Chapter 7 International Accounting Standards and Global Convergence.

Chapter 7

International Accounting Standards and Global

Convergence

Comparability of Accounting Information

International pressure exists for comparability, especially with MNEs

Different approaches to comparability Harmonization is more flexible Standardization suggests a state of uniformity

Which groups are interested?

Governments Trade Unions Investors (including financial analysts) Bankers and lenders Accountants and Auditors

Governments

Government involvement in accounting determination varies across the world

Do governments really use corporate reports? Info needed by govt.’s is often extensive to include in the report

More relevant for Govt. involved countries like Germany/France Governments can demand whatever information they need

Information needs are extensive and confidential Influenced by government planning and regulation/tax Power of government to obtain info suggest governments may not

be important users of corporate report

Government use of annual reports

Use reports, along with segmental information, to check performance of local subsidiaries of MNEs

Governments wish to monitor MNE operations as a whole – their importance to commercial development

Governmental needs in differing departments can be accommodated by an annual report

Developing countries would have more information without bargaining for it with increased corporate disclosure – but MNE have more power to control the process – Host govt. fear of losing MNE

Governmental use of annual reports

Interest in extranational operations of MNEs – to some extent information sharing

Intergovernmental organizations use this information for policy formulation (UN, EU).

Many governments desire increased bargaining power for information as members of intergovernmental organizations

Intergovernmental Organizations United Nations

1976 study lack of information / int’l compararbility 1979 – Working Group of Experts established

Emphasis on developing countries Have different interests from those of OECD and IFRS Major aim is international disclosure standards Intergovernmental Working Group of Experts on

International Standards of Accounting and Reporting (ISAR) established in 1983

Current issues deal with corporate governance Monitoring role in endorsing desirable standards UNCTAD – represented in

Standards Advisory Council of the IASB Advisory Panel of Small and Medium-sized Entities of the IASB

Intergovernmental Organizations Organization for Economic Cooperation and

Development (OECD) Represents industrialized nations – US, UK, Australia,

Germany, France, Canada, Japan – most MNEs exist here Issued Guidelines for Multinational Enterprises

Aimed at strengthening confidence between MNEs and governments

Not required by law – though govt.’s agreed to recommend guidelines related to financing, taxation, competition, etc. – as more of benchmark

Aim is to promote improvements in comparability and harmonization of standards – though not standard setting

Let’s go over exhibit 7.1

Intergovernmental Organizations – European Union – 25 countries

Involved in international harmonization of standards as part of company law harmonization

Goal is to promote European economic integration and development

No company should be at a disadvantage because of legal differences between countries

International Organizations – European Union

Interests of shareholders, lenders, suppliers, and other parties are protected

Directives in the EU have the force of law and must be ratified by member nations

Regulations become law without national ratification

Intergovernmental Organizations – European Union

Fourth Directive – approved in 1978 Requirements relate to

Disclosure Classification and presentation of information Methods of valuation

Compromise between continental European and Anglo-American systems

Contains detailed requirements for historical cost accounting with some flexibility


Fourth Directive Level of disclosure and transparency increased Historical costing concepts adopted with flexibility in

valuing inventory, goodwill, depreciation. “true and fair view” concept adopted Different layouts of financial statements allowed Starting point for harmonization process Does not adequately address

Foreign currency translation Leases and funds Cash flow statement


Seventh Directive (1983) – Consolidated Accounts Definition of Control Group source of controversy.

UK definition (Share ownership/legal control) v. German definition of effective control and ownership.

Compromise: control other than ownership could be applied on optional basis.

Requirements Worldwide consolidations “Fair value” approach for assets purchased through

acquisitions Equity treatment of associated corporations Segmental disclosures of turnover by line of business and

geographical area Disclosure has been substantially improved


Additional Directives Eighth Directive – adopted in 1984

Deals with qualification and work of auditors Includes minimum educational requirements Encourages mobility of professional auditors

Proposed directive for employee disclosure was put aside due to MNE and government opposition Issues readdressed in Charter of Fundamental Social

Rights


Harmonization of stock exchange regulations and securities laws is also a prerogative Ensure investor access to sufficient information Promote capital market and stock exchanges

Reaffirmed commitment to harmonization in 2000 requiring all listed companies to adopt IFRS in 2005 Includes all IAS except IAS 32 and 39 (as these

under revision by IASB) All Standard Industrial Classifications (SIC)

Trade Unions and Employees

International Trade Union Confederations European Trade Unions Confederation International Confederation of Free Trade Unions World Confederation of Labor

Industry-specific trade unions Deal with individual MNEs

National Trade Unions Influence MNEs on a variety of levels

Information needs depend on contact with MNEs and purpose of information

Trade Unions and Employees Power exists in the nation where they operate –

Striking very powerful tool esp in EU Unions have not grown beyond national boundaries

as MNEs have Trade union pronouncements are aimed at

establishing policies concerning MNEs Main concern centers on subsidiaries

Transfer pricing policies are a major concern MNE subsidiary transactions have received little attention

to date by regulatory bodies Information about the terms, conditions, scale,

security, and location of employment are of concern

Investors

Owners or potential owners of shares in the MNE parent corp. or a subsidiary

Interests are represented by international financial analyst organizations and IOSCO

Concerned with current lack of comparability Some want information approach rather than

a market approach to disclosure

Investors

International organizations ICCFAA and IOSCO

IOSCO - works for multilisting and international trading IOSCO is closely associated with the IASB

Want comparable information Interested in segmental information of MNEs Interested in consolidated results

Bankers and Lenders

Information needs are focused on financial positions, performance, and future prospects

Concerned with security of loans advanced Significant impact in France, Germany, Japan Have more direct access to required info International banks are involved in

harmonization and often require special financial reports (IFC, World Bank, etc.)

