CHAPTER 3

INTERNATIONAL ACCOUNTING
 International Accounting
Standards
 Financial accounting is influenced
by the environment in which it operates
 the fin. accounting standard applied by multinational
company often significantly different from country to country
 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
 If investors and creditors can not obtain understandable fin.
Information about company that operate in foreign countries, they
are not likely to invest in or lend money to these company
The move toward harmonization in international
accounting standard
 2002 FASB and IASB did joint commitment to the
development of accounting standards that could be used
for both domestic and cross-border financial reporting
 2004  FASB and IASB announced two joint projects:
 A project to develop c ommon conceptual framework
 A project to establish a high quality standard for presentation
information in financial statement
 2005  SEC was examining the possibility of removal of
the need for the reconciliation requirement for non-US
companies tha uswews IFRS
 2005  European Union countries adopted IFRS
 2007  SEC accepted FS from foreign private issuers
prepared in IFRS.
International Business Accounting
Issues
 A company’s first exposure to
international accounting is
frequently the result of a purchase
or sale with a foreign entity

 Problems that caused dealing with foreign companies:

1 Exchange gains or losses
2 Difficult to obtaining international credit information
3 Evaluation of financial statements may be complicated by the use of
a different language and or accounting principles
 Next step may be to open an international division
 Another 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 Standard:

Level of Political
Education System

Economic
Legal
Development
System
 Level of Education
 Countries with better-educated populations are associated with
more advanced financial accounting systems
 Political System
 Companies in socialist country may be required to provide
information on social impact in addition to information on
profitability
 Legal System
 When governments prescribe accounting practice and
procedures, the authority of the accounting profession is usually
weak.
 Economic Development
 Countries with low levels of economic development will have
relatively less need for a sophisticated accounting system
 Approaches to Preparing Financial
Statements for Foreign Users
1 Send the same set of FS to all users
2 Translate language
3 Translate language and currency
4 Prepare two sets of FS
5 Prepare one set of FS based on World-
wide standards
 The International Accounting
Standards Committee
 The preparation of financial statements for foreign users
under option #5 is being increasingly advocated
 IASC
 formed in 1973 to
 International
develop world wide Accounting
accounting standard Standards Board
 Since 1983, the  replaced IASC in 2001
IASC’s member
included all of the
professional
accounting bodies
that are members of
the International
Federation of
Accountants (IFAC)
 Standard Setting by the IASC
 Original intent:
 avoid complex details
 concentrate on basic standards
 As a result, the IASB’s standards are
more principles based than the FASB’s
standards
 Standard Setting by the IASC
 IASs sometimes permitted two treatments for
accounting transaction:
1 Benchmark treatment  preferable treatment
2 Alternative treatment
 Improvements Project
 2003  IASB removed 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 (1998-1999), IASC acted mainly as a
HARMONIZER
 A harmonizer = a body that selected an accounting treatment that already
existed at the national level in some countries and then sought world wide
acceptence of that treatment, perhaps with some modification
 Recently, it has begun to combine that role with the role of a
CATALYST
 A catalyst = a coordinator of national initiatives and an initiator of new work at
the 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
 Appoints
KEY: Reports To

New Structure Advises

IASC Foundation
19 Trustees Appoint, Oversee, Raise Funds

Board: 12 Full time & 2 Part Time

Set Technical Agenda
Approve Standards, Exposure Drafts, &
Interpretations

Standards
Advisory Council
49 members International Financial
Reporting
Interpretations
Advisory Groups
Committee
For Major Agenda Projects
(12 members)
Structure of The IASB
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 As National requirements
2 As the basis for some or all national requirements
3 As an benchmark for countries to develop standards
4 By regulatory authorities for domestic and foreign companies
5 By companies themselves
 Also International Organization of Securities Commissions
(IOSCO) looks to the IASC to provide standards that can
be used in multinational securities offerings
 Current Issues
 Partnership with the IOSCO
 Generate standards acceptable to IOSCO
 December 17, 2003
 IASB published 13 revised International Accounting Standards
 Reissued two others
 Gave notice of the withdrawal of its standard on price level
accounting.
 July 2006, IASB announced that it was beginning an
annual improvement project.  annual process to deal
with non-urgent but necessary amandement to IFRS
 The Use of IASC Standard
 More than 12.000 companies in approximately 120
countries adopt IFRS
 2005, the companies listed on European Union-regulated
stock exchange to prepare their consolidated FS in
accordance with IFRS
 All major economies except the US will soon be using
IFRS.
 IASB and FASB are currently engaged in several efforts to
attain a uniform set of IAS
 Short-term International Convergence Project
 The Norwalk Aggreement
 The Roadmap to Convergence
 IFRS No. 1: First-time Adoption of International
Financial Reporting Standards

 To assist companies making change to IFRS, and to

enable users to understand the effect of applying a
new set of accounting standard, the IASB issued IFRS
No 1.
 FASB Short-term International
Convergence Project

 The goal of this project is to remove a variety of

individual differences between U.S. GAAP and IFRS
that are not within the scope of other major projects.

