International Accounting, 6/e Frederick D.S. Choi Gary K.

Meek

Chapter 8: Global Accounting and Auditing Standards

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Learning Objectives

Define and understand the distinction between harmonization and convergence as they apply to accounting standards. State the pros and cons of adopting international accounting standards. Understand what is meant by reconciliation and mutual recognition of different sets of accounting standards. Identify the six organizations that have leading roles in setting international accounting standards and promoting international accounting convergence. Describe the structure of the International Accounting Standards Board and how it sets International Financial Reporting Standards. Understand the major provisions of the U.S. Sarbanes-Oxley Act and why similar legislation is being enacted in other countries.
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Standardization, Harmonization, and Convergence

Standardization

Rigid, narrow set of rules One-size-fits-all approach Less flexible than harmonization or convergence Not the current thinking Standards that are compatible no logical conflicts Means the elimination of differences among existing accounting standards

Harmonization

Convergence

Means the gradual elimination of differences in accounting standards But might also involve a new accounting treatment not in any current standard Involves cooperative efforts of IASB and national standard-setters Now the preferred term over harmonization

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A Survey of International Convergence

Advantages of international convergence Investor understanding and confidence is improved. Investor decision making is improved. Capital is allocated more efficiently around the world. Financial risk and cost of capital are reduced. Strategic decision making in mergers and acquisition is improved. Criticisms of international standards Solution is too simple for such a complex problem. Strips accounting of its flexibility to adapt to different situations. Challenges national sovereignty. A tactic of large accounting firms to expand their market share. May create standards overload.
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A Survey of International Convergence (contin)

Reconciliation and mutual recognition

Reconciliation

Financial statements based on home GAAP, but net income and stockholders equity reconciled to another GAAP. This is the SEC requirement for foreign filers. Less costly than preparing complete financial statements based on another GAAP. But a summarized, incomplete picture. Jurisdictions accept financial statements based on each others GAAP. Does not improve comparability. Can create an unlevel playing field.

Mutual recognition (reciprocity)

Evaluation

Arguments on both sides have merit. But convergence and international standards are a reality.

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Some Significant Events in the History of International Accounting Standard Setting

1959 Jacob Kraayenhof issues first significant proclamation that work on international standards should begin 1973 IASC created 1977 IFAC founded 1978 EU Fourth Directive issued 1987 IOSCO resolves to promote common, international accounting and auditing standards 1989 IASC issues Exposure Draft 32 1995 IASC and IOSCO agree on core standards work plan 1995 EU adopts New Accounting Strategy 2000 IOSCO accepts IASCs core standards 2001 EC proposes that EU-listed companies use IAS by 2005 2001 IASB succeeds IASC 2002 Norwalk Agreement signed between IASB and FASB 2005 SEC roadmap to eliminate IFRS reconciliation requirement
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International Accounting Standards Board

1.

Overview
Independent private-sector standard-setting body Objectives
To develop, in the public interest, a single set of high-quality, understandable, and enforceable global accounting standards that require high-quality, transparent, and comparable information in financial statements and other financial reporting to help participants in the worlds capital markets and other users make economic decisions To promote the use and rigorous application of those standards In fulfilling the objectives associated with (1) and (2), to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies To bring about convergence of national accounting standards, and International Accounting Standards and International Financial Reporting Standards to high-quality solutions

2. 3.

4.

Represents accounting organizations from approximately 100 countries Standards follow fair presentation and full disclosure Standards are principles-based
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International Accounting Standards Board (contin)

IASCs core standards and the IOSCO agreement

IOSCO agreed to IASCs core standards plan in 1995 IOSCOs agreement was a major boost to IASCs credibility Core standards completed in 1998 IOSCO approved core standards in 2000

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International Accounting Standards Board (contin)

The new IASB structure IASC was restructured as IASB in 2001 Bodies

Trustees

Representatives from entire world Appoints members of Board Raises funds and oversees IASB activities Issues International Financial Reporting Standards 14 members 12 full-time and 2 part-time Actively partners with national standard setters to promote convergence Follows due process in setting IFRS Advises IASB Board on agenda and priorities Issues interpretations of IFRS
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IASB Board

Standards Advisory Council

International Financial Reporting Interpretations Committee

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International Accounting Standards Board (contin)

Recognition and support for IASB

IFRS are widely accepted around the world Significant events that boosted IASBs credibility

IOSCO endorsement of (IASCs) work plan EC proposal that EU-listed companies use IFRS by 2005 Norwalk Agreement between IASB and FASB

SEC response to IFRS

Supports work of IASB but does not yet accept IFRS filings by foreign companies 2005 Issued roadmap setting out the steps for eliminating requirement to reconcile IFRS to US GAAP 2007 Proposed eliminating reconciliation requirement by 2009