Accountants and Auditors

International Accounting Standards Board Formerly the IASC Governed by 14 board members Objectives

Propose international standards and promote their acceptance

Work toward improvement and harmonization of standards

Goal achieve comparability while minimizing cost of MNE to comply with accounting standards


IASB Adopted 41 IAS standards, completed 5 new standards, and

revised 15 existing standards Achievements

Completed a core set of standards in 2000 as agreed with IOSCO for cross-board and national listings

Recent efforts are focused on EU compliance with IFRS in 2005 Endorsement by IOSCO was limited

Members of IOSCO are permitted to require reconciliation of certain items, supplementary information, and eliminate some options existing in IAS

Members will individually determine whether or not to endorse IFRS for cross-boarder listings


IFRS and U.S. GAAP IASB and FASB are working toward similar

accounting standards FASB is researching international convergence

Objectives include Identify every substantive difference between U.S. GAAP

and IFRS Catalog those differences according to the strategy for

resolving them Recommend further agenda decisions to the Board to

further the objective of convergence with IFRS


IFRS and U.S. GAAP Benefits of convergence according to the FASB

Increased efficiency in capital markets by increased comparability and transparency from nation to nation

Reducing the administrative burden for MNEs by allowing only one set of financials to be prepared

Enable U.S. companies access to capital markets throughout the world without reconciling U.S. GAAP to IFRS


IFRS and U.S. GAAP Street, Nichols, and Gray (2000) suggest the gap

is narrowing Major differences are in the areas of

Property, plant and equipment revaluations Deferred taxes Goodwill Capitalized borrowing costs

SEC desires enforcement of international standards if they are in place


Rules versus Principles Recent scandals and aftermath perhaps show a

need for principle-based standards – Rules often lend more opportunity to form over substance

Sarbanes-Oxley requires the SEC to examine the feasibility of principles-based standards

Problems with principles-based standards Guidance for application Comparability No guidance for complex transactions


Rules versus Principles Survey by Mike Ng (2004)

93% of companies surveyed reported that is was possible to apply rules-based standards but not reflect the economic substance of the transaction

Only 7% of companies surveyed believed principles-based standards would lead to a better reflection of economic reality

Results show that neither approach will ensure that companies report the economic reality of transactions


Noncompliance with IFRS is problematic IASI states that compliance means following IFRS and

each interpretation of IFRS Improper accounting treatment is not condoned by

explaining accounting treatments applied or by footnotes (paraphrase IASI).

Street and Gray (2000) found that only 77% of the 162 companies in their sample stated they were fully compliant with IAS. International accounting firms are not supporting the

enforcement of IAS New structure of the IASB should help with compliance –

raising standards of accounting and auditing worldwide


International Federation of Accountants Sets international auditing guidelines Promotes international convergence of standards

International Auditing and Assurance Standards Board Independent body under the IFAC that creates

International Auditing Standards (ISA)

Accounting and Auditors

Reforms by the IFAC in cooperation with accounting firms, member bodies, regulators, and accounting organizations include: Establishment of the Public Interest Oversight Board to

oversee IFAC’s standard setting process Increased transparency with regard to IFAC governance

and international standard setting Public participation in the standard-setting process A more formal process of communicating with international

regulators


International Forum on Accountancy Development (IFAD) Created after the Asian financial crisis to aid developing nations Encourages conformity with IFRS Developed the International Financial Framework to aid in

improving standards within national financial frameworks Conducted a GAAP Convergence Survey (2002)

90% of countries surveyed plan to convert to IFRS Majority of countries surveyed plan to converge with IFRS by

establishing a government regulation or a standard-setting body Half of the countries surveyed see a barrier to convergence in the

complication of standards


International Association for Accounting Education and Research Promotes excellence in accounting education Contributes to development of international standards

The International Harmonization and Disclosure Debate

Some see harmonization and disclosure as a means to create a balance of power between MNEs and domestic corporations

More industrialized nations will not be totally supportive of increased regulation

Regional integration Long-term goal to remove market imperfections and

eliminate regulatory barriers (EU) Many countries are more concerned with protecting

their own business community at the expense of others


Differences in reporting are due to differences in domestic needs

With domestic corporations, there is little concern for international standards

Natural accounting coordination will be a lengthy process according to research

Regional economic groupings (EU) and intergovernmental organizations (UN) will help


Future developments will be centered on MNEs

May be less disclosure now in practice because of the complex nature of MNEs

National reporting requirements may limit disclosure

Chapter 7 International Accounting Standards and Global Convergence.

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Transcript of Chapter 7 International Accounting Standards and Global Convergence.