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Accounting 6570

Introduction to International
Financial Reporting Standards
(IFRS) and Framework

International Harmonization and

Harmonization is the process of increasing the
level of agreement in accounting standards
and practices between countries. It means
everyone has the same choices .
Harmonization is NOT standardization or
uniformity; standardization is similar to
Convergence is everyone agreeing to use
the same set of standards.

Arguments for Convergence

Reduce financial reporting costs
Reduce cost of capital
Raise the quality level of accounting practices
Increase credibility of financial information
Allow developing nations to have highly
qualified standard setters
Easier to transfer accounting staff

Arguments Against Convergence

Culture will still influence interpretation and
selection of choices
Different environments may call for different
accounting systems
Politics may rule whose accounting systems are
Developing nations may not need as complex an
accounting system.

Major Convergence Efforts

Investors and Regulators

Accountants and Auditors


Regional Organizations
European Union

International Organization of Securities
Commissions (IOSCO)

Securities regulators around the world

Around 135 members from about 100 countries
SEC is a member
Aims to ensure a better regulation of the markets
Global coordination of stock exchange rules to
encourage multiple listings
Supports more disclosure and one set of high quality

Accountants and Auditors

International Federation of Accountants (IFAC)
Formed in 1977
Concerned with international auditing guidelines and
standards, ethics, education and training

International Forum on Accountancy

Development (IFAD)
Formed in June 1999 to enhance the accounting
profession in emerging countries
Formed Forum of Firms to increase quality of financial
reporting and auditing standards for all nations

European Union - common framework of law, taxation,
and financial resources
27 European countries currently
Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark,
Estonia, Finland, France, Germany, Greece, Hungary, Ireland,
Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands,
Poland, Portugal, Romania, Slovakia, Slovenia, Spain,
Sweden, and United Kingdom
Euro currency - used by 16 countries including Austria, Belgium,
Cyprus, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia,
and Spain
MAJOR EXCEPTIONS: Denmark, Sweden, and the U.K.

European Union
Goal is to have comparable, reliable financial information
provided by all E.U. companies
As of 2007, ALL E.U. listed (publicly-held) companies
must follow International Acct. Standards

International Accounting
Standards Committee (IASC)
Formed June 29, 1973 by representative
bodies from 9 countries including:
Australia, Canada, France, Germany, Japan,
Mexico, Netherlands, U.K./Ireland, and U.S

Headquartered in London, England

Representatives from 112 countries and
more than 153 organizations

Board Restructuring
Restructured April 1, 2001
New structure
Now called International Accounting Standards Board
IASB is an independent organization with two main
Also has a a Standards Advisory Council (about 50 members),
miscellaneous Advisory Committees and an International
Financial Reporting Interpretations Committee (12 members
appointed by the Foundation)

What is the structure of the

international standard setters?



Board (IASB)


Information provided by

Board Restructuring
22 highly respected experienced members
Chairman Tommaso Padoa-Schioppa, Former Italian
Minister of Economy and Finance, Italy
Vice Chairman Tsuguoki Fujinuma, Former President
of IFAC, JICPA, and Senior Partner of Ernst & Young
Main duties
Appoint Board, Committee, and Council Members
Exercise oversight of Board
Raise funds

Board Restructuring

Sole responsibility for setting accounting standards

14 voting members, 1 nonvoting member
Have best available combination of technical skills and
international business experience
Seven must have a formal liaison with one or more national
standard setters
Minimum: 5 practicing auditors, 3 preparers, 3 users, 1 academic
First chairman of the IASC Board
Sir David Tweetie, former U.K. Accounting Standards Board

List of members (

Mission Statement
The International Accounting Standards Board is an
independent, privately-funded accounting standard setter
based in London, United Kingdom. Board Members come
from eleven countries and have a variety of functional
The Board is committed to developing, in the public
interest, a single set of high quality, understandable and
enforceable global accounting standards that require
transparent and comparable information in general purpose
financial statements.
In addition, the Board cooperates with national accounting
standard setters to achieve convergence in accounting
standards around the world.

