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Standard Setting Seminar. Peter Berridge Mike Kimeda Roy Park Manish Pathak Alison Sherk. Seminar Outline. Importance and Type of Standards Historical Context and Challenges Accounting Organizations & Standard Setting Process: Canada US International Enforcement and Oversight - PowerPoint PPT Presentation
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Standard Setting Seminar
Peter BerridgeMike Kimeda
Roy ParkManish PathakAlison Sherk
Seminar Outline• Importance and Type of Standards• Historical Context and Challenges• Accounting Organizations & Standard Setting
Process: Canada US International
• Enforcement and Oversight SOX and Bill 198
• Rules vs. Principle based Accounting• Harmonization• Class Discussion
Accounting Standards
• Common set of standards and procedures specifying how transactions & other events should be treated: Generally Accepted Accounting Principles (GAAP) Developed by an authoritative accounting body, or
become accepted over time as appropriate because of its universal application
• Needed: To make informed decision For comparability of financial statements across
companies and time
Types of Accounting Standards
• Explanatory How financial statements were developed
• Measurement How numbers were calculated
eg. asset valuation, income assessment, depreciation method, inventory value etc.
• Disclosure What information should be disclose for reader’s own
judgement
• Presentation How information should be displayed on financial
statements
Stakeholders
• Various with coinciding and conflicting needs:InvestorsCreditorsManagers/CorporationsIndustry AssociationsGovernment
Historical Development
Accounting Theory
Bookkeeping to financial reporting
Maturation of financial reporting
1930’s - Historical cost-matching model
Information value perspective
Standard Setting
1930’s – Rule making bodies emerge
National organizations mature
1970’s – International standards proposed
Drive toward harmonization
Factors Influencing Development
• Why regions differed in speed of development… Political environment Maturity of economy Speed of adapting GAAP or other principles Monitoring & enforcement capabilities
Regulatory strength Corruption
Recent business issues Ownership structure
Development Issues
• Factors effecting standards development…Fragmentation of international effortDifferent approaches
Rules based Standards based Committee approach
Uniformity a global issue
More Development Issues
• Factors affecting standards development…Impact of technologyCapital markets – sophistication, speed,
complexityChanging economies – resource to
knowledgeAccountability improvements
Today’s Challenges
• Globalization of companies and capital markets• Impact of technology
Greater access to information Potential for real-time or continuous reporting
• Changing nature of economy Shift from manufacturing & resource extraction to “knowledge
based economy” Need relevant model for measuring & reporting assets not
currently recognized on BS
• Increased requirement for accountability More sophisticated investors Shift to holistic reporting: strategic vision, non-
financial metrics, etc.
Accounting Organization and Standard Setting Process
Canada
Accounting Organizations in Canada
CICA Canadian Institute of Chartered Accountants
AcSOC Accounting Standards Oversight Council
PSAB Public Sector Accounting Board
AcSB Accounting Standards Board
EIC Emerging Issues Committee
UAC User Advisory Board
Accounting Structure in Canada
CICAServes interests of society
& CA profession
AcSOCServes public interest; provides
strategic direction and priorities
AcSBSets GAAP
PSABEstablishes accounting
standards for public sector
EICClarifies wording & applicability
UACProvides user perspective
on financial statements
AcSB
• Authority to develop and establish standards
• Objectives:Serve public interestEncourage input from all stakeholdersBring objectivity in the consideration of issuesRespond in a timely manner
Agenda
1
Topicsidentified
Proposal
2
Vote ondecision to
proceedwith
proposal
Exposure Draft
34
Released forpublic
comment:CA Magazine
AcSB Website
Standard Setting Process
Re-ExposureDraft
5
Repeat steps3 and 4
Feedback
4
Considers comments& meets
with interested
parties
Final Approval& Issuance
6
Published inCICA
Handbook,updated quarterly
Continued…
Monitoring & Enforcement
• Canada Business Corporations Act & Securities Legislation:Companies required to prepare financial
statements in according with GAAP
Monitoring & Enforcement
Accountants
SecuritiesCommission
OverseenProvincially;
power to de-list
companies
Bill 198(Similar to SOX)
Auditors
Licensed provincially
Accounting Organization and Standard Setting Process
United States
Accounting Organizations in US
FASB Financial Accounting Standards Board
FAF Financial Accounting Foundation
FASAC Financial Accounting Standards Advisory Council
GASB Government Accounting Standards Board
AICPA American Institute of Certified Public Accountants
EITF Emerging Issues Task Force
SEC Securities Exchange Commission
Organization Organizations
FinancialAccountingFoundation
FASB
FinancialAccounting StandardsAdvisoryCouncil
GASB
GovernmentalAccounting StandardsAdvisoryCouncil
Staff andTask Force
FASB• Develops broad accounting concepts and
financial reporting standards GAAP
• Although SEC has the authority to be the national standard setter, their policy states that FASB will officially develop these standards
• Focus is on relevance, reliability, comparability and consistency
Decisions – How Topics are Added
Factors to be considered
• Pervasiveness of the issue—troublesome issues • Alternative solutions - solutions to improve financial
reporting• Technical feasibility - developing a technically sound
solution• Practical consequences - a generally accepted solution• Convergence possibilities - opportunity to amalgamate
standards• Cooperative opportunities - support for other standard
setters• Resources – adequate resources from FASB or others to
complete the project
Due Process for FASB
• Receives request/recommendations for new projects• Board meetings to discuss requests/recommendations• Take vote to decide whether to accept – majority wins• Deliberate issue at Public Board meeting• Board issues exposure draft• Public roundtable on review of Exposure Draft• Board evaluates public comments, and re-deliberates at
public Board meeting• Statement of Interpretations issued if majority votes to
approve standard
Accounting Organization and Standard Setting Process
International
International Organization Structure
IASC
IFRICResolves conflicting
interpretations
