a path toward standards convergence. It plans to reconcile these differences to IAS by 2008.Accounting Standards in JapanClassification of International Accounting Models


Since June 30, 2001, goodwill is only expensed if impaired under U.S. GAAP. Amortization of goodwill is required under the Japanese model, with a life of five years.Under IAS standard 38, internally generated goodwill is not capitalized.Treatment of GoodwillInternational Reporting Issues


Since June 30, 2001, goodwill is only expensed if impaired under U.S. GAAP. Amortization of goodwill is required under the Japanese model, with a life of five years.Under IAS standard 38, internally generated goodwill is not capitalized.Treatment of GoodwillInternational Reporting Issues


LIFO is not acceptable under IAS.IASB recommends specific cost. If specific cost is not determinable, the benchmark is FIFO or weighted average.InventoriesInternational Reporting Issues


In the United States:Research and development (R&D) costs are expensed as incurred.In acquisitions, in-process R&D is recognized as an expense. IAS No. 38: Research costs are expensed as incurred. Development costs are capitalized when a product is determined to be commercially feasible. Purchased R&D costs are capitalized and amortized.Research and DevelopmentInternational Reporting Issues


Purchase method required under U.S. GAAP.Purchase method required under International Accounting Standards (IAS).Business CombinationsInternational Reporting Issues


In several countries, fixed assets are valued at depreciated historical cost (Japan and the United States). Under IAS 16, fixed assets are initially valued at cost. Subsequently, they can be valued under either the: Cost model, or theRevaluation model.Fixed Assets and DepreciationInternational Reporting Issues


In several countries, fixed assets are valued at depreciated historical cost (Japan and the United States). International Reporting Issues


)Q & AQuestion and Answer Session

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THANK YOU

1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

Technical Bulletins provide answers to specific questions related to the application and implementation of FASB Statement or Interpretations, APB Opinions, and ARBs. Technical Bulletins do not alter GAAP; they merely provide guidance on questions related to existing GAAP.Technical Bulletins provide answers to specific questions related to the application and implementation of FASB Statement or Interpretations, APB Opinions, and ARBs. Technical Bulletins do not alter GAAP; they merely provide guidance on questions related to existing GAAP.Technical Bulletins provide answers to specific questions related to the application and implementation of FASB Statement or Interpretations, APB Opinions, and ARBs. Technical Bulletins do not alter GAAP; they merely provide guidance on questions related to existing GAAP.Technical Bulletins provide answers to specific questions related to the application and implementation of FASB Statement or Interpretations, APB Opinions, and ARBs. Technical Bulletins do not alter GAAP; they merely provide guidance on questions related to existing GAAP.

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Harmonisation of Accounting Standards