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European Union

Overview

Company law harmonization designed to integrate European financial markets European Commission has full enforcement powers for accounting directives

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European Union (contin)

Fourth, Seventh, and Eighth Directives

Fourth Directive (1978)

Broad, comprehensive set of accounting rules

Valuation rules Disclosure requirements Format rules for financial statements

Individual company accounts Applies to public and private companies True and fair view is overriding requirement Requires audits of financial statements Consolidated financial statements

Seventh Directive (1983)

Required for groups of companies above a certain size Note disclosures Directors report

Specifies

Requires audits of financial statements Member states have wide latitude in incorporating provisions Specifies qualifications for statutory auditors Revised in 2006 and now called Statutory Audit Directive

Eighth Directive (1984)

Requirements for appointment and removal of auditors Audit standards Continuing professional education Auditor rotation Public oversight Audits must follow International Standards on Auditing Established European Group of Oversight Bodies A response to European accounting scandals similar to those in the U.S. 12

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European Union (contin)

Have EU harmonization efforts been successful?

Yes: Directives improved financial reporting practices and brought about harmonization Directives accelerated accounting development in many EU countries No: EU countries mostly adapted the new rules to their existing ones Enforcement was uneven Some difficult issues werent dealt with
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European Union (contin)

The EUs new approach and the integration of European financial markets Requirement that EU companies listed on regulated markets prepare consolidated financial statements using IFRS To become legally binding, IFRS must be adopted by the European Commission

European Financial Reporting Advisory Group (EFRAG)

Provides technical review and opinion of the IFRS Assesses whether EFRAGs advice is well balanced and objective Recommends that the IFRS be adopted (or not) Is the IFRS compatible with European directives? Is the IFRS conducive to the European public interest? Adoption completes the process
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Standards Advice Review Group Accounting Regulatory Committee

European Commission

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International Organization of Securities Commissions (IOSCO)

Securities regulators from over 100 countries Responsible for over 90 percent of global securities markets Objectives of member agencies

To cooperate together to promote high standards of regulation in order to maintain just, efficient, and sound markets To exchange information on their respective experiences in order to promote the development of domestic markets To unite their efforts to establish standards and an effective surveillance of international securities transactions To provide mutual assistance to promote the integrity of the markets by a rigorous application of the standards and by effective enforcement against offenses

Extensive work on international accounting and disclosure standards Cooperates with IASB Has endorsed IFRS for cross-border securities offerings

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International Federation of Accountants

Worldwide organization representing the accountancy profession

160 member organizations 120 countries 2.5 million accountants To strengthen the accountancy profession worldwide To contribute to the development of strong international economies by establishing and promoting adherence to high-quality professional standards, furthering the international convergence of such standards To speak out on public interest issues where the professions expertise is most relevant

Mission

Aim is to harmonize and converge auditing standards and professional practice worldwide

Auditing adds credibility to external financial reports High-quality auditing standards are necessary to ensure that accounting standards are rigorously interpreted and applied If auditor training and audit standards vary, the reliability of financial statements will also vary

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International Federation of Accountants (contin)

Organizational structure

IFAC council elects the IFAC board IFAC board sets policies and oversees IFAC operations Public Interest Oversight Board provides additional oversight Work done through standard-setting boards and standing committees

Standard-setting boards

International Accounting Education Standards Board International Auditing and Assurance Standards Board Issues International Standards on Auditing International Ethics Standards Board for Accountants International Public Sector Accounting Standards Board Compliance Advisory Panel Developing Nations Committee Nominating Committee Professional Accountants in Business Committee Small and Medium Practices Committee Transnational Auditors Committee

Standing committees

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UN Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR)

Only intergovernmental working group devoted to corporate accounting and auditing Objective

To promote the transparency, reliability, and comparability of corporate accounting and reporting To improve disclosures on corporate governance by enterprises in developing countries and countries with economies in transition

Discusses and publishes worldwide best practices Recent initiatives

Corporate governance Accounting by small and medium-sized businesses Technical assistance in emerging economies
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Organization for Economic Cooperation and Development (OECD)

International organization of 30 (mostly industrialized) market-economy countries Promotes good governance in public and private sectors A voice for larger, industrialized countries

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Conclusion

Debate is no longer whether to converge, nor even how to converge Financial reporting systems are converging, as international capital markets become more investor oriented International Accounting Standards Board is at the center of the convergence movement

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Other Chapter Exhibits

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Other Chapter Exhibits (contin)

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Exhibit 8-2 (contin)

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Exhibit 8-2 (contin)

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Exhibit 8-2 (contin)

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Chapter Exhibits (contin)

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Exhibit 8-3 (contin)

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Other Chapter Exhibits (contin)

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Exhibit 8-5 (contin)

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Other Chapter Exhibits (contin)

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Exhibit 8-6 (contin)

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