Chapter Eleven

Worldwide Accounting

Diversity and International

Standards

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International Accounting Diversity

Chinese companies use the direct method

in preparing the statement of cash

flows.

Companies in Germany are

allowed to report assets on the

balance sheet at revalued amounts.

Most companies in the United States

and Europe use the indirect method.

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Learning Objective 11-1

Explain the major factorsinfluencing the internationaldevelopment of accountingsystems.

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Reasons for Accounting Diversity

Legal System Taxation

Inflation

Culture

Financing Systems

Political and

EconomicTies

All these interact!!!

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Reasons for Accounting Diversity

Legal Systems:► Common Law ► Roman (Codified) Law

Major providers of financing:►Family members ► Governments► Banks ► Shareholders► Other creditors

► Taxation

► Inflation

►Societal Values► Individualism ► Uncertainty Avoidance

► Power Distance ► Masculinity

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Gray’s Framework for the Development of Accounting Systems Internationally

Cultural DimensionsIndividualismUncertainty AvoidancePower DistanceMasculinity

Institutional ConsequencesLegal systemCorporate OwnershipCapital MarketsProfessional AssociationsEducation & Religion

Accounting ValuesProfessionalismUniformityConservatismSecrecy

Accounting SystemsAuthorityEnforcementMeasurementDisclosure

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Nobes’ Model of the Reasons for International Accounting Diversity

Nobes’ simplified model has two explanatory factors:

(1) national culture, including institutional structures, (2) the nature of a country’s financing system divided into two classes.

Class A (Strong equity-outsider financing system)Less conservativeGreater disclosureFinancial and tax accounting separate

Class B (Weak equity-outsider financing system)More conservativeLess extensive disclosureFinancial reporting follows tax rules

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Learning Objective 11-2

Understand the problemscreated by differences inaccounting standards acrosscountries and the reasons todevelop a set of internationallyaccepted accounting standards.

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Harmonization of Diverse Accounting Standards

Problems Caused by Diverse Accounting Standards1. Subsidiaries use local standards for financial statements. 2. Costly to prepare financial statements that comply with local

standards.3. Accounting rules differ from country to country.

Harmonization to reduce differences1. The International Accounting Standards Committee (IASC)

began the movement.2. In 1987, the International Organization of Securities

Commissions (IOSCO) 3. 2001, the International Accounting Standards Board (IASB)

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Learning Objective 11-3

List the authoritativepronouncements that constituteInternational FinancialReporting Standards (IFRS).

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International Accounting Standards Committee- IASC

International Accounting Standards committee (IASC) established in 1973.

IASB superseded IASC in April 2001.

The IASB has sole responsibility for establishing IFRSs (“IASB GAAP”)

IASB has no enforcement authority!!

All of the 41 IASs issued by the IASC were adopted by the IASB. 28 are currently in effect.

New standards are called “International Financial Reporting Standards” (IFRSs).

As of January 2013, 13 IFRSs have been issued.11-11

Learning Objective 11-4

Describe the ways and theextent to which IFRS are usedaround the world.

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International Financial Reporting Standards (IFRSs)

Countries can elect to use IFRS by:(1) adopting IFRS as its national GAAP(2) requiring domestic listed companies to use IFRS for their

consolidated financial statements(3) allowing domestic listed companies to use IFRS(4) require or allow foreign companies listed on a domestic stock

exchange to use IFRS.

Ninety-two of the 153 countries using IFRS require all domestic listed companies to use IFRS for consolidated statements.

(2) All publicly traded companies in the EU required to use IFRS.(3) Two significant exceptions – China and the U.S.

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Learning Objective 11-5

Describe the FASB–IASBconvergence process and the SEC recognition of IFRS.

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Norwalk Agreement: FASB-IASB Convergence

In Norwalk, Connecticut, FASB and IASB held a joint meeting in September 2002 and agreed to “use their best efforts”

1) to make existing financial reporting standards compatible “as soon as is practicable” and

2) Coordinate efforts to “ensure that once achieved, compatibility is maintained”

In 2006- Memorandum of Understanding (MoU), FASB and IASB agreed that trying to eliminate differences between standards and create identical standards, is not realistic. Instead, they agreed that standards in need of improvement should be replaced with new jointly developed standards.

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FASB-IASB Convergence

As of January 2013, the FASB‐IASB convergence process had resulted in changes made to U.S. GAAP, IFRS, or both:

• Business combinations ∙ Borrowing costs• Consolidated financial statements ∙ Derecognition• Non‐controlling interests ∙ Post‐employment

benefits• Acquired in‐process research costs ∙ Fair value option• Non‐monetary asset exchanges ∙ Joint ventures • Share‐based payment ∙ Fair value

measurement• Accounting changes ∙ Segment

reporting• Presentation of (OCI) ∙ Inventory

accounting

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Learning Objective 11-6

Recognize acceptable accountingtreatments under IFRS andidentify key differences betweenIFRS and U.S. GAAP.

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Current Differences Between IFRSs and US GAAP

Measurement: How is cost determined?

Disclosure:If allowed, How?

Inventory Fixed Assets

Extraordinary Items

Recognition: If recognized, how? When?

Discontinued Operations

Presentation:Principles? Financial

Statement Components?

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Learning Objective 11-7

Determine the impact thatspecific differences betweenIFRS and U.S. GAAP have onthe measurement of incomeand stockholders’ equity.

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U.S. GAAP Reconciliations

IASB: Principles-Based

Provide general principles with limited guidance.

Requires greater professional judgment.

FASB: Rules-Based

Provide detailed guidance.

May encourage mindset of looking for loop-holes.

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