International Accounting, Chapter 8 ch 08

International Accounting, 6/e

Frederick D.S. Choi

Gary K. Meek

Chapter 8: Global Accounting

and Auditing Standards

Learning Objectives



Define and understand the distinction between “harmonization”

and “convergence” as they apply to accounting standards.



State the pros and cons of adopting international accounting

standards.



Understand what is meant by “reconciliation” and “mutual

recognition” of different sets of accounting standards.



Identify the six organizations that have leading roles in setting

international accounting standards and promoting international

accounting convergence.



Describe the structure of the International Accounting

Standards Board and how it sets International Financial

Reporting Standards.



Understand the major provisions of the U.S. Sarbanes-Oxley

Standardization, Harmonization,

and Convergence



Standardization

 Rigid, narrow set of rules  One-size-fits-all approach

 Less flexible than harmonization or convergence  Not the current thinking



Harmonization

 Standards that are compatible – no logical conflicts

 Means the elimination of differences among existing accounting standards



Convergence

 Means the gradual elimination of differences in accounting standards  But might also involve a new accounting treatment not in any current

standard

 Involves cooperative efforts of IASB and national standard-setters  Now the preferred term over harmonization

A Survey of International

Convergence



Advantages of international convergence



Investor understanding and confidence is improved.



Investor decision making is improved.



Capital is allocated more efficiently around the world.



Financial risk and cost of capital are reduced.



Strategic decision making in mergers and acquisition is improved.



Criticisms of international standards



Solution is too simple for such a complex problem.



Strips accounting of its flexibility to adapt to different situations.



Challenges national sovereignty.



A tactic of large accounting firms to expand their market share.



May create standards overload.

A Survey of International

Convergence (contin)



Reconciliation and mutual recognition

 Reconciliation

 Financial statements based on home GAAP, but net income and stockholders’

equity reconciled to another GAAP.

 This is the SEC requirement for foreign filers.

 Less costly than preparing complete financial statements based on another

GAAP.

 But a summarized, incomplete picture.

 Mutual recognition (reciprocity)

 Jurisdictions accept financial statements based on each other’s GAAP.  Does not improve comparability.

 Can create an unlevel playing field.



Evaluation

 Arguments on both sides have merit.

Some Significant Events in the History

of International Accounting Standard

Setting



1959 – Jacob Kraayenhof issues first significant proclamation that work

on international standards should begin



1973 – IASC created



1977 – IFAC founded



1978 – EU Fourth Directive issued



1987 – IOSCO resolves to promote common, international accounting

and auditing standards



1989 – IASC issues Exposure Draft 32



1995 – IASC and IOSCO agree on core standards work plan



1995 – EU adopts New Accounting Strategy



2000 – IOSCO accepts IASC’s core standards



2001 – EC proposes that EU-listed companies use IAS by 2005



2001 – IASB succeeds IASC

International Accounting

Standards Board



Overview

 Independent private-sector standard-setting body

 Objectives

1. To develop, in the public interest, a single set of high-quality,

understandable, and enforceable global accounting standards that require high-quality, transparent, and comparable information in financial statements and other financial reporting to help participants in the world’s capital

markets and other users make economic decisions

2. To promote the use and rigorous application of those standards

3. In fulfilling the objectives associated with (1) and (2), to take account of, as

appropriate, the special needs of small and medium-sized entities and emerging economies

4. To bring about convergence of national accounting standards, and

International Accounting Standards and International Financial Reporting Standards to high-quality solutions

 Represents accounting organizations from approximately 100 countries  Standards follow fair presentation and full disclosure

International Accounting

Standards Board (contin)



IASC’s core standards and the IOSCO

(International Organization of Securities

Commissions) agreement



IOSCO agreed to IASC’s core standards plan in

1995



IOSCO’s agreement was a major boost to IASC’s

credibility



Core standards completed in 1998

International Accounting

Standards Board (contin)



The new IASB structure



IASC was restructured as IASB in 2001



Bodies



Trustees

 Representatives from entire world  Appoints members of Board

 Raises funds and oversees IASB activities



IASB Board

 Issues International Financial Reporting Standards  14 members – 12 full-time and 2 part-time

 Actively partners with national standard setters to promote convergence  Follows due process in setting IFRS



Standards Advisory Council

 Advises IASB Board on agenda and priorities



International Financial Reporting Interpretations Committee

International Accounting

Standards Board (contin)



