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International Harmonization of Financial Reporting


International Harmonization of Financial Reporting Summary of Diversity Research Findings as of 1995 Micro/macro, code-law and common law, were found to consistently ... – PowerPoint PPT presentation

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Title: International Harmonization of Financial Reporting

International Harmonization of Financial
Summary of Diversity Research Findings as of 1995
  • Micro/macro, code-law and common law, were found
    to consistently be highly correlated with
    patterns of financial reporting around the world.
  • Culture appeared to play an important role
    everywhere, but what characteristics dominated
    remained unclear.
  • Inflation and trading relationships, in some
    countries, seem to matter a great deal.
  • Economic variables were implicated but the
    importance of their role was unclear.

These findings left many questions unanswered,
including the following
  • Could diversity be reduced throughout the world?
    If so, how?
  • Would it be wise to reduce diversity?
  • If so, how much? What are the costs vs benefits
    of imposing upon the business world a reporting
    system with far less diversity?
  • Would it happen by itself naturally?
  • How could mandated changes be enforced?

Beginning in the 1970s
  • Efforts began to reduce financial reporting
  • These early fledgling efforts were met with great
  • Most of the early effort began in Europe, as an
    extension of the dream of many for economic and
    political unity on the European continent.
  • The International Accounting Standards Committee
    (IASC) was also formed by professional accounting
    groups in 1973.

In the 1980s
  • Progress, though incomplete and imperfect, was
    made in Europe.
  • The EU began to endorse changes in reporting
  • The 4th and 7th directives were implemented.
  • EU directives were given the force of law.
  • For the first time, some reporting diversity,
    especially in the extremes, was reduced.

On the other hand
  • The IASC floundered with a small staff and little
  • It mostly issued low level, anything goes
    standards copied from others.
  • Many countries, regardless of how economically
    significant, around the world were equally
    represented on the IASC.
  • Most major economic players ignored the IASC.

In the 1990s
  • Berlin wall falls, and not long after, the USSR
    collapses with it.
  • US capital markets take off, continuing an
    unprecedented bull run that drives share prices
    up, on average, over 1500 from 1982-1999.
  • Many economies around the world go into steep
    decline (e.g., Japan and Russia).
  • Bank capital becomes scarce.
  • The Asian crisis occurs in 1998, sparked by the
    collapse of Indonesias currency, markets and

In the wake of these events
  • American (corporate?) influence expanded
  • The importance of equity financing grew and
    shaped business interests around the world.
  • Currency manipulations and shifts reached
    unprecedented levels as attempts were made to
    stabilize the world economy.
  • The concept of harmonized financial reporting was
    given new credibility and support.

  • What is harmonization?
  • Harmonization -- the process of increasing the
  • level of agreement in accounting standards and
  • practices between countries.

Objective 1
  • The two levels of Harmonization
  • Harmonization in accounting standards, which is
    increased agreement in accounting rules.
  • Harmonization in practice, which is increased
    agreement in actual accounting practices.
  • Harmonization in standards may or may not result
    in harmonization in practice.

  • Harmonization
  • Is different from Standardization.
  • Harmonization allows for different standards in
    different countries as long as there are not
    logical conflicts.
  • Standardization involves using the same
    standards in different countries.

Some of the Significant Harmonization Efforts of
the 1990s and 2000s
  • Worked to achieve improved market regulation
  • Worked to facilitate cross-border listings.
  • Advocated for the development and adoption of a
    single-set of high quality accounting standards.

The EU
  • The EU achieved in monetary union in a phased-in
    fashion between 1999-2002.
  • The EU also added many new members from Eastern
  • The EU stopped making separate standards. As of
    2005, it requires members to use IFRSs.

Harmonization Efforts
  • IASB
  • Preceded by the IASC (International Accounting
    Standards Committee).
  • Works toward harmonization of international
    accounting standards.
  • IASB was created in 2001.

The Question of Credibility
  • The crucial problem was how to be effective.
  • SEC indicated an international standard-setter
    would have to be FASB-like, i.e., driven by
    expertise, not geography.
  • EU wanted geographical representation to be
  • IASB decided to be expert-driven.

History of IASB Why now (2001)?
  • 198789- Beginning of effective attempts at IASC
    to reduce flexibility. IOSCO lobbies for common
    standards. E32 issued.
  • 1995- IOSCO demands acceptable set of standards.
  • Agreement between IASB and IOSCO that IASs can be
    used in cross-border listings as an alternative
    to national standards IF core standards were
  • Core standards are completed in 1998.