 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 Norwalk Agreement

 September 18, 2002:

 FASB and IASB held joint meeting in Norwalk, Connecticut
 Both 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.
 The Roadmap to Convergence
 2008, the SEC vote to publish for public comment a
proposed roadmap to the use IFRS by US issuers
beginning in 2014
1) Improvements to accounting standard
2) Funding of the International Accounting Standards
Committee Foundation
3) Improved ability to use interactive data for IFRS reporting
4) Improved education and trainning in the US
5) Limited use in a narow group of companies
6) SEC was to determine in 2011 whether mandatory
adoption of IFRS is feasible based on the progress in the
first five milestones
7) Mandatory use
 The Roadmap to Convergence
 Agreement between FASB & IASB:
 Convergence best achieved through the development of high-
quality, common standards
 Develop a new common standard rather than try to eliminate
differences
 Replace weaker standards with stronger standards
 International vs. GAAP
Accounting Standards

 Question: Should foreign companies be

allowed to list
their securities in United States markets
 Form 20-F reconciliations
 Pressure on the SEC to accept
international accounting rules
 In 1989 IASC issued: Framework for the Preparation
and Presentation of Financial Statements
 Purpose - to set out concepts that underlie the preparation
and presentation of financial statements for external user
by:
1 Helping the IASC in developing future standards
2 Promoting harmonization of accounting standards
3 Assisting national standard setters
4 Assisting preparers in applying international standards
5 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. The objective of financial reporting of useful
financial information
2. The Qualitative characteristics
3. The reporting entity
4. The definision, recognition, and
measurement of the elements of FS
5. The concepts of capital and 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 statements
1 Accrual basis
2 Going concern
 Qualitative Characteristics
 Attributes that make accounting information
useful
1 Understandability
2 Relevance
3 Reliability
4 Comparability
 Also recognized that timeliness and a
balance between costs and benefits were
constraints
The Elements of Financial Statements
 Asset
 Liability
 Equity
 Income
 Expense
 The concept of recognition
– Probable
– Measurable
Measurement of the Elements of
Financial Statements
 Measurement involves assigning monetary
amount at which the elements of the FS are
to be recognized and reported.
 Variety of measurement
Historical cost
Current cost
Net realizable (settlement) value
Present value (discounted)
The Concepts of Capital and Capital
Maintenance
 Capital:
 In financial concept  capital= net asset or equity of
the enterprise
 In physical concept  capital= the productive capacity
of the enterprise
 Concepts:
1 Financial capital maintenance
2 Physical capital maintenance
 The selection of the measurement bases and
concept of capital maintenance determine the
accounting model used.
 IASC does not intend to prescribe a model
Financial Capital Mantenance Concept

 A profit is earned only if the financial (or

money) amount of the net assets at the end
of the period > at the beginning period after
excluding distribution to, and contribution
from owners
 Increase in the price of assets held over the
priod (holding gain), may not be recognised,
until the assets disposed in a exchange
transaaction
Physical Capital Maintenance Concept
(PCMC)
 A profit is earned only if the physical productive capacity
(or operating capability) at the end of the period > at the
beginning period after excluding distribution to, and
contribution from owners
 PCMC requires the current cost measurement
 Price changes affecting the assets and leabilities are
treated as capital maintenaance adjustments within
equity and not as profit.
IAS No. 1 “Presentation of Financial Statements”

 To address the demand of investor for

transparent informationthat is comparable
over all period
 Considerations:
a Fair presentation and compliance with IASC standards
b Accounting policies
c Going concern
d Accrual basis of accounting
e Consistency of presentation
f Materiality and aggregation
g Offsetting
h Comparative information
IAS No. 1 “Presentation of Financial Statements”
2003 Amendments

 “Presents fairly” definition

 Elaboration of “misleading” results
from complaince
 Standards on selection of accounting
policies moved to IAS No. 8
 Certain disclosures no longer
required
 Specific disclosures required
 Statement of Changes in Equity
disclosure requirements
IFRS No. 1 “First Time Adoption of International
Reporting Standards”
 Requires an entity to comply with every IASB
standard
 Entities must explain how the transition to IASB
standards affect their financial statements
 The principles apply:
 Recognition all assets and liabilities whose recognition is
required under IFRSs
 Do not recognize items as assets or liabilities when
IFRSs do not allow
 Requires reclassifying if necessary
 Applies existing IFRSs to measuring all recognized
assets and liabilities
 Prepared by Kathryn Yarbrough, MBA

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