Introduction to International Accounting

Why accounting differs from place to place

Mixed Economy Model

South American Model British-American

Model

Continental Model

Clusters of Accounting Models

Forces toward differences• Political and economic ties with

other countries• Economic system

• Relationship between business and the providers of capital

• Capital markets vs. large banks•Numerous or few investors•How well developed are the stock

exchanges and bond markets

• Existence of a conceptual framework

Forces toward differences• Legal System

• Legislative orientation (Common Law)•Laws establish limits beyond which it is illegal

to venture•Considerable flexibility within the limits• Judgment permitted and encouraged•Tend to have accounting practices

established by accountants rather than national legislators

• Legalistic orientation (Code Law)•Laws stipulate minimum standards•Citizens must comply with letter of the law•Accounting is “codified” much like US tax

code

• Reporting regime

Forces toward differences• Level of Inflation• Status of the accounting

profession• Culture• Other

• Size & complexity of business enterprises

• Sophistication of management & financial community

• General level of education

D’Arcy 2001 paper

Usefulness of Classifications• Classification or clustering groups

countries according to distinctive features of their financial accounting systems• Pedagogical demand

•Simplifies enormous amount of detail

• Informational demand•Countries in a cluster may react to new

circumstances in similar ways

• Justification demand•Aid in standard setting (IASB, etc.)

The Drivers for Harmonization• Growing cross-border economic

transactions• Globalization of capital markets• Developments in telecommunications

and the internet• Access to financial statements from

anywhere in the world

• Investors and creditors needs – financial reporting that is • Comparable • Transparent

HISTORY - IASC• 1973 - IASC formed

• Australia, Canada, France, Germany, Japan, Mexico, The Netherlands, the United Kingdom & Ireland, U.S.

• 1974 - First Exposure Draft published • IAS 1 Disclosure of Accounting Policies

• 1977 - Revised constitution adopted• Board expanded to 11 countries• Reference to 'basic' standards removed• Link to IFAC established

HISTORY - IASC• 1987 - IOSCO joins Consultative Group• 1988 - FASB joins Consultative Group

and joins Board as observer • 1990 - European Commission joins

Consultative Group and joins Board as observer

• 1995 - Agreement with IOSCO to complete core standards by 1999 - on successful completion IOSCO will consider endorsing IASs for cross-border offerings • First German companies report under IASs • European Commission supports IASC/IOSCO

agreement and use of IASs by EU multinationals

HISTORY - IASC• 1999

• IOSCO review of IASC core standards begins • IASC Board meetings opened to public

observation • IFAC commits to support the use of IASC

standards as the minimum benchmark worldwide • IASC Board unanimously approves restructuring

into 14-member board (12 full-time) under independent trustees

• 2000• IASC Board approves a new Constitution as part

of restructuring• IOSCO recommends that its members allow

multinational issuers to use 30 IASC standards in cross-border offerings and listings

• 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

HISTORY – IASC → IASB• 2001

•Trustees announce members of the International Accounting Standards Board

•European Commission presents legislation to require use of IASC Standards for all listed companies no later than 2005

•April 1, 2001 •IASB assumes responsibility for setting accounting standards, designated International Financial Reporting Standards (IFRS)

IASB Structure

Recent developments• On January 1, 2005 companies listed on a

European Union Stock Exchange were required to adopt IFRS resulting in a radical change in the way that many companies reflect their asset values on their balance sheet

• The most important single innovation of IFRS is to move away from historical cost• Companies now have the option to carry their

long-term real estate and other assets based on their original cost or at “fair value”, which typically equates to market value

Recent developments• Companies listed on North American

exchanges are still governed by t FASB in the U.S. and the AcSB” in Canada• FASB & IASB working toward

harmonization• Timeline 2007-2009• Major philosophical difference = rules-

based vs. principles-based approach

• November, 2007 – SEC allows foreign companies to use IFRS instead of reconciling to US GAAP.

Major Differences (PwC Report)• Framework

• Allows fair value accounting for intangibles, PPE, financial instruments, and investments.

• Requires ‘retrospective application’ in the first year a company uses IFRS

• Financial Statements• No set format for I/S, B/S or SCF, just form basic guidelines• Extraordinary items are prohibited• SPEs are included when company has substantial control• Consolidated entities methods are adjusted to match the

investor’s methods

• Other issues• Development costs can be capitalized• Impairment estimates are a one-step process instead of a two-

step process• Prohibits LIFO• Contingent liabilities are more common (lower threshold)

2002 Survey by Big CPA firms

2002 Survey

2002 Survey

2002 Survey

Other International Organizations

• IOSCO - The International Organization of Securities Commissions

• IFAC – The International Federation of Accountants

• IAASB - International Auditing and Assurance Standards Board

• PIOB - Public Interest Oversight Board • IPSASB - International Public Sector

Accounting Standards Board