Major Players Jump on Board
  • 1998-Germany allows internationally recognized
    rules for consolidated statements.
  • 2000-IOSCO recommends acceptance of 30 IAS core
    standards for cross-border listings.
  • 2005- EU makes IASs compulsory for all firms
    preparing consolidated statements.

IASB- Structure and Process
  • Comprised of 14 members (12 full, 2 part-time).
  • 7 members are liaison with a national board.
  • Standard development process is open.
  • Standards are principles-based.
  • Since establishment of IASB, focus is on global
    standard-setting rather than harmonization per se.

IASB Structure and Process
  • Up until 2000 Issued IASs
  • After 2000- Issues IFRSs (Intl financial
    reporting standards)
  • Similar process to FASB- in the sunshine due
  • SIC- final step- interprets the standards.

IASB- Structure and Process
  • Publication of an exposure draft and/or
    standard-requires 8 of the 14 members approval.
  • Financed mostly by selling publications.
  • At end of 1998, IASB found itself in competition
    with FASB, as many firms sought to be listed on
    US Exchanges.

Geographical Backgrounds of IASC Trustees-
IASB Members- 2001
Companies referring to the use of IAS standards
in 2001
  • No Power to Enforce or require use of standards.
  • Result-Each country individually decides whether
    to accept IASs.
  • Major holdouts that still do not accept IAS
    standards- US, Canada, and Japan.

Principles-Based Approach to Accounting Standard
  • IASB Perspective
  • IASB attempts to follow a Principles-Based
    approach to standard setting.
  • As such accounting standards are grounded in the
    IASB Framework.

Principles-Based Approach to Accounting Standard
  • A Principles-Based approach
  • Represents a contrast to a Rules-Based Approach.
  • Attempts to limit additional accounting guidance
    (e.g., FASB EITFs, FASB Interpretations).
  • Is designed to encourage professional judgment
    and discourage over-reliance on detailed rules.

IASB Framework and IFRSs
  • IASB Framework
  • Similar to the relationship between U.S. GAAP
    financial statements and the FASB Conceptual

IASB Framework and IFRSs
  • IASB Framework
  • Provides the basis for financial statements
    presented in accordance with IFRS.
  • Includes
  • The objective and underlying assumptions of
    financial statements.
  • Qualitative characteristics of information.
  • Definition, recognition, and measurement of
    elements in financial statements.
  • Concepts of capital maintenance.

IASB Framework and IFRSs
  • IASB Framework
  • The objective and underlying assumptions of
    financial statements
  • Primary objective is to provide information
    useful to decision making.
  • Underlying assumptions include accrual-basis and
    going concern.

IASB Framework and IFRSs
  • Qualitative characteristics of information
  • Understandability should be understandable to
    people with reasonable financial knowledge.
  • Comparability allows for meaningful comparisons
    to financial statements of previous periods and
    other companies.

IASB Framework and IFRSs
  • Qualitative characteristics of information
  • Relevance useful for making predictions and
    confirming existing expectations.
  • Reliability free from bias (neutral) and
    represents that which it claims to represent
    (representational faithfulness).

IASB Framework and IFRSs
  • Elements of Financial Statements
  • Definition assets, liabilities, and other
    financial statement elements are defined.
  • Recognition guidelines as to when to recognize
    revenues and expenses.
  • Measurement various bases are allowed,
    historical cost, current cost, realizable value,
    and present value.

IASB Framework and IFRSs
  • Concepts of Capital maintenance
  • Financial capital maintenance
  • One approach to income measurement.
  • Net income represents the increase in net
    financial assets, excluding owner transactions.
  • The approach in U.S. GAAP.

IASB Framework and IFRSs
  • Concepts of Capital maintenance
  • Physical capital maintenance
  • Another approach to income measurement.
  • Net income represents increase in physical
    productive capacity.
  • Excluding owner transactions.
  • Requires current costs for measurement of certain
    physical assets.

IASB/FASB Convergence
  • The Norwalk Agreement
  • Reached in 2002.
  • Between the IASB and FASB.
  • To work toward accounting standards convergence.

Learning Objective 7
IASB/FASB Convergence
  • FASBs key initiatives in the Norwalk
  • Agreement
  • Joint projects boards will work together to
    address some issues (e.g., revenue recognition).
  • Short-term convergence to remove differences
    between IFRSs and U.S. GAAP for issues where
    convergence is deemed most likely.
  • IASB liaison IASB member in residence at FASB.

Learning Objective 7
IASB/FASB Convergence
  • Monitoring IASB projects FASB monitors IASB
    projects of most interest.
  • Convergence research project identification of
    all major differences between IFRSs and U.S.
  • Convergence potential FASB assesses agenda
    items for possible cooperation with IASB.

Learning Objective 7