International accounting

- IASB and current international developments

Gunnar Rimmel Associate professor

Head of Financial Accounting and Reporting GroupSchool of Business, Economics and Law

University of Gothenburg

Fall 2009

Special lecture on International Financial Accounting at Karlstad UniversityGunnar.Rimmel@handels.gu.se

Overview

Origins of international accounting differences

Harmonising or standardising?

From EU directives to IFRS 2005

IASB

IASB vs FASB = conergence?

Origin of international differences

Country A Country B

Cultural differences

Coincidence andexternal influences

Provision of finance

Existinglaw

Relationship between accounting and taxation

Accounting regulation /profession

4

Common law versus code law countries

Anglo-Saxon law traditionLaws are created and developed by ”case law” practice

Continental – Roman-German law traditionLaws are written and developed by the state

Anglo-Saxon law tradition(common/case law countries)

Continental – Roman-German law tradition(code law countries)

USAUnited KingdomAustraliaNew ZealandCanadaIreland

GermanyFranceBelgiumItalySpainPortugalJapan (trade law)

5

Provision of finance- shareholder-oriented vs credit-oriented countries

Shareholder oriented Credit/family/state oriented

USAUnited KingdomNetherlandsSwedenAustraliaCanada

GermanyFranceBelgiumItalySpainPortugal

A B

Strong capital marketMany ”outside” shareholdersStrong/large auditing professionSeparate accounting and taxation rules

Weak capital marketMain ”inside” shareholderWeak/small auditing professionTaxation rules dominate accounting rules

Initial classification

General relationship between accounting and taxation

DependenceFinancial reporting purpose –to protect creditors and the state

Reporting independent from taxationFinancial reporting purpose – to increase disclosure and more detailed information as well as increased ”fair” information

fair => large number of outside owners require unbiased information about the success of a business and its state of affair.

Independence Dependence

DenmarkIrelandUnited KingdomNetherlandsCzech RepublicPoland

GermanyFranceBelgiumItalySpainNorway

Cultural differences

Individualism versus collectivism

Large versus small power distance

Strong versus weak uncertainty avoidance

Masculinity versus femininity

Geert Hofstede: Organisations and culture

Dates of establishment of professional accounting bodies

9

Country classification 1980

Accounting Systems(corporate Financial accounting)

Macro-uniformGovernment-driven

Tax-dominated

Netherlands Australia NZ UK Canada Italy France Belgium GermanyUSAIreland Spain Japan Sweden

Business practiceProfessional rules

British originBusiness economicsExtreme judgmental

Micro-fair-judgmentalCommercially-driven

UK influenceProfessional

regulation

US influenceProfessional

regulation

Code-basedinternationalinfluences

Plan-based Statute-based Economiccontrol

Families

Sub-classes

Classes

Country classification 1998Christopher Nobes (1998)

Accounting Systems(corporate financial accounting)

StandardDutch

Equity,Class A

Classes

UK GAAP IAS GAAP US GAAP StandardBelgian

StandardFrench

StandardGermany

StandardItalian

StandardJapanese

2. Bayer(Germany)Nestlé(Switzerland)Nokia(Finland)

1 US SEC-registeredcompanyaccounts

2. SomeJapanesegroupaccounts

Dutchaccounts

UKaccounts

2. Irishaccounts

Singaporelistedcompanies

Belgianaccounts

1 Frenchindividualaccountsand someFrenchgroupaccounts

1. Germanindividual andgroup accounts,except for somegroup accountsof large listedcompanies

2 Austrianindividualaccounts

Italianindividualaccountsorunlistedgroupaccounts

Japaneseindividualaccountsand mostgroupaccounts

Exam

ples

System

Equity,Class B

Family

Accounting harmonisation- three strategies to harmonise on ”de jure”-level (VanHulle 1993)

Harmonisation

equal rules

1. Standardisation with uniform rules without possibilities to choose. This model is applied by the FASB

2. ”equal” rules with notes. This model has dominated the EU.3. Choice alternatives, but desired alternative has been indicated.

This model has dominated the IASB.

Choice alternatives standardisation

One should differentiate between harmonisation on the de jure-level (rules and regulation) and the de facto-level (how corporations use accounting in practice).

Three strategies:

Harmonisation problem a la Daimler-Benz

Historical development of IAS/IFRS and IASB

Year What happened?1972 Proposal to form International Accounting Standards Committee (IASC).

1973 inaugural meeting 29 June, London International Accounting Standards Committee (IASC).Members: Australia, Canada, France, Germany, Japan, Holland, UK, Ireland & USA

1975 First IAS published:IAS 1 Disclosure of Accounting PoliciesIAS 2 Valuation and Presentation of Inventories in the Context of the Historical Cost System.