Recognition and support for IASB



IFRS are widely accepted around the world



Significant events that boosted IASB’s credibility



IOSCO endorsement of (IASC’s) work plan



EC proposal that EU-listed companies use IFRS by 2005



Norwalk Agreement between IASB and FASB



SEC response to IFRS



Supports work of IASB but does not yet accept IFRS filings by

foreign companies



2005 – Issued “roadmap” setting out the steps for eliminating

requirement to reconcile IFRS to US GAAP

European Union



Overview



Company law harmonization designed to

integrate European financial markets



European Commission has full enforcement

European Union (contin)

 Fourth, Seventh, and Eighth Directives

 Fourth Directive (1978)

 _{Broad, comprehensive set of accounting rules}

 _{Valuation rules}

 _{Disclosure requirements}

 _{Format rules for financial statements}

 _{Individual company accounts}

 Applies to public and private companies  True and fair view is overriding requirement  Requires audits of financial statements

 Seventh Directive (1983)

 _{Consolidated financial statements}

 _{Required for groups of companies above a certain size}

 Specifies

 _{Note disclosures}  _{Director’s report}

 Requires audits of financial statements

 Member states have wide latitude in incorporating provisions

 Eighth Directive (1984)

 _{Specifies qualifications for statutory auditors}

 _{Revised in 2006 and now called Statutory Audit Directive}

 _{Requirements for appointment and removal of auditors}  _{Audit standards}

 _{Continuing professional education}  _{Auditor rotation}

European Union (contin)



Have EU harmonization efforts been successful?



Yes

:



Directives improved financial reporting practices and

brought about harmonization



Directives accelerated accounting development in many EU

countries



No

:



EU countries mostly adapted the new rules to their existing

ones



Enforcement was uneven

European Union (contin)



The EU’s new approach and the integration of European financial

markets



Requirement that EU companies listed on regulated markets

prepare consolidated financial statements using IFRS



To become legally binding, IFRS must be adopted by the

European Commission



European Financial Reporting Advisory Group (EFRAG)

 Provides technical review and opinion of the IFRS



Standards Advice Review Group

 Assesses whether EFRAG’s advice is well balanced and objective



Accounting Regulatory Committee

 Recommends that the IFRS be adopted (or not)

 Is the IFRS compatible with European directives?

 Is the IFRS conducive to the European public interest?



European Commission

International Organization of

Securities Commissions (IOSCO)



Securities regulators from over 100 countries



Responsible for over 90 percent of global securities markets



Objectives of member agencies

 To cooperate together to promote high standards of regulation in order to

maintain just, efficient, and sound markets

 To exchange information on their respective experiences in order to promote

the development of domestic markets

 To unite their efforts to establish standards and an effective surveillance of

international securities transactions

 To provide mutual assistance to promote the integrity of the markets by a

rigorous application of the standards and by effective enforcement against offenses



Extensive work on international accounting and disclosure standards



Cooperates with IASB

International Federation of

Accountants

 Worldwide organization representing the accountancy profession

 160 member organizations  120 countries

 2.5 million accountants

 Mission

 To strengthen the accountancy profession worldwide

 To contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards, furthering the international convergence of such standards

 To speak out on public interest issues where the profession’s expertise is most relevant

 Aim is to harmonize and converge auditing standards and professional practice worldwide

 Auditing adds credibility to external financial reports

 High-quality auditing standards are necessary to ensure that accounting standards are rigorously interpreted and applied

 If auditor training and audit standards vary, the reliability of financial statements will also vary

International Federation of

Accountants (contin)



Organizational structure

 IFAC council elects the IFAC board

 IFAC board sets policies and oversees IFAC operations

 Public Interest Oversight Board provides additional oversight

 Work done through standard-setting boards and standing committees

 Standard-setting boards

 International Accounting Education Standards Board  _{International Auditing and Assurance Standards Board}

 _{Issues International Standards on Auditing}

 International Ethics Standards Board for Accountants  _{International Public Sector Accounting Standards Board}

 Standing committees

 _{Compliance Advisory Panel}  Developing Nations Committee  _{Nominating Committee}

 _{Professional Accountants in Business Committee}  Small and Medium Practices Committee

UN Intergovernmental Working Group of Experts

on International Standards of Accounting and

Reporting (ISAR)



Only intergovernmental working group devoted to

corporate accounting and auditing



Objective



To promote the transparency, reliability, and comparability of

corporate accounting and reporting



To improve disclosures on corporate governance by

enterprises in developing countries and countries with

economies in transition



Discusses and publishes worldwide best practices



Recent initiatives



Corporate governance



Accounting by small and medium-sized businesses

Organization for Economic

Cooperation and Development

(OECD)



International organization of 30 (mostly

industrialized) market-economy countries



Promotes good governance in public and

private sectors

Conclusion



Debate is no longer

whether

to converge, nor

even

how

to converge



Financial reporting systems are converging,

as international capital markets become more

investor oriented



International Accounting Standards Board is

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