Introduction to International Accounting

Purpose of International AccountingWorldwide Accounting DiversityBasic Terminology

International AccountingThe word International in International Accounting can be defined at three different levels.

1. The first level is the supranational accounting, which denotes standards, guidelines and rules of accounting, auditing and taxation issued by supranational organisations (for example European Union).

2. At the second level, the company level, international accounting can be viewed in terms of the standards, guidelines and practices that company follows related to its international business activities and foreign investments. These would include standards for accounting denominated in foreign currency and techniques for evaluating the performance of foreign operations.

3. At the third and broadest level, international accounting can be viewed as the study of the standards, guidelines and rules of accounting that exist within each country and comparison of these rules with International Financial Reporting Standards (IFRS) set by International Accounting Standards Board.

Reasons for accounting diversity in the world Legal system (common law or codified Roman law) Taxation (in some countries, published financial statements form a basis for taxation) Providers of financing (family members, banks, governments and shareholders) Inflation (some countries, for example in Latin America apply so called Inflation Accounting) Political and economic ties (for example through colonialism, England and France have

transferred their accounting systems to a variety of countries) Language barriers

Problems caused by accounting diversity Incomparability of financial statements and lack of high-quality accounting information in

some countries Preparation of Consolidated financial statements Access to Foreign capital markets

Supranational accounting – EU Accounting Directives

1. Fourth Directive: annual accounts of companies with limited liability2. Seventh Directive: consolidated accounts of companies with limited liability3. Eight Directive: statutory audits of annual accounts and consolidated accounts

Fourth Directive (1978)The Directive lay down the principles which govern the drawing up of the balance sheet and the profit and loss account.The balance sheet: the Directive provides for two balance sheet layouts, leaving it to the Member States to choose. It then lists the balance sheet items and comments on them.The profit and loss account: four layouts are proposed from which Member States are free to choose. The Directive provides a commentary on certain items here too.The Directive states general principles for the valuation of items in the annual accounts, such as prudence, consistency in the application of the methods of valuation, etc. They also set out specific valuation rules.The Directive lists the information which must be provided in the notes to the accounts: the valuation methods applied to the various items, undertakings in which the company holds a certain percentage of the capital, certain types of the company's debts, financial commitments not included in the balance sheet, etc.

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The annual report must include a fair review of the development of the company's business and of its position. It must also provide information on any important events that have occurred since the end of the financial year, the company's likely future development and activities in the field of research and development.The Directive lays down certain rules on publication (documents which must be published, etc.).Lastly, the Directive provides for a system of auditing under which companies must have their annual accounts audited by one or more persons authorised by national law to audit accounts. Such a person or persons must also verify that the annual report is consistent with the annual accounts for the same financial year.Less strict rules are laid down for small and medium-sized companies. Member States may lighten their obligations in respect of the publication of annual accounts or dispense small companies from the requirement that the annual accounts be audited.

Seventh Directive (1983)This Directive defines the circumstances in which consolidated accounts are to be drawn up. Any company (parent company) which legally controls another company (subsidiary company) is under a duty to prepare consolidated accounts. In most cases, legal control takes the form of the holding of a majority of voting rights. Member States may also require consolidated accounts to be prepared in other cases where a parent company has only a minority shareholding but exercises de facto control. They may provide for exemption from this obligation. The Directive sets out the methods of drawing up consolidated accounts: Consolidated accounts comprise the consolidated balance sheet, the consolidated profit and loss

account and the notes to the accounts. Consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the companies included therein taken as a whole.

The book values of shares in the capital of companies included in a consolidation must be set off against the proportion which they represent of the capital and reserves of those companies. Such set-off must be effected on the basis of book values as at the date on which the companies are included in the consolidation for the first time.

The consolidated accounts must be drawn up on the same date and by the same methods as the annual accounts of the parent company.

The Annex states that certain information must be provided in the notes, on such things as valuation methods, the names and the registered offices of the undertakings included in the consolidation, total of certain types of debts, etc.The Directive also regulates the contents of the consolidated annual report. This must include at least a fair review of the development of business and the position of the undertakings included in the consolidation taken as a whole, and certain indications for each of those undertakings (number and nominal value of shares, etc.).The Directive establishes a system of auditing under which a company which prepares consolidated accounts must have them audited by one or more persons authorised to audit accounts under the laws of the Member State which govern that company. The person or persons responsible for auditing the consolidated accounts must also verify that the consolidated annual report is consistent with the consolidated accounts for the same financial year.