How are international standards set?



n paper
Input is received from:


IFRS Advisory
Working Group


International groups
such as analysts,
preparers, audit
technical partners
Special interest






Local standard setters

Political groups

Post-implementation meetings
Information provided by

Standard Setting Process

1. The Board establishes an Advisory Committee
to give advice on the issues arising in the project.
Consultation with the Advisory Committee and
the Standards Advisory Council occurs throughout
the project.
2. IASB may develop and publish Discussion
Documents for public comment.
3. Following the receipt and review of comments,
IASB would develop and publish an Exposure
Draft for public comment

Standard Setting Process

4. Following the receipt and review of comments,
IASB would issue a final International Financial
Reporting Standard.
5. Publication of a Standard, Exposure Draft, or
final SIC Interpretation requires approval by 8 of
the 15 members (simple majority). Other
decisions, including the issuance of a Draft
Statement of Principles or a Discussion Paper and
agenda decisions, requires a simple majority of the
Board Members present at a meeting attended by
50% or more of the board members.

What is the outlook for IFRS adoption?

Global snapshot

IFRS required or permitted

Local GAAP based on legacy IAS
No action taken/date set for adoption
In process of adopting or converting to IFRS

Currently, there are 117

countries that either
adopted or signed to adopt
Brazil 2010
Canada 2011
Chile 2009/2010/2011
India 2011/2012
Japan 2010 (optional)
Mexico 2012
The predominance of usage
of IFRS around the world
provides even greater
motivation for IFRS
adoption in the US.

Use of IFRS
IFRS is required for all companies in 76 countries.
European Union All listed companies must use IFRS
Some countries allow IFRS for foreign companies only
Application of IFRS among the Global 5500 companies
increased from 29 in 2004 to 159 in 2007
AICPAs Governing Council recognizes IFRS as
authoritative for financial reporting for members of
Private U.S. domiciled companies may now choose freely
between U.S. GAAP, IFRS, and IFRS for Small, Medium
Enterprises (IFRS SMEs - simpler than IFRS)

Principles-Based Approach
Standards are vague guidelines instead of
step by step rules (as in the U.S.)
Guidance is limited (ON PURPOSE!)
Judgment is encouraged to apply the
standards; over-reliance on detailed rules is
True and fair view overrides
If following a standard would be misleading,
you do not have to follow the standard

Is IFRS better than US GAAP?

The following example is a simple
illustration of a principles-oriented approach
compared to a rules-oriented approach.
Principles oriented:

Your parents tell you

to do your best to get
good grades.
If you do not get good
grades, they will
consider the substance
of your reasons.

Rules oriented:

Your parents tell you to

get a 3.2 GPA or above.

They provide you with 15

contingencies that might
justify acceptance of
anything lower than a 3.2

IASB Framework
Investors are primarily the main user group.
Primary objective is to provide information useful for
decision making.
Underlying assumptions include accrual basis and going
Understandability, relevance, reliability, and comparability
are the main characteristics.
The elements assets, liabilities, income, expenses and
capital are defined.
No one measurement basis is prescribed.
The IASB Framework is being revised with several other
countrys standard setters.

Framework Update
There are eight phases of update: Objectives, Elements,
Measurement, Reporting entity, Presentation and disclose,
Purpose and status, Non-profit sector, Remaining issues
Red = currently working on.
Objective - Provide financial information about the
reporting entity that is useful to existing and potential
investors, lenders, and other creditors in making decisions
about providing resources to the entity.

Framework Update
Fundamental Qualitative Characteristics
Relevance (capable of making a difference)
Faithful representation (replaces reliability)
Enhancing Qualitative Characteristics
Comparability, Verifiability, Timeliness,
Pervasive Constraints
No matching
No conservatism/prudence

Framework Update
Working definition of asset:
An asset of an entity is a present economic
resource to which the entity has a right or
other access that others do not have.
Economic resource
Entity has rights or means to access
Rights exist at the financial statement date

Framework Update
Working definition of liability:
A liability of an entity is a present
economic obligation for which the entity is
the obligor.

Derived from working definition of an asset

No need to specify probability, past event
Only an unconditional obligation to an external party
Distinguishes liabilities from equity

Framework Update
Measurement still working on this
Reporting Entity circumscribed area of
business activity of interest to some users
Time table:

Objective & QCs Q3 2010

Reporting entity ED March 11, 2010
Measurement DP 2010

Main Differences Between U.S.

Revaluation of tangible assets allows fair
market valuation of property, plant and
Development costs can be capitalized
LIFO inventory not permitted
No extraordinary items allowed

Differences from U.S. GAAP

IFRS have no enforceability internationally;
only enforceable by the local country
adopting them.
IFRSs deemed less rigorous
IFRSs do not cover as many issues as US

Acceptance of IAS
FASB/IASB Memorandum of Understanding
MoU (Norwalk Agreement)
Both pledged to use their best efforts to
converge standards
Coordinate future work programs
FASB is increasing its size back to 7.
Originally wanted to converge by June 30,
Not feasible.

