Introduction to International Financial Reporting Standards

1
Introduction to International Financial
Reporting Standards
2
GAAP

• Traditional Sources
• AICPA ARBs (AICPA Committee on Accounting
  Procedures) and ABPOs (AICPA Accounting
  Principles Board)
• FASB Statements of Financial Accounting
  Standards, Financial Interpretations, Emerging
  Issues Task Force (EITF) Abstracts, etc.
• Securities and Exchange Commission (SEC)

3
Should have said sources of US GAAP

• GAAP for the most part has been country specific
• Differences between countries may be cosmetic or
  substantive
• Example In UK balance sheet presentation has
  traditionally been A L OE and also in
  reverse order of liquidity. These are cosmetic
  differences.
• Again in the UK when Glaxo Wellcome plc merged
  with SmithKline Beecham plc to form
  GlaxoSmithKline they used the pooling method for
  the consolidation. This method combines the two
  companies utilizing historical costs rather than
  the US approach which uses fair market values and
  records goodwill. Pooling has not be allowed per
  US GAAP for decades. This is an example of
  substantive difference.

4
Why Rules Differ Internationally

• Short answer rules are established by
  governments or accounting bodies that have
  jurisdiction only within their respective
  borders.
• One still might think that given the desire for
  orderly capital markets and efficient allocation
  of scarce resources the rules would end up
  virtually the same.

5
Factors Affecting Standards

• Sources of capital
• Inflation
• Taxation
• Culture
• Legal system, code vs. common law
• Code countries such as France and Germany tend to
  have detailed, comprehensive accounting
  regulations. Common law countries like the UK
  and US typically have accounting rules that are
  less detailed and require higher levels of
  professional judgment in their application.

6
More Factors Affecting Standards

• Accidents of history war, conquest, and
  colonialism
• (http//en.wikipedia.org/wiki/Commonwealth_o
  f_Nations)
• Business complexity

7
Other Types of Differences Between Countries

• Tax-based accounting
• In some countries the tax treatment for a
  transaction must also be used in financial
  reporting. Hence tax revenue considerations
  drive standards rather than a comprehensive body
  of accounting theory.
• Asset revaluations
• Some countries allow periodic revaluation of
  assets. This leads to a lack of comparability
  for assets and equity as compared to an entity
  that did not revalue.

8
Other Types of Differences Between Countries

• Form over substance
• an underlying concept in US and many other
  countries accounting standards.
• If a lease appears to transfer the risks and
  rewards of ownership its treated as a
  sale/purchase (capital lease).
• Some countries rely on the form of the
  transaction only
• If it is a lease it is accounted for as a
  (operating) lease.

9
Demand for International Accounting Standards

• Prior to the 1970s cross-country accounting
  differences didnt much matter.
• Most businesses and capital transactions did not
  cross international borders.
• Multinational companies
• Growth of global capital markets
• Economic interdependence and the rise in
  multinational political organizations (EU)
• Reduction of costs

10
Impediments to International Standards

• Who is going to make up the rules and who is
  going to pay for the process?
• What will the rules be like (uncertainty)?
• Significant transitional costs.
• How will rules be enforced?
• Nationalism.
• Carve outs.