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IFRS – International Financial Reporting StandardsIFRS began as an attempt to harmonise accounting across the European Union but the value of harmonisation quickly made the concept attractive around the world. They are sometimes still called by the original name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards International Financial Reporting Standards (IFRS).

IFRS due processInternational Financial Reporting Standards (IFRSs) are developed through an international consultation process, the "due process", which involves interested individuals and organisations from around the world.The due process comprises six stages:

1. Setting the agenda2. Planning the project3. Developing and publishing the discussion paper (DP)4. Developing and publishing the exposure draft (ED)5. Developing and publishing the standard6. After the standard is issued

After an IFRS is issued, the staff and the IASB members hold regular meetings with interested parties, including other standard-setting bodies, to help understand unanticipated issues related to the practical implementation and potential impact of its proposals.The IFRS Foundation also fosters educational activities to ensure consistency in the application of IFRSs.

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Current use of IFRSs in the countries of the G20Country Status for listed companies as of December 2013

Argentina Required for fiscal years beginning on or after 1 January 2012

Australia Required for all private sector reporting entities and as the basis for public sector reporting since 2005

Brazil Required for consolidated financial statements of banks and listed companies from 31 December 2010 and for individual company accounts progressively since January 2008

Canada Required from 1 January 2011 for all listed entities and permitted for private sector entities including not-for-profit organisations

China Substantially converged national standards

European Union All member states of the EU are required to use IFRSs as adopted by the EU for listed companies since 2005

France Required via EU adoption and implementation process since 2005

Germany Required via EU adoption and implementation process since 2005

India India is converging with IFRSs at a date to be confirmed. 

Indonesia Convergence process ongoing

Italy Required via EU adoption and implementation process since 2005

Japan Permitted from 2010 for a number of international companies

Mexico Required from 2012

Republic of Korea Required from 2011

Russia Required from 2012

Saudi Arabia Required for banking and insurance companies; full convergence with IFRSs currently under consideration

South Africa Required for listed entities since 2005

Turkey Required for listed entities since 2005

United Kingdom Required via EU adoption and implementation process since 2005

United States Allowed for foreign issuers in the US since 2007

Since 2001, almost 120 countries have required or permitted the use of IFRSs.

Source: http://www.ifrs.org/The-organisation/Documents/2013/Who-We-Are-English-2013.pdf

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List of IFRS and Interpretations in 2014IFRSConceptual Framework for Financial ReportingInternational Accounting Standards (IASs)IAS 1 Presentation of Financial StatementsIAS 2 InventoriesIAS 7 Statement of Cash FlowsIAS 8 Accounting Policies, Changes in Accounting Estimates and ErrorsIAS 10 Events after the Reporting PeriodIAS 11 Construction ContractsIAS 12 Income TaxesIAS 14 Segment ReportingIAS 16 Property, Plant and EquipmentIAS 17 LeasesIAS 18 RevenueIAS 19 Employee BenefitsIAS 20 Accounting for Government Grants and Disclosure of Government AssistanceIAS 21 The Effects of Changes in Foreign Exchange RatesIAS 23 Borrowing CostsIAS 24 Related Party DisclosuresIAS 26 Accounting and Reporting by Retirement Benefit PlansIAS 27 Separate Financial StatementsIAS 28 Investments in AssociatesIAS 29 Financial Reporting in Hyperinflationary EconomiesIAS 31 Interests in Joint VenturesIAS 32 Financial Instruments: PresentationIAS 33 Earnings per ShareIAS 34 Interim Financial ReportingIAS 36 Impairment of AssetsIAS 37 Provision, Contingent Liabilities and Contingent AssetsIAS 38 Intangible AssetsIAS 39 Financial Instruments: Recognition and MeasurementIAS 40 Investment PropertyIAS 41 AgricultureInternational Financial Reporting Standards (IFRSs)IFRS 1 First-time Adoption of International Financial Reporting StandardsIFRS 2 Share-based PaymentIFRS 3 Business CombinationsIFRS 4 Insurance ContractsIFRS 5 Non – current Assets Held for Sale and Discontinued OperationsIFRS 6 Exploration for and Evaluation of Mineral ResourcesIFRS 7 Financial Instruments: DisclosuresIFRS 8 Operating SegmentsIFRS 9 Financial InstrumentsIFRS 10 Consolidated Financial StatementsIFRS 11 Joint ArrangementsIFRS 12 Disclosure of Interests in Other EntitiesIFRS 13 Fair Value measurement

