FINANCIAL ACCOUNTING

RICHARD G. SCHROEDER

MYRTLE W. CLARK

JACK M. CATHEY

THEORY AND ANALYSIS:

TEXT AND CASES11TH EDITION

CHAPTER 3INTERNATIONAL ACCOUNTING

International Accounting Standards

Financial accounting is influenced by the environment in which it operates

Companies develop financial reports directed at their primary users Previously most were residents of the same country as the

corporation Transnational financial reporting has become more commonplace

because of the European Union, GATT and NAFTA

U. S. companies must be able to compete in global markets with transnational financial reporting

International Business Accounting Issues A company’s first exposure to

international accounting is frequently the result of a purchase or sale

Problems: 1 Exchange gains or losses 2 Obtaining credit information3 Evaluation of financial statements

Next step may be to open an international division Another issue is raising capital in foreign markets

Must prepare financial statements in a format acceptable by appropriate securities market

Factors Influencing the Development of Accounting Systems:

Level of Education

Political System

Legal System

Economic Development

Influences on the Development of Financial Reporting

Type of economy

Agricultural Resource Based Tourist Based

Manufacturing

Legal System

CodifiedCommon Law

Political System

DemocraticTotalitarian

Nature of Ownership

Private Enterprise Socialist

Communist

Influences on the Development of Financial Reporting

Growth Pattern of economy

GrowingStable

Declining

Social ClimateStability of currency

Sophistication of managementSophistication of financial community

Existence of accounting legislationEducation System

Approaches to Preparing Financial Statements for Use in Other Countries:

1 Same to all2 Translate language3 Translate language and currency4 Two sets5 World-wide standards

The International Accounting Standards Committee

The preparation of financial statements for foreign users under option #5 is being increasingly advocated

IASC Formed in 1973 to

aid in this process

International Accounting Standards Board Replaced IASC in

2001

Standard Setting by the IASC

Original intent:

Avoid complex details

Concentrate on basic standards

Steps in the process

Similar to FASB

1 Steering Committee

1 Identify issues and prepare point outline

1 Board prepares comments

1 Steering Committee prepares final Statement of Principles

1 Exposure Draft

1 Steering Committee reviews comments and prepares final standard

Standard Setting by the IASC

Two treatments1 Benchmark - point of reference2 Alternative

Improvements Project 2003 Removed some of the existing alternative accounting

treatments  Where an IAS retains alternative treatments

IASB removed references to 'benchmark treatment' Now termed 'alternative treatment'

Using descriptive references ‘Cost model' ‘Revaluation model' 

Restructuring the IASC

In its early years, IASC acted mainly as a harmonizer Recently, it has begun to combine that role with the role of a

catalyst

Harmonizer Catalyst

Coordinator of national initiatives

Initiator of new work at national level

Restructuring the IASB

Future IASB role as catalyst and initiator should become more prominent

Important for the IASB to focus objectives more precisely, as follows: 1. To develop international accounting standards that require high-

quality, transparent, and comparable information that will help participants in capital markets and others to make economic decisions; and

2. To promote the use of international accounting standards by working with national standard setters.

Restructuring the IASB

Structural changes needed So that IASB can anticipate the new challenges facing it and meet those

challenges effectively.

Issues that need to be addressed: 1. Partnership with national standard setters.

IASB should enter into a partnership with national standard setters So that IASB can work together with them to accelerate

Convergence between national standards And international accounting standards around solutions requiring high-

quality, transparent, and comparable information That will help participants in capital markets and others to make

economic decisions.

Restructuring the IASB

2. Wider participation in the IASB Board. A wider group of countries and organizations should take part in the

IASB Board Without diluting the quality of the Board's work

3. Appointment. The process for appointments to the IASB Board and key IASB

committees should be the responsibility of a variety of constituencies

Those appointed must be competent , independent, and objective.

Restructuring the IASB

2001: Responsibility for international standards-

setting was transferred to the to the International Accounting Standards Board (IASB)

Restructuring the IASB

The new structure:The IASC FoundationThe International Accounting

Standards BoardThe International Accounting

Standards Advisory Council International Financial Reporting

Interpretations Committee

IASB Structure

IASC Foundation22 Trustees Appoint, Oversee, Raise Funds

IFRS Interpretations Committee

(14 members)

Board: 16 (Maximum 3 part-time)Set Technical Agenda. Approve Standards,

Exposure Drafts, & Interpretations

IFRS Advisory Council

Approx. 40 members

Working GroupsFor Major Agenda Projects

Appoints

Reports To

Advises

KEY:

Monitoring BoardApprove and Oversee Trustees

Revising the IASB’s Constitution Key issues to be reviewed:

1. Whether the objectives of the IASC Foundation should expressly refer to the challenges facing small and medium-sized entities (SMEs)

2. Number of Trustees and their geographical and professional distribution

3. The oversight role of the Trustees 4. Funding of the IASC Foundation 5. The composition of the IASB 6. The appropriateness of the IASB's existing formal liaison

relationships 7. Consultative arrangements of the IASB 8. Voting procedures of the IASB 9. Resources and effectiveness of the International Financial

Reporting Interpretations Committee (UMC):10. The composition, role, and effectiveness of the SAC

The Uses of International Accounting Standards

IASC noted that its standards are used in a variety of ways:1 National requirements

2 Basis for national requirements

3 Benchmark to develop standards

4 By regulatory agencies

5 By companies

Also International Organization of Securities Commissions (IOSCO) looks to the IASC to provide standards that can be used in multinational securities offerings

Other Issues

Partnership with the IOSCO Generate standards acceptable to IOSCO

December 17, 2003 IASB published 13 revised International Accounting Standards Reissued two others Gave notice of the withdrawal of its standard on price level

accounting.

Revised and reissued standards mark near-completion of the IASBs Improvements project

2005: reaffirmed support and development of IFRS

IASB Annual Improvements ProjectJuly 2006Non-urgent issuesAmendments

The Use of IASC Standards

Adopted by approx. 120 countries EU Australia New Zealand

Planned option by others Israel Canada Japan China

US (?)

FASB Short-term International Convergence Project

The project scope is limited to those differences in which convergence around a high-quality solution would appear to be achievable in the short-term, usually by selecting between existing IFRS and U.S. GAAP.

The goal of this project is to remove a variety of individual differences between U.S. GAAP and International Financial Reporting Standards that are not within the scope of other major projects.

The Norwalk Agreement

12/18/2002: FASB and IASB held joint meeting in Norwalk, Connecticut Both standard setting bodies acknowledged…

Their commitment to the development of high-quality compatible accounting standards that can be used for both domestic and cross-border financial reporting.

Also committed to use their best efforts to make their existing financial reporting standards compatible as soon as practicable and to coordinate their future work programs to help ensure that once compatibility is achieved, it will be maintained.

The Norwalk Agreement

Both Boards agreed to:1. Undertake a short-term project aimed at removing a variety of

differences between U. S. GAAP and IFRSs.2. Remove any other differences between IFRSs and U. S.

GAAP that may remain on January 1, 2005 by undertaking projects that both Boards would address concurrently.

3. Continue the progress on the joint projects currently underway.4. Encourage their respective interpretative bodies to coordinate

their activities.

The Roadmap to Convergence 2005 agreement between FASB & IASB: Convergence best achieved with high-quality, common

standards Develop a new common standard rather than try to eliminate

differences Replace weaker standards with stronger standards

The Roadmap to Convergence 7 Original Milestones

1. Improvements to accounting standards2. Funding of IASCF3. Improved ability to use interactive data for IFRS reporting4. Improved education and training in the US5. Limited use in narrow group of companies6. SEC to determine in 2011 if mandatory adoption is feasible7. Mandatory use

2014 2015 2016

SEC staff report

July 2012 final reportHow can IFRS be incorporated into financial

reporting system for US issuers?Retain US GAAP while considering aspects of

convergence and endorsement? Options for US issuers

No final decision or recommendation

SEC staff report

Key findings1. US standards perceived as high quality

2. IFRIC should do more to address practice issues on timely basis

3. IASB should consider placing greater reliance on national standard setters

4. Global application of IFRS and cooperation among regulators could be improved

5. Overall design of governance structure reasonable

6. IFRS Foundation has made progress in developing a broad-based funding mechanism

7. US investors’ current understanding of IFRS varies significantly

SEC staff report

Identified 6 areas of consideration1. Sufficient development and application of IFRS for

US domestic reporting system

2. Independent standard setting for benefit of investors

3. Investor understanding and education regarding IFRS

4. Regulatory environment

5. Impact on issuers

6. Human capital readiness

International vs. GAAP Accounting Standards

Question: Should foreign companies be allowed to list their securities in United States markets

Form 20-F reconciliationsPressure on the SEC to accept

international accounting rules

SEC Staff Report

In 2011, the SEC staff issued a report analyzing the use of IFRS in practice. Focused on how the recognition and measurement requirements

of IFRS were applied in practice. Compared their observations for all companies to identify trends

on an overall basis as well as by country and industry.

Report is informational only and does not include conclusions or recommendations.

Found that company financial statements generally

appeared to comply with IFRS requirements.

