International Harmonization of Financial Reporting

  International Harmonization of Financial Reporting

  _{FAKULTAS EKONOMI DAN BISNIS} EBA 604 AKUNTANSI PERTEMUAN #3

  

International Harmonization of Financial

Reporting

Chapter Topics

• Harmonization: Defnition, pros and cons, eforts toward.
• International Accounting Standards Board (IASB).
• Other organizations involved in Harmonization.
• Principles-based vs. Rules-based accounting.
• IASB Framework and IFRSs.
• Use of and support for IFRSs.
• Convergence of IAS and U.S. GAAP.

  

International Harmonization of Financial

Reporting

Learning Objectives 1. Explain the meaning of harmonization.

  

2. Identify the arguments for and against

international

harmonization of accounting standards.

  3. Discuss major harmonization eforts.

  

4. Explain the principles-based approach

used by the International Accounting Standards Board (IASB).

  

International Harmonization of Financial

Reporting

Learning Objectives

  5. Discuss the IASB’s Framework and Standards related to the adoption of International Financial Reporting Standards (IFRSs) and presentation of fnancial statements.

  6. Examine the support for, and the use of, IFRSs across countries.

  7. Describe the IASB/FASB convergence project.

Harmonization What is harmonization?

  Harmonization -- the process of

  increasing the level of agreement in accounting standards and practices between countries.

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

Harmonization Harmonization • Is diferent from Standardization

• Harmonization allows for diferent standards in diferent countries as long as there are not logical conficts.
• Standardization involves using the same standards in diferent countries.

Harmonization: The Pros and Cons Pros:

• Expedite the integration of global capital markets and make easier the cross-listing of securities.
• Facilitate international mergers and acquisitions.

• • Reduce investor uncertainty and the cost of

  capital.
• Reduce fnancial reporting costs.
• Allow for easy adoption of high-quality standards by developing countries.

Harmonization: The Pros and Cons Cons:

• Signifcant diferences in standards currently exist.

• • The political cost of eliminating diferences.

• Overcoming “Nationalism” and traditions.
• Perhaps it will not provide signifcant benefts.
• Will cause “Standards Overload” for some frms.
• Diverse standards for diverse places is acceptable.

Harmonization Eforts Organizations involved

• • Association of South East Asian Nations

  (ASEAN).
• United Nations (UN) / European Union (EU).

• • International Organization of Securities

  Commissions (IOSCO).

• • International Federation of Accountants

  (IFAC).
• IASB and FASB.

Harmonization Eforts Organizations involved

• IOSCO – is essentially the international equivalent of the U.S. Securities and Exchange Commission (SEC).
• IFAC – is similar, at the international level, to the American Institute of Certifed Public Accountants (AICPA).
• IASB – is essentially the international

Harmonization Eforts

  IOSCO

• Works to achieve improved market regulation internationally.
• Works to facilitate cross-border listings.
• Advocates for the development and adoption of a single-set of high quality accounting standards.

Harmonization Eforts

  IFAC

• Works to develop international standards of auditing, ethics, and education.
• Began International Forum on

  Accountancy Development (IFAD) to enhance the accounting profession in emerging countries.

• Started the Forum of Firms to raise

Harmonization Eforts EU

• Has worked to harmonize accounting standards within the EU, primarily by way of two directives.
• Fourth Directive – a set of comprehensive accounting rules built on the principle of a “true and fair view.”
• Seventh Directive – requires consolidated fnancial statements for company groups of a certain size.

Harmonization Eforts

  IASB

• Preceded by the IASC (International Accounting Standards Committee).
• Works toward harmonization of international accounting standards.
• IASC was established in 1973.

Harmonization Eforts

  IASB

• 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 on global standard-setting rather than harmonization per se.

Harmonization Eforts

  IASB – Major Initiatives Comparability Project

• Comprehensive review of existing IAS (International Accounting Standards).
• Begun in 1989.
• In order to increase rigor of IAS.

Harmonization Eforts

  IASB – Major Initiatives

  IOSCO Agreement

• Establishment of a core set of 30 accounting standards.
• Standards agreed upon by IOSCO and IASC.

Harmonization Eforts

  IASB – Revised Structure

The restructured IASB is overseen by the

  IASC Foundation which also oversees:

• The International Financial Reporting Interpretations Committee (IFRIC).
• The Standards Advisory Council (SAC).
• Also, IFRSs are subject to due process and the IASC Foundation now periodically reviews its constitution.

  Principles-Based Approach to Accounting Standard Setting

  IASB Perspective

• IASB attempts to follow a Principles- Based approach to standard setting.
• As such accounting standards are grounded in the the IASB Framework.