1989 European Accounting Federation (FEE) intend for international harmonisation and greater European involvement in IASC

1996 Development of main principles.EU:s Contact Committee makes a feasibility study.

1997 Standing Interpretations Committee (SIC) forms to check IAS before endorsement.

1999 International Organization of Securities Commissions (IOSCO) review of IASC core standards begins.

2000 IASC member bodies approve IASC's restructuring and the new IASC Constitution European Commission announces plans to require IASC standards for all EU listed companies from

no later than 2005

2001 IASC forms IASB Foundation. IASC gives IASB responsibility to develop new IAS/IFRS.European Commission presents legislation to require use of IASC Standards for all listed companies

no later than 2005

2002 European Commission approves legislation to require IAS/IFRS. SIC transforms into International Financial Reporting Interpretations Committee (IFRIC)

2003 European Commission approves legislation on IAS/IFRS.

Historical development of EU-directives

Directiveson company law

Draftdates

Draftadopted

Topic

First 1964 1968 Ultra vires rules

Second 1970, 1972 1976 Separation of public companies,minimum capital, distributions

Third 1970, 1973, 1975 1978 Mergers

Fourth 1971, 1974 1978 Formats and rules of accounting

Fifth 1972, 1983 - Structure, managementand audit of companies

Sixth 1978 1982 De-mergers

Seventh 1976, 1978 1983 Consolidated accounting

Eigth 1978 1984 Qualifications and work of auditors

Ninth - - Links between public company groups

Tenth 1985 - International mergers of public companies

Eleventh 1988 1989 Disclosures about branches

Twelfth 1988 1989 Single member company

Thirteenth 1989, 1996, 1997 - Takeovers

Implementation of EU-directives redovisningslagstiftning

Fourth SeventhDenmark 1981 1990

United Kingdom 1981 1989

France 1983 1985

Netherlands 1983 1988

Luxembourg 1984 1988

Belgium 1985 1990

Germany 1985 1985

Ireland 1986 1992

Greece 1986 1987

Spain 1989 1989

Portugal 1989 1991

Austria 1990 1990

Italy 1991 1991

Finland 1992 1992

Sweden 1995 1995

Norway 1998 1998

16

The IASB Foundation

International Accounting Standards Committee

Foundation(19 Trustees)

International Accounting

Standards Board (12+2 Board Members)

Standards Advisory Council

Advisory Groups

Director of Operations and non-Technical Staff

Director of Technical Activities and Technical staff

International Financial Reporting Interpretations

Committee (12)Appoints

Report to

Membership links

Advises

National Standard setters and other interested parties

IASB Board members Sir David Tweedie, chairman (ex chairman ASB,UK)

Thomas E.Jones (ex chairman IASC, CFO Citicorp)

Mary E.Barth (Stanford University, ex AA partner)

Steven Cooper (ex board member UBS Investment Bank)

Phillipe Danjou (ex director of French securities regulator - AMF)

Jan Engström (ex CFO Volvo Group)

Gilbert Gélard (ex partner KPMG, ex IASC Board)

Robert P.Garnett (ex CFO Anglo American plc, South Africa)

James J.Leisenring (ex FASB)

Warren McGregor (ex Australian Accounting Research Foundation)

John T. Smith (partner Deloitte)

Tatsumi Yamada (ex partner PwC Japan, ex IASC Board)

Zhang Wei-Guo (ex Chief Accountant and Director General of the Department of International Affairs at the China Securities RegulatoryCommission - CSRC)

International Financial Reporting Standards (IFRS)

ContentIASC Foundation ConstitutionIASB Framework for the Preparation and Presentation of Financial StatementsPreface to International Financial Reporting Standards,Due Process Handbook for the IASB, Glossary of TermsFrameworkIAS 1 – 41IFRS 1 - 8IFRIC 1 -17SIC 1 - 33

The main changes 2009 • one revised standard - IFRS 1 • amendments to IFRSs that were issued as separate documents • amendments to IFRSs issued in the first annual improvements project • amendments to other IFRSs resulting from those revised or amended

standards • three new Interpretations - IFRICs 15-17

19

Standards Advisory Council- around 40 members

Current composition of members

2 Africa 7 Asia / Oceania

(Australia, China, India, Japan, Korea, 2 South-East Asia)

13 Europe(10 EU + Russia + Switzerland + CESR-fin)

3 Latin America1 Middle East4 North America

7 International organisations• Basel Committee of Banking Supervisors• International Association of Insurance Supervisors• International Federation of Accountants• International Monetary Fund• International Organization of Securities

Commissions• United Nations Conference for Trade and

Development• World Bank

3 Official observers• European Commission • Financial Services Agency of Japan • US Securities and Exchange Commission

Objectives of IASB

MISSION STATEMENT“The International Accounting Standards Board is an independent, privately-funded accounting standard setter based in London, UK. Board Members come from nine countries and have a variety of functional backgrounds. The Board is committed to developing, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. In addition, the Board cooperates with national accounting standard setters to achieve convergence in accounting standards around the world.”

IAS fundamental rule

An enterprise whose financial statements comply with International Accounting Standards should disclose that fact. Financial statements should not be described as complying with International Accounting Standards unless they comply with all the requirements of each applicable Standardand each applicable interpretation of the Standing Interpretations Committee.