SEC Staff Report Noted that apparent compliance should be

considered in light of the following two concerns: Transparency and clarity of the financial statements in

the sample could be enhanced Diversity in the application of IFRS presented

challenges to the comparability of financial statements across countries and industries. This diversity can be attributed to a variety of factors. Explicit options permitted by IFRS or owing to the absence of

IFRS guidance in certain areas. Noncompliance with IFRS.

IS Adopting IFRS Feasible?

Miller and Bahnson: SEC has already determined that adopting IFRS is

legally impossible. Allowing U.S. companies to choose between GAAP

and IFRS would be unworkable.

Selling: After Europe discovers that working with an IASB that

doesn’t include the United States is of little benefit, the next step will be for every other country with mature standard setting mechanisms to revert to their previous standard-setting procedures

Standards Overload

2009: IASB published IFRS for small to medium-sized businesses 95% of all companies Provide simplified

standards Now reviewing impact Another area of

difference with U. S. GAAP

Framework for the Preparation and Presentation of Financial Statements

Purpose - to set out concepts that underlie the preparation and presentation of financial statements by:1 Assisting the IASC in developing future standards2 Promoting harmonization of accounting standards3 Assisting national standard setters4 Assisting preparers in applying international standards5 Assisting auditors in forming an opinion as to

whether financial statements conform to international standards

6 Assisting users in interpreting financial statements prepared in conformity with international standards

7 Providing interested parties with information about the IASC’s approach to the formation of international accounting standards

Framework for the Preparation and Presentation of Financial Statement” The Framework specifies: Chapter 1: The Objective of General-

Purpose Financial Reporting This topic is discussed in Chapter 2 of this text. Chapter 2: The Reporting Entity The chapter on the Reporting Entity will be

inserted once the IASB has completed its redeliberations following the Exposure draft issued in March 2010.

Chapter 3: Qualitative Characteristics of Useful Financial Information

This topic is discussed in Chapter 2 of this text. Chapter 4: The Framework: The Remaining

Text

Underlying Assumption

Going concernIf that presumption is invalid, appropriate

disclosure and a different basis of reporting are required.

The Elements of Financial StatementsAssetLiabilityEquity Income ExpenseThe concept of recognition

– Probable– Measurable

The Concepts of Capital Maintenance

Concepts:1 Financial capital maintenance2 Physical capital maintenance

Selection of the measurement bases and the concept of capital maintenance chosen will determine the accounting model

IASC does not intend to prescribe a model

The IASB–FASB Financial Statement Presentation Project IASB and the FASB are undertaking a joint project to

develop a new joint standard for presenting financial statements.

Ultimately, the new standard will replace IAS No. 1 , “Presentation and IAS No. 7 ,

The main objective of this project is to address fundamental issues relating to presentation and display of information in the financial statements, including: The relationship between items across financial statements The disaggregation of information so that it is useful in predicting

an entity’s future cash flows The provision of information to help users assess an entity’s

liquidity and financial flexibility

Future work program

In July 2011, the IASB requested consultation on its future work plan.

This consultation sought input on the direction and the overall balance of its work.

Culminated in the release of a Feedback Statement issued by the IASB on December 18, 2012 that identified several key themes: A period of calm. Prioritize work on the Conceptual Framework Targeted improvements to certain standards Updates to assist implementation and

maintenance. Updates to assist in improving the standard-setting

process.

Future work program As a result, the following initiatives developed:

Improved implementation Resume work the Conceptual Framework Developed a list of nine research projects that it will

explore over the next three years1. Emissions trading schemes

2. Business combinations under common control

3. Discount rates

4. Equity method of accounting

5. Intangible assets, extractive activities, and research and development activities

6. Financial instruments with the characteristics of equity

7. Foreign currency translation

8. Nonfinancial liabilities (amendments to IAS No. 37 )

9. Financial reporting in high inflationary economies Each research project will result in a report or discussion paper

IAS No. 1 “Presentation of Financial Statements”

Considerations:a Fair presentation and compliance with IASC standardsb Accounting policiesc Going concernd Accrual basis of accountinge Consistency of presentationf Materiality and aggregationg Offsettingh Comparative information

IAS No. 1 “Presentation of Financial Statements”2003 Amendments

“Presents fairly” definition Elaboration of “misleading” results

from complaince Standards on selection of accounting

policies moved to IAS No. 8 Certain disclosures no longer

required Specific disclosures required Statement of Changes in Equity

disclosure requirements

IFRS No. 1 “First Time Adoption of International Reporting Standards”

Compliance requirements Recognition of assets and liabilities

Only when required by IFRSs Requires reclassifying if necessary Applies existing IFRSs in measuring

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Prepared by Kathryn Yarbrough, MBA

End of Chapter 3