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InterpretationsSIC-7 Introduction of the Euro SIC-10 Government Assistance – No Specific Relation to Operating ActivitiesSIC-15 Operating Leases – IncentivesSIC-25 Income Taxes – Changes in the Tax Status of an Enterprise or its ShareholdersSIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a LeaseSIC-29 Service Concession Arrangements: DisclosuresSIC-31 Revenue – Barter Transactions Involving Advertising ServicesSIC-32 Intangible Assets – Web Site CostsIFRIC 1 Changes in Existing Decommissioning, Restoration and Similar LiabilitiesIFRIC 2 Members` Shares in Co-operative Entities and Similar InstrumentsIFRIC 4 Determining whether an Arrangement contains a LeaseIFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation

FundsIFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic

EquipmentIFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary

EconomiesIFRIC 8 Scope of IFRS 2IFRIC 9 Reassessment of Embedded DerivativesIFRIC 10 Interim Financial Reporting and ImpairmentIFRIC 12 Service Concession ArrangementsIFRIC 13 Customer Loyalty ProgrammesIFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their

InteractionIFRIC 15 Agreements for the Construction of Real EstateIFRIC 16 Hedges of a Net Investment in a Foreign OperationIFRIC 17 Distributions of Non-cash Assets to OwnersIFRIC 18 Transfers of Assets from CustomersIFRIC 19 Extinguishing Financial Liabilities with Equity InstrumentsIFRIC 20 Stripping Costs in the Production Phase of a Surface MineIFRIC 21 Levies

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US GAAPGenerally Accepted Accounting Principles are accounting rules used in the United States.These are used to prepare, present and report financial statements for a wide variety of entities, including publicly traded and privately held companies, non-profit organizations, and government authorities, with the Financial Accounting Standards Board (FASB) establishing rules for public and private companies, and non-profit organizations; the Governmental Accounting Standards Board (GASB) determining a different set of assumptions, principles for local and state governments - and the Federal Accounting Standards Advisory Board (FASAB) performing a similar role for federal government entities.

These organizations influence the development of GAAP in the United States. United States Securities and Exchange Commission (SEC)

The SEC was created as a result of the Great Depression. At that time there was no structure setting accounting standards. The SEC encouraged the establishment of private standard-setting bodies through the AICPA and later the FASB, believing that the private sector had the proper knowledge, resources, and talents. The SEC works closely with various private organizations setting GAAP, but does not set GAAP itself.

In the past: American Institute of Certified Public Accountants (AICPA) In 1939, urged by the SEC, the AICPA appointed the Committee on Accounting Procedure (CAP). During the years 1939 to 1959 CAP issued 51 Accounting Research Bulletins that dealt with a variety of timely accounting problems. However, this problem-by-problem approach failed to develop the much needed structured body of accounting principles. Thus, in 1959, the AICPA created the Accounting Principles Board (APB), whose mission it was to develop an overall conceptual framework. It issued 31 opinions and was dissolved in 1973 for lack of productivity and failure to act promptly.

Financial Accounting Standards Board (FASB) FASB has 4 major types of publications: 1. Statements of Financial Accounting Standards (SFAS) - the most authoritative

GAAP setting publications. 168 SFAS have been issued to date. 2. Statements of Financial Accounting Concepts (SFAC) - first issued in 1978. They

are part of the FASB's conceptual framework project and set forth fundamental objectives and concepts that the FASB use in developing future standards. However, they are not a part of GAAP. There have been 7 concepts published to date.

3. Interpretations - modify or extend existing standards. There have been around 50 interpretations published to date.

4. Technical Bulletins - guidelines on applying standards, interpretations, and opinions. Usually solves some very specific accounting issue that will not have a significant, lasting effect.

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