GAAP Convergence
Boards have achieved high-level convergence in
some areas

Business combinations
Share-based payments
Income taxes
Fair value option
Statement of cash flows

GAAP Convergence
In other areas, models are very different:

Debt/equity classification
Impairment of long-lived assets

June 2010 announced areas of priority

Financial instruments, Revenue recognition, Financial
statement presentation, consolidation, leases, financial
instruments with characteristics of equity and fair value

IFRSs Acceptance
Securities and Exchange Commission (SEC)
As of November 15, 2007, foreign listed companies
using IFRS no longer have to reconcile to U.S. GAAP.
Currently there are around 1,230 foreign private issuers
from more than 57 countries listing with the SEC.
Around 143 companies filed their 2007 20-F with no U.S.
GAAP reconciliation

Proposal to switch to IFRS under consideration

What is the outlook for IFRS adoption?

In 2008, the SEC released a proposed Roadmap that laid out a timeline
and milestones for continuing US progress toward acceptance of IFRS
for public companies.
In February 2010, the SEC reaffirmed its commitment to IFRS and
continued convergence activities. It also set forth a transparent work plan
(the Work Plan) to allow the SEC to make its decision on IFRS adoption
in 2011.
The Work Plan will address the specific factors and areas of concern that were noted
by the SEC and by the comment letters on the Roadmap.
In executing the Work Plan, the SEC staff will gather information by performing its
own research as well as by seeking comment from, holding discussions with, and
analyzing information from constituents. The SEC staff will also consider the
experiences of jurisdictions that have successfully incorporated or plan to incorporate
IFRS into their financial reporting systems.
The SEC staff stated that it will provide public progress reports on the Work Plan
beginning in October 2010.

What is the outlook for IFRS adoption?

The following are the specific areas of focus within the Work Plan:

Sufficient development and consistent application of IFRS:

Independence of the standard-setting process:

The SEC staff will evaluate the comprehensiveness and enforceability of

IFRS as well the auditability and comparability of financial statements
prepared using IFRS, both in concept and in practice. These efforts will
include consideration of the IASBs efforts to improve IFRS through its
conversion efforts with the FASB.

The SEC staff will consider the extent to which the IASBs governance
(including its Monitoring Board), composition, funding and standard-setting
process continue to promote the reporting of full, fair and reliable financial
information to support investors in their capital allocation decision making.

Investor understanding and education:

The SEC staff will consider investor understanding and education regarding
IFRS, including the current familiarity with IFRS, the actions needed to
facilitate further understanding and the time frame to do so.

What is the outlook for IFRS adoption?

There has been some concern expressed about following
standards developed by a standard-setting body over which the
SEC has no control.

James Kroeker, SEC Chief Account, has pointed out

the following in addressing these concerns:
The US representation on the Monitoring Board will allow for
influence over the international standard setting actions of the IASB.
The FASB will play a key role in further aligning US GAAP with
IFRS and will have an ongoing and substantive role post-adoption
similar to national standard setters in other post-adoption jurisdictions.
This could include exerting influence on IFRS, maintaining US
GAAP as necessary and representing the US on the international
stage in areas of research and thought leadership.

Impediments to Convergence
Resistance to change
European Union wanted changes in IAS 32
and 39 and forced the IASB to change its
No more rigorous than the FASB
U.S. Congress

Impediments to Change
IASB setup Currently 4-U.S., 2, U.K, 1each from
Australia, Brazil, China, France, Germany, India,
Japan, South Africa, and Sweden
Too political?
Still too large?
15 now, expanding to 16 people by July 2012
(4 North America, 4 Europe, 4 Asia/Oceania, 1 Africa, 1
South America, 2 other for geographical balance)

Impediments to Change
Is it really independent?
There is now a MONITORING BOARD for the Trustees
Composed of Emerging Markets and Technical Committees of
Financial Services Agency of Japan
Basel Committee on Banking Supervision is an observer.

Are constituents biased toward their own national

Constituents often appear Anti-U.S.
Other differences?

IAS Plus (
Website sponsored by Deloitte
Lists differences between IFRSs and different
countrys GAAP

Homework for September 30

1-1, 1-4 (Abdulaziz Alsayyari)

2-1, 2-4 (Weerapat Attachot)
3-2, 3-3 (Dr. Harrington)
4-1, 4-2 (Michele Bouton)
5-3, 5-5 (Stephanie Braden)
6-1, 6-2 (Heather Brown)
All homework problems 2 points each.