SACProvides advice to IASB
IASBSets accounting standards
International Accounting Organizations
IASC International Accounting Standards Committee
IFRIC International Financial Reporting Interpretations Committee
IASB International Accounting Standards Board
SAC Standards Advisory Council
IASB
• Members appointed by International Accounting Standards Council (IASC)
• Solely responsible for setting international accounting standards
• Meetings with the SAC, IFRIC, and IASB working groups to work on agenda items
• Use a “comply or explain” approach to standard setting
IASB 6 Step Process
1. Set the Agenda2. Project Planning3. Development and Publication of Discussion
Paper4. Development and Publication of Exposure
Draft5. Development and Publication of an
International Financial Reporting Standard (IFRS)
6. Procedures after an IFRS is issued
Enforcement of US and International Standards
• National commissions used to ensure that publicly available financial reporting information is compliant
• National standard setters are involved in the standard setting process
• Countries responsibility to ensure that companies are in compliance
Principle vs. Rule Based
Rules-Based Accounting
• Proliferation of rules
• Many complaints that the rules are too detailed and too complex
• Too difficult to stay current for both preparers and auditors
• ‘Check-box’ mentality
• Too many exceptions
Principle-Based Accounting
• Requires professional judgment
• Exercise in good communication; more than just compliance
• Reduction of form-over-substance accounting
Fewer exceptions
Fewer conflicting rules
• Simpler standards
• IASB and other major standards already using the principles
International Accounting Standards (IAS)
• Advantages Help firms compete on equal terms to raise capital on
the world markets
Financial statements that better represents the state of a company Only in certain cases
Decrease in litigation for the US
Increase in comparability and consistency
Reduces the reporting costs for multi-national firms
International Accounting Standards (IAS)
• Disadvantages Increased litigation
Reduction in comparability and consistency
Different good-faith judgments
Different interpretations
How many disclosures will there be?
Harder to enforce a principles based systems because of the different interpretations
Can take more time (already long)
National differences with the International Community
Challenges of IAS
• National taxation
IAS primarily serves the world markets which may have different priorities than the taxation authorities
• Who is going to police the IAS?
• Principle-based standards leading to rules-based in order to increase consistency and comparability
• US must be a part of this initiative for it to be a true IAS (largest capital market)
• SEC will not endorse IAS if not as rigorous as US GAAP
SEC Staff Study – July 25, 2003• Recommends accounting standards should be principle-
based standards with the following characteristics:
Improved and consistently applied conceptual framework
Clearly stated accounting objective of the standard
Sufficient detailed and structured for it to be operationalized consistently
Minimal use of exceptions to the standard
Avoiding the use of percentage tests
Compliant, but not intent of standard
• FASB has already started applying the ‘objectives-oriented’ approach on a prospective basis
SEC Staff Study – July 25, 2003• Operationalizing will take time requiring the following:
Newly developed standards that articulate the objectives and avoids exceptions, bright-lines, and excessive details
Addressing the deficiencies and inconsistencies of the framework
Ensuring new standards are in-line with the conceptual framework
Addressing current standards that are rules-based
Redefining the GAAP hierarchy
Continuing to converge the US, foreign, and international standards
Harmonization
What is Harmonization?
• Harmonization refers to the convergence between differing accounting standards
• For Canada this means harmonizing Canadian, US and International rules
• For the USA this mean adoption of a more principles based approach
Why is Harmonization Important?
• Daimler-Benz DM 1.1 billion difference: January - June 1993
DM 168 million PROFIT under German GAAP DM 949 million LOSS under US GAAP Difference attributable to variation in accounting standards
• Roche Group estimated it would save US$100 million annually by producing one set of books
• Harmonization is one of the most important, dynamic accounting topics today (really!)
• It is a priority of FASB, IASB and AcCSB
Benefits of Harmonization
• Lowered costs of reporting for international organizations
• Single standard improves understand-ability for users
• Compatibility of reports in different counties• High quality standards for countries that can not
create their own standards
Disadvantages of Harmonization
• Lowering of standards to a compromise position for jurisdiction with highest levels
• High costs of changing from current standards
• Differing legal and tax backgrounds make common rules less relevant
• Does it benefit users?
Australian Experience
• Australia has made an exerted effort to adopt IAS
• Political positioning from ASE to accept IAS for ASE’s financial gain
• NO feedback from users as to advantages from adoption of IAS
Australian vs International Standards
International Standard
OZ Standards
Options for Canada
1. Adopting US GAAP and eliminating CDN-GAAP
2. Adopting IAS and eliminating CDN-GAAP
3. Maintaining CND-GAAP
4. Abandon the field and let the market decide
5. Status Quo: wait until the market is more clear
Position of Loblaws
• Loblaws responded to an AcSB request for comment on the direction Canada should take.
• Pushing for AcSB to actively push international accounting standards with FASB and IASB
• Concerned about US style rules• Concerned about differential rules for
private and public companies
Canadian Direction
• AcSB published its strategic plan Jan 4, 2006• Approaching different strategies for different
users: publicly traded companies, private companies, not-for-profit
Public companies: Reporting rules will converge with IFRS CDN GAAP will cease to exist AcSB will work with IASB and FASB to eliminate
differences between US GAAP and IFRS
Canadian Direction
Not-Publicly Accountable Enterprises: Need to determine who the “users” of financial reports
are Recognizes that needs are very different from public
companies No clear strategy on how to proceed Continuation of Canadian GAAP
Not For Profit Enterprises Will follow same rules as for-profit companies Will research how to create rules Will develop standards specific to NFPE’s
Conclusions