TOPIC 3:

INTERNATIONAL
CONVERGENCE OF
FINANCIAL REPORTING
INTERNATIONAL CONVERGENCE OF FINANCIAL
REPORTING

Chapter Topics
 Convergence—the buzz word in international
financial reporting.
 Organizations involved in harmonization.
 Arguments for and against convergence.
 International convergence towards and the
adoption of IFRS.
HARMONIZATION AND CONVERGENCE
Harmonization
 The process of reduction of alternatives while
maintaining a high degree of flexibility in
accounting practices.
 Term is now becoming “antiquated.”

Convergence -- the adoption of one set of standards

internationally. This is the main objective of the IASB.
HARMONIZATION
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.
CONVERGENCE: PROS & CONS
PROS:
 Expedite the integration of global capital
markets and make easier the cross-listing of
securities.
 Facilitate international mergers and acquisitions.
 Reduce investor uncertainty and the cost of
capital.
 Reduce financial reporting costs.
 Allow for easy and cost effective adoption of
high-quality standards by developing countries.
 Easier to transfer accounting staff internationally.
CONVERGENCE: PROS & CONS
CONS
 Significant differences in standards
currently exist.
 The political cost of eliminating differences.
 Overcoming “Nationalism” and traditions.
 Perhaps it will not provide significant
benefits.
 Will cause “Standards Overload” for some
firms.
 Diverse standards for diverse places is
acceptable.
HARMONIZATION EFFORTS
Organizations involved
 Association of South East Asian Nations
(ASEAN)
 United Nations (UN)
 European Union (EU)
 International Accounting Standards
Committee(IASC)—dissolved in 2001
 International Organization of Securities
Commissions (IOSCO)
 International Federation of Accountants
(IFAC)
 IASB (successor to IASC) and FASB
USE OF IFRS
Evidence of support for IFRS

 Adoption by the EU – public companies in the EU

were required to begin using IFRS in 2005.
 IOSCO has endorsed IFRS for cross-listings.
 IFAC G20 accountancy summit in July 2009 issued
renewed mandate for adoption of global
accounting standards.
 Latest IFAC Global Leadership Survey—emphasized
that investors and consumers deserve simpler and
more useful information.
 Adoption of IFRS in 2011: Japan, Canada, India,
Brazil and Korea.
INTERNATIONAL CONVERGENCE ISSUES
 The complicated nature of standards such as
financial instruments and fair value accounting.
 The tax-driven nature of the national accounting
regime.
 Disagreement with significant IFRS, such as financial
statements and fair value accounting.
 Limited capital markets = little benefit.
 Investor satisfaction with national accounting
standards.
 IFRS difficulties in language translation.
NATIONAL DIFFERENCES:
MORE RECENT EVOLUTIONS

 Research in the nineties and in the 21st century tries to

explain differences in accounting quality between
countries through the analysis of institutional differences
observed between countries
 Major findings of the research is that accounting quality is
still influenced by domestic institutional variables relating to
investor protection and quality of enforcement of
standards
HIGH QUALITY GAAP VERSUS
LOW QUALITY GAAP

 Low quality GAAP allows management to report results

when they want to report those results
 High quality GAAP provides less discretion for such
practices
THE IMPLEMENTATION OF
THE GAAP

How GAAP is implemented is

influenced by national characteristics
such as the degree of investor
protection, the degree of
enforcement of financial accounting
standards, risk of litigation and the
legal system.
 RECENT RESEARCH IN
RELATION TO THE
ACCOUNTING QUALITY OF

IFRS ACCOUNTS IN THE EU
E.g. (Daske et al. 2008; Armstrong et al. 2010; Barth et al. 2008;
Landsman et al. 2011; Florou and Pope, 2012; Christensen et al.
2012)
 Positivecapital market reactions mainly in
countries with high quality of enforcement
 A country’s institutional environment still influences
accounting quality
 Impact of IFRS difficult to single out, a
number of countries also change
governance regimes and enforcement
systems in the period 2005-2010
 National differences influence the
implementation of the accounting
standards in a country – also in the
case of compulsory compliance
with IFRS

CONCLUSION: NATIONAL
DIFFERENCES
STILL PLAY A ROLE!
GROUP DISCUSSION
 Organizations involving in accounting convergence (their
roles and activities)
 IASB and using of IFRS over the world
 IFRS and accounting quality (choose to discuss deeply on 2-3
issues)
 Accounting quality?
 Cost and benefit of applying IFRS (choose to discuss deeply
on 2-3 issues)
 Applying of IFRS in Vietnam: benefit and challenges
 Accounting system in Vietnam: history and evolving issues
 Accounting system in some countries: UK; US; Australia;
Singapore; Malaysia; Japan; China…

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REQUIREMENTS
 Group assignment: 3-4 students

 A written report (60%): submitted both hard and soft copy

 Format: Cover page; Table of Content; Introduction; Main part;
Conclusion; References

 Citing rules in research

 Around 3000 - 4000 words

 Deadline:

 A 15 minutes presentation on research result (40%).

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