CHAPTER 3

INTERNATIONAL 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 divisionAnother 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

Spheres of Influence of Current Accounting Practices

Various attempts at groupings that have changed in response to changes in the environment such as NAFTA and EUCurrent groupings

United StatesUK/NetherlandsContinental/JapanSouth AmericanThird WorldChanging EconomiesCommunist

Approaches to Preparing Financial Statements for Use in Other Countries:

1 Same to all

2 Translate language

3 Translate language and currency

4 Two sets

5 World-wide standards

The International Accounting Standards Committee

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

IASCformed in 1973 to aid in this process currently 134 sponsoring organizations from 104 countries

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

2 Identify issues and prepare point outline

3 Board prepares comments

4 Steering Committee prepares final Statement of Principles

5 Exposure Draft

6 Steering Committee reviews comments and prepares final standard

Standard Setting by the IASC

Two treatments1 Benchmark - point of reference2 Alternative

Improvements Project2003Removed some of the existing alternative accounting treatments  Where an IAS retains alternative treatments

IASB removed references to 'benchmark treatment' and allowed 'alternative treatment'

using descriptive references 'cost model' 'revaluation model' 

Restructuring the IASC

In its early years, IASC acted mainly as a harmonizerRecently, 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 IASC

Future IASC role as catalyst and initiator should become more prominent

Important for the IASC 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 IASC

Structural changes needed so that IASC can anticipate the new challenges facing it and meet those challenges effectively.

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

IASC should enter into a partnership with national standard setters

so that IASC 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 IASC

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

in the IASC Board Without diluting the quality of the Board's work

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

committees should be the responsibility of a variety of constituencies

Must that those appointed are competent

Restructuring the IASC

2001: Responsibility for international standards-setting was transferred to the to the International Accounting Standards Board (IASB)

Restructuring the IASC

The following changes were adopted:1. Steering Committees replaced by a Standards Development

Committee National standard setters will play a major role in developing

international accounting standards for approval by the IASC Board Standards Development Committee will also be responsible for

approving the publication of final SIC Interpretations prepared by the Standing Interpretations Committee

2. Standards Development Committee supported by a Standards Development Advisory Committee Acts as a channel of communication with those national standard

setters who are unable to participate directly in the Standards Development Committee because of its limited size

Restructuring the IASC

3. IASC Board expanded from 16 to 25 countries and organizations Without diluting the quality of the Board’s work

4. Advisory Council was replaced by 12 Trustees Three appointed by the International Federation of

Accountants Three by other international organizations Six by the Trustees to represent the world "at large" Trustees appoint members of the Standards Development

Committee, the Board, and the Standing Interpretations Committee

Trustees also have responsibility for monitoring IASC’s effectiveness and for financing the IASC’s activities

Restructuring the IASC

The new structure:The IASC Foundation

The International Accounting Standards Board

The International Accounting Standards Advisory Council

International Financial Reporting Interpretations Committee

New StructureIASC Foundation

19 Trustees Appoint, Oversee, Raise Funds

International Financial Reporting Interpretations

Committee (12 members)

Board: 12 Full time & 2 Part TimeSet Technical Agenda

Approve Standards, Exposure Drafts, & Interpretations

Standards Advisory Council

49 members

Advisory GroupsFor Major Agenda Projects

Appoints

Reports To

Advises

KEY:

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

Current Issues

Partnership with the IOSCOGenerate standards acceptable to IOSCO

December 17, 2003IASB 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

Issues to Be Addressed by Standard Setting Bodies in Various Countries

Until recently, little impact in U. S.

Standard setters will need to focus on following questions:1 Can international accounting standards be set voluntarily by

organizations representing a broad set of sovereign nations?2 What is the impact on standard setting of differing economies and

social settings in various countries?3 Can lessons be learned from other international world bodies with

sovereign members having experience in bringing conflicting national laws into harmony?

IFRS No. 1: First-time Adoption of International Financial Reporting Standards

More than 90 countries will either require or permit the use of IFRSs during the next several years.

As a result, thousands of companies throughout the world will be making a transition in financial reporting by breaking away from national practices and changing to accounting standards set by the IASB.

The IASB issued IFRS No 1 to aid in this process

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, ConnecticutBoth 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.

International vs. National Accounting Standards

Question: Should foreign companies be allowed to list their securities in United States marketsForm 20-F reconciliationsPressure on the SEC to accept international accounting rules

The Financial Statement Impact of International Accounting Standards

FASB project:

Purpose of analysis1 Identify similarities and differences of

the IAS standard and U. S. GAAP2 Assess the impact of these similarities

and differences and their relative significance

3 Include examples wherever possible

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:1 Objective of financial statements2 Qualitative characteristics3 Elements4 The concepts of capital maintenance

The Objective of Financial Statements

Information useful in making economic decisions

General purpose financial statements

The framework indicated that:

1 Users require evaluation of the ability of an enterprise to generate cash and the timing and certainty of that generation

2 The financial position of an enterprise is affected by the economic resources it controls, its financial structure, its liquidity and solvency and its capacity to adapt to change

3 Information on profitability is required to assess changes in the economic resources an enterprise controls in the future

4 Information of the financial position of an enterprise is useful in assessing its investing, financing and operating activities

5 Information about financial position is contained in the balance sheet and information about performance is contained in the income statement

The Objective of Financial Statements

Underlying assumptions for the preparation of financial statements1 Accrual basis2 Going concern

The Elements of Financial Statements

Asset

Liability

Equity

Income

Expense

The 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

Qualitative Characteristics

Attributes that make accounting information useful 1 Understandability2 Relevance3 Reliability4 Comparability

Also recognized that timeliness and a balance between costs and benefits were constraints

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

FASB staff review

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Prepared by Kathryn Yarbrough, MBA