  Principles-Based Approach to Accounting Standard Setting A Principles-Based approach

• Represents a contrast to a Rules- Based Approach.
• Attempts to limit additional accounting guidance (e.g., FASB EITFs, FASB Interpretations).
• Is designed to encourage professional judgment and discourage over-reliance on detailed

  Principles-Based Approach to Accounting Standard Setting Support for a Principles-Based Approach from outside the IASB

• FASB – has published a supportive proposal entitled, “Principles-Based Approach to U.S. Standard Setting” (www.fasb.org/proposals/principles- based_approach.pdf).
• SEC – has recommended adoption of this approach (www.sec.gov/news/studies/principlesbaseds tand.htm).

  IASB Framework and

IFRSs

  IASB Framework

• Provides the basis for fnancial statements presented in accordance with IFRS.
• Similar to the relationship between

  U.S. GAAP fnancial statements and the FASB Conceptual Framework.

  IASB Framework and

IFRSs

  IASB Framework

• The objective and underlying assumptions of fnancial statements.
• Qualitative characteristics of information.
• Defnition, recognition, and measurement of elements in fnancial statements.
• Concepts of capital maintenance.

  IASB Framework

  IASB Framework and

IFRSs

• Possesses objective and underlying assumptions of fnancial statements.
• Primary objective is to provide information useful to decision making.
• Underlying assumptions include accrual-basis and going concern.

  IASB Framework and

IFRSs Qualitative characteristics of information

• Understandability – should be understandable to people with reasonable fnancial knowledge.
• Comparability – allows for meaningful comparisons to fnancial statements of previous periods and other companies.

  IASB Framework and

IFRSs Qualitative characteristics of information

• Relevance – useful for making predictions and confrming existing expectations.
• Reliability – free from bias (neutral) and represents that which it claims to represent (representational faithfulness).

  IASB Framework and

IFRSs

  

Elements of Financial Statements

• Defnition – assets, liabilities, and other fnancial statement elements are defned.
• Recognition – guidelines as to when to recognize revenues and expenses.
• Measurement – various bases are allowed, historical cost, current cost, realizable value, and present value.

  IASB Framework and

IFRSs

  

Concepts of Capital maintenance

Financial capital maintenance

• One approach to income measurement.
• Net income represents the increase in net fnancial assets, excluding owner transactions.
• The approach in U.S. GAAP.

  IASB Framework and

IFRSs

  

Concepts of Capital maintenance

Physical capital 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

  Presentation of Financial Statements (IAS 1)

This standard provides guidance

in the following areas

• Purpose of fnancial statements – to provide decision-useful information.
• Components of fnancial

  statements – balance sheet,

  statements of income, cash fows, changes in equity, and notes to the

  Presentation of Financial Statements (IAS 1)

• • Fair presentation – the overriding principle of

  fnancial statement presentation.
• Accounting policies
• – Should be consistent with all IASB standards.
• – When specifc guidance is lacking, use standards on similar issues, and defnitions of the fnancial statement elements.

  Presentation of Financial Statements (IAS 1) Basic principles and assumptions • Reiteration of underlying assumptions.

• – Accrual basis/going concern/comparability.

  Structure and Content of Financial Statements

• Provides information on presentation format: – Current/noncurrent.
• – Items to be included on face of fnancial statements.
• – Content of notes.

  First Time Adoptions of IFRSs (IFRS 1)

• Provides guidance for frst time adoption.
• Much used in 2005, particularly in EU.
• Requires compliance with all efective IFRSs.
• Allows exemptions when costs deemed to outweigh benefts.

Use of IFRSs Evidence of support for IFRSs

• • Adoption by the EU – public companies in the

  EU were required to begin using IFRSs in 2005.
• IOSCO has endorsed IFRSs for cross-listings.

• • Many developing nations have adopted IFRSs.

• Some countries disallow IFRSs for domestic frms but allow foreign companies to use them.
• U.S. is a major exception, does not allow use of IFRSs.

IASB/FASB Convergence The Norwalk Agreement • Reached in 2002

• Between the IASB and FASB.
• To work toward accounting standards convergence.

IASB/FASB Convergence

  

FASB’s key initiatives in the Norwalk

Agreement

• Joint projects – boards will work together to address some issues (e.g., revenue recognition).
• Short-term convergence – to remove diferences between IFRSs and U.S. GAAP for issues where convergence is deemed most likely.
• IASB liaison – IASB member in residence at FASB.

IASB/FASB Convergence

• Monitoring IASB projects – FASB monitors IASB projects of most interest.
• Convergence research project – identifcation of all major diferences between IFRSs and U.S. GAAP.
• Convergence potential – FASB assesses agenda items for possible cooperation with IASB.

  

SEKIAN

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TERIMA KASIH