(IAS1§11)

Research

9 – 15 months

IASB’s standard setting process

Discussionpaper

Exposuredraft IFRS

ProjectProposal

- IASB Board- SAC- National standard setters

Review ofcomments

Review ofcomments

9 – 15 months

EU-endorsement of IFRS

• Endorsed, no directive!• Endorsement 31 dec 2002 • Group accounting 2005 according to IFRS (and

EU-directive!)• Mandatory for listed corporations, member states

decide if unlisted corporations may report according to IFRS

• ARC - Accounting Regulatory Committee (politics)

• Technical level: EFRAG• Modernisation of the Directives

Committees and organizations involved for standards EU approval(European Financial Reporting Advisory Group)

Accounting RegulatoryCommittee

Technical Expert Group (TEG)

EU-Commission

Consultation forum with European norm setter

CESR (The Committee of European Securities

Regulators)

Supervisory Board

EFRAG

Observer status

Translation

IASB

approval

EFRAGadvice

EU bureaus

EU Comm + ARC

endorses EU review

EU-Parliament

+ C o Ministers

2 m + 1m2 m 1,5m

EU’s regulation process

Endorsed

Official translation

Timetable for Application of Standards- no new standards until 2009

2003 IAS 41

2004 IFRS 1 – First Time Adoption of IFRS

2005 (Mandatory) Improvements Project Share-based Payment (IFRS 2) Amendments to IAS 32/39 Convergence Phase 1 (ED 4) Business Combinations Phase 1 (ED 3) Insurance Contracts Phase 1 (ED 5)

2005 (Optional) Business Combinations – Phase II Consolidation, Including Special Purpose Entities Disclosure of Financial Risk and Other Disclosures about Financial Activities Comprehensive Income (Performance Reporting) Other Convergence Issues Revenue Recognition, Liabilities, and Equity

Improvements Project

Exposure draft Improvements to IFRS was issued May 2002 Comment deadline: 16 September 2002 Final Standards were issued in December 2003

Revised IAS Resulting from the Improvements Project

IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Balance Sheet Date IAS 15 Information Reflecting the Effects of Changing Prices (Withdrawn) IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 24 Related Party Disclosures IAS 27 Consolidated and Separate Financial Statements IAS 28 Investments in Associates IAS 31 Interests in Joint Ventures IAS 33 Earnings per Share IAS 40 Investment Property

Effective dates: 2005 year ends

FASB vs. IASB

Remember the Titans ?

Sarbanes-Oxley Act (2002)Plenty of new rules and regulation on corporate governance and internal control

The Norwalk Agreement (2002)IASB & FASB convergence of their accounting rules

Convergence project

Objectiveidentify differences between IFRS and US GAAPfind the best global solutions to these differencesto eliminate a variety of differences between International Financial

Reporting Standards and US GAAPTo save money by working on rules together

PurposeTo increase transparency of reports

”Tell it like it is” …David Tweedie

To encourage investors to diversifyTo lower company’s costs

TimingPhase 1: ED 4 issued on 24 July 2003, final standard in Q1 2004 would

apply in 2005Phase 2: mandatory after 2005, optional in 2005

Convergence topics for Phase 2

Classification of liabilities* (IAS 1)Inventories – idle capacity and spoilage (IAS 2)Application of temporary difference approach (IAS

12)Asset exchanges* (IAS 16)Government grants (IAS 20)Joint ventures (IAS 31)Interim financial reporting (IAS 34)Research and development costs (IAS 38)

Convergence topics for Phase 2

Convergence Issues for Asset Disposals and Discontinued Operations:

— Project completed

Convergence Issues for IAS 12 Income Taxes:— Exposure draft expected 4th quarter 2005— Final standard timetable not yet announced

Convergence Issues for IAS 14 Segment Reporting:— Exposure draft expected 4th quarter 2005— Final standard timetable not yet announced

Convergence topics for Phase 2

Convergence Issues for IAS 19 Employee Benefits:

— Project completed (see Completed Projects below)

Convergence Issues for IAS 20 Government Grants:

— Exposure draft on replacement of IAS 20 expected 4th quarter 2005

— Final standard: timetable not yet announced

Convergence Issues for IAS 37 Provisions:— Exposure draft was issued 30 June 2005— Final standard expected 2nd half 2005

FRANCE

IASBUK

USA/FASBJAPAN

GERMANY

AUS

CANADA

Some years ago

SPAIN

FRANCEUK

GERMANY AUS

SPAIN

IASB

USA/FASBJAPAN

CANADA

A couple of month ago

USA/FASBJAPAN

CANADA

FRANCEUK

GERMANY AUS

SPAIN

Current state

IASB

US GAAP IAS/IFRS

GLOBAL GAAPGLOBAL GAAP

CONVERGENCE

JAPAN

GLOBAL GAAP on its way?