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CHAPTER 1:

A Survey of
International
Accounting
Prepared by

Bill Dawson, BA,


HBA, CMA.
University of
Western Ontario

2013 McGraw-Hill Ryerson Limited

Learning Objectives
LO1 Describe the conceptual framework for
financial reporting.
LO2 Identify factors that can influence a countrys
accounting standards.
LO3 Identify the role that the IASB intends to play in
the establishment of uniform worldwide accounting
standards.
LO4 Identify the direction that the FASB intends to
follow for public companies.
2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 2

Learning Objectives
LO5 Describe how accounting standards in Canada
are tailored to different types of organizations.
LO6 Analyze and interpret financial statements to
assess the impact of different accounting
methods on key financial statement ratios.
LO7 Identify some of the differences between
IFRS and ASPE.

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 3

LO1

The Conceptual Framework


for Financial Reporting

Document in the CICA Handbook just prior to the


IFRSs in Part 1.
Main items include

The objective of general-purpose financial reporting

Qualitative characteristics of useful financial


information

Underlying assumptions

Definition, recognition, and measurement of the


elements of financial statements
All accounting practices should be traceable back to
and supported by the conceptual framework.

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 4

LO1

The Conceptual Framework


for Financial Reporting

Professional judgement is required in order to apply


the basic principles and concepts of The Conceptual
Framework in order to provide useful information
to make decisions.

Use judgement to provide a fair representation of the


financial position and the financial performance of
the entity.

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 5

LO1

The Conceptual Framework


for Financial Reporting

There are three main areas where judgement


needs
to be applied:

Choice of appropriate accounting policies

Making accounting estimates eg. tangible asset


life, effective hedging strategy, asset impairment

Disclosure in the notes to the financial statements


(what to disclose, disclosure details how much
disclosure.)

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 6

LO2

GAAP Variations and


Standardization

Past GAAP variations between countries caused


financial measurement and presentation differences

GAAP differences have included income


smoothing techniques, variances in asset
measurement and revaluations, and the differing
nature and extent of disclosures.

Globalization of commerce and capital has increased


the number of multinational companies and therefore
the need to standardize financial reporting.

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 7

Comparability and costbenefit


constraint

LO2

The comparability objective of financial reporting is impaired by


differing standards.

For example, to improve comparability to U.S. public companies,


the U.S. Securities and Exchange Commission (SEC) has
required
Foreign companies that trade on U.S. exchanges to reconcile
their
net income from foreign GAAP to U.S. GAAP unless they use
International Financial Reporting Standards (IFRSs) issued by
the International Accounting Standards Board (IASB).

Prior to Canada adopting IFRSs in 2011, this applied to Canadian


companies listed on U.S. stock exchanges

The cost of preparing financial statements under multiple GAAP


standards is significant and hinders the international flow of
capital.
2013
McGraw-Hill
Ryerson Limited
Chapter 2 Slide 8

The pressure
toward accounting harmonization and convergence

Factors that Influence a


Countrys Accounting
Standards

LO2

The following factors can affect national accounting standards:


Taxation: how closely is taxable income based on
accounting income.
Capital markets: in countries where publicly traded debt
and equity are the major source of business financing,
disclosure standards are greater.
Legal system: Code law countries set GAAP in legal
statutes; private bodies (e.g. CICA or FASB) set GAAP
in common law countries.
Ties between countries: GAAP can be similar between
countries with political or economic ties.
Inflation levels: Countries with high inflation often
diverge from historical cost.

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 9

LO3

Harmonization in the European Union

27 European Union (EU) member countries in


2012, 17 of which use the Euro as a common
currency.

EU has attempted to harmonize accounting


principles of member countries by issuing directives
which often allowed flexible alternative reporting
practices

A 1983 EU directive required the consolidation of


subsidiaries, a change in practice for a number of
member countries.

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 10

LO3

International Accounting Standards


Board (IASB)

Successor in 2001 to International Accounting Standards


Committee (IASC). Canada was a founding member of
the IASC in 1973.

Current IASB objectives:

To develop a single set of high-quality, global accounting standards


that require transparent and comparable information in general
purpose financial statements.
To cooperate with various national accounting standard-setters in
order to achieve convergence in world standards.

41 IASB standards in force as of 2012


IASB will introduce new International Financial Reporting
Standards (IFRSs) and International Standards (IASs)
in the future.

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 11

International adoption of

LO3

principles-based on IFRS

December 2012, 93 countries including Canada


currently require the use of IFRSs for all publicly
traded domestic companies, 5 countries required
IFRSs for some companies, 23 countries permitted
but did not require its use.

The EU adopted IFRS in 2005 for all publicly traded


companies (over 8,000) in EU countries.

IFRSs are broad-based principles requiring the use


of
judgement in application, resulting in some
differences
2013 McGraw-Hill Ryerson Limited
Chapter 2 Slide 12
in comparability.

LO4

The United States

Standards set by Financial Accounting Standards


Board (FASB), a private organization.

FASB pronouncements are detailed and rule