international harmonization

7/28/2019 International Harmonization

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International Harmonization ofFinancial Reporting


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Summary of Diversity Research

Findings as of 1995

Micro/macro, code-law and common law, were foundto consistently be highly correlated with patterns of

financial reporting around the world. Culture appeared to play an important role

everywhere, but what characteristics dominatedremained unclear.

Inflation and trading relationships, in some countries,seem to matter a great deal.

Economic variables were implicated but theimportance of their role was unclear.


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These findings left many questions

unanswered, including the following:

Could diversity be reduced throughout theworld? If so, how?

Would it be wise to reduce diversity?

If so, how much? What are the costs vsbenefits of imposing upon the business world

a reporting system with far less diversity? Would it happen by itself naturally?

How could mandated changes be enforced?


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Beginning in the 1970s:

Efforts began to reduce financial reporting diversity.

These early fledgling efforts were met with great

resistance.

Most of the early effort began in Europe, as an

extension of the dream of many for economic and

political unity on the European continent.

The International Accounting Standards Committee

(IASC) was also formed by professional accounting

groups in 1973.


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In the 1980s:

Progress, though incomplete and imperfect,was made in Europe. The EU began to endorse changes in reporting

practices.

The 4th and 7th directives were implemented.

EU directives were given the force of law.

For the first time, some reporting diversity,especially in the extremes, was reduced.


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On the other hand:

The IASC floundered with a small staff and little

support.

It mostly issued low level, anything goes standards

copied from others.

Many countries, regardless of how economically

significant, around the world were equally

represented on the IASC.

Most major economic players ignored the IASC.


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In the 1990s:

Berlin wall falls, and not long after, the USSRcollapses with it.

US capital markets take off, continuing anunprecedented bull run that drives share prices up,on average, over 1500% from 1982-1999.

Many economies around the world go into steepdecline (e.g., Japan and Russia).

Bank capital becomes scarce. The Asian crisis occurs in 1998, sparked by the

collapse of Indonesias currency, markets andeconomy.


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In the wake of these events:

American (corporate?) influence expanded

dramatically.

The importance of equity financing grew and shaped

business interests around the world.

Currency manipulations and shifts reached

unprecedented levels as attempts were made to

stabilize the world economy.

The concept of harmonized financial reporting was

given new credibility and support.


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What is harmonization?

Harmonizat ion-- the process of increasing thelevel of agreement in accounting standards and

practices between countries.


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Harmonization

The two levels of Harmonization

Harmonization in accounting standards,which is increased agreement in accounting

rules.

Harmonization in practice, which is increased

agreement in actual accounting practices. Harmonization in standards may or may not

result in harmonization in practice.


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Harmonization

Harmonization

Is different from Standardization. Harmonization allows for different standards

in different countries as long as there are not

logical conflicts.

Standardization involves using the samestandards in different countries.


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Some of the Significant Harmonization

Efforts of the 1990s and 2000s:

IOSCO

Worked to achieve improved marketregulation internationally.

Worked to facilitate cross-border listings.

Advocated for the development and adoption

of a single-set of high quality accountingstandards.


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The EU

The EU achieved in monetary union in a

phased-in fashion between 1999-2002. The EU also added many new members

from Eastern Europe.

The EU stopped making separate standards.

As of 2005, it requires members to useIFRSs.


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Harmonization Efforts

IASB

Preceded by the IASC (InternationalAccounting Standards Committee).

Works toward harmonization of international

accounting standards.

IASB was created in 2001.


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The Question of Credibility

The crucial problem was how to be effective.

SEC indicated an international standard-setter would have to be FASB-like, i.e.,

driven by expertise, not geography.

EU wanted geographical representation to be

emphasized.

IASB decided to be expert-driven.


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History of IASB Why now (2001)?

1987&89- Beginning of effective attempts at IASC to

reduce flexibility. IOSCO lobbies for common

standards. E32 issued.

1995- IOSCO demands acceptable set of standards.

Agreement between IASB and IOSCO that IASs can

be used in cross-border listings as an alternative to

national standards IF core standards were created.

Core standards are completed in 1998.


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Major Players Jump on Board

1998-Germany allows internationallyrecognized rules for consolidatedstatements.

2000-IOSCO recommends acceptance of30 IAS core standards for cross-border

listings. 2005- EU makes IASs compulsory for all

firms preparing consolidated statements.


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IASB- Structure and Process

Comprised of 14 members (12 full, 2 part-

time). 7 members are liaison with a national board.

Standard development process is open.

Standards are principles-based.

Since establishment of IASB, focus is onglobal standard-setting rather than

harmonizationper se.


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IASB Structure and Process

Up until 2000Issued IASs

After 2000- Issues IFRSs (Intl financialreporting standards)

Similar process to FASB- in the sunshine

due process.

SIC- final step- interprets the standards.


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IASB- Structure and Process

Publication of an exposure draft and/or

standard-requires 8 of the 14 membersapproval.

Financed mostly by selling publications.

At end of 1998, IASB found itself in

competition with FASB, as many firms soughtto be listed on US Exchanges.


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Geographical Backgrounds of IASC

Trustees- 2001-2002

0

1

2

3

4

5

Number

US

Japan

AustraliaCanada

S Africa

France

Germany

Switz

Brazil

China

Denmark

Italy


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IASB Members- 2001

0

1

2

3

4

5

Number

US

UK

Australia

Canada

S Africa

France

GermanyJapan

Switz


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Companies referring to the use of IAS

standards in 2001

0

10

20

30

40

5060

70

# of companies

Austria

Bahrain

ChinaCyprus

Czech Rep

Denmark

Switz

France

Germany

Hong Kong

Hungary

Kuwait


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IASB-Limitations

No Power to Enforce or require use of

standards. Result-Each country individually decides

whether to accept IASs.

Major holdouts that still do not accept IAS

standards- US, Canada, and Japan.


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Principles-Based Approach to

Accounting Standard Setting

IASB Perspective

IASB attempts to follow a Principles-Basedapproach to standard setting.

As such accounting standards are grounded

in the IASB Framework.


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Principles-Based Approach to

Accounting Standard Setting

A Principles-Based approach

Represents a contrast to a Rules-BasedApproach.

Attempts to limit additional accounting

guidance (e.g., FASB EITFs, FASB

Interpretations). Is designed to encourage professional

judgment and discourage over-reliance on

detailed rules.


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IASB Framework and IFRSs

IASB Framework

Similar to the relationship between U.S.GAAP financial statements and the FASB

Conceptual Framework.


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IASB Framework Provides the basis for financial statements presented

in accordance with IFRS.

Includes: The objective and underlying assumptions of

financial statements. Qualitative characteristics of information. Definition, recognition, and measurement of

elements in financial statements. Concepts of capital maintenance.


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IASB Framework

The objective and underlying assumptionsof financial statements: Primary objective is to provide information useful

to decision making.

Underlying assumptions include accrual-basis

and going concern.


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Qualitative characteristics of

information Understandabi l i ty should be

understandable to people with reasonable

financial knowledge.

Comparabi l i ty allows for meaningfulcomparisons to financial statements of

previous periods and other companies.


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Qualitative characteristics of

information Relevance useful for making predictions

and confirming existing expectations.

Reliabi l i ty free from bias (neutral) and

represents that which it claims to represent(representational faithfulness).


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Elements of Financial Statements

Defini t ion assets, liabilities, and otherfinancial statement elements are defined.

Recogni t ion guidelines as to when to

recognize revenues and expenses.

Measurement various bases are allowed,historical cost, current cost, realizable value,

and present value.


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Concepts of Capital maintenance

Financial cap ital maintenance One approach to income measurement.

Net income represents the increase in net

financial assets, excluding owner

transactions. The approach in U.S. GAAP.


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Concepts of Capital maintenance

Phys ical capi tal maintenance Another approach to income measurement.

Net income represents increase in physical

productive capacity.

Excluding owner transactions. Requires current costs for measurement of

certain physical assets.


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IASB/FASB Convergence

The Norwalk Agreement

Reached in 2002. Between the IASB and FASB.

To work toward accounting standards

convergence.

Learning Objective 7


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FASBs key initiatives in the NorwalkAgreement

Joint pro jects boards will work together toaddress some issues (e.g., revenue recognition).

Short-term convergence to remove differencesbetween IFRSs and U.S. GAAP for issues whereconvergence is deemed most likely.

IASB l iaison IASB member in residence at FASB.



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Moni tor ing IASB pro jects FASB monitors

IASB projects of most interest.

Convergence research p roject

identification of all major differences between

IFRSs and U.S. GAAP.

Convergence po tent ial FASB assessesagenda items for possible cooperation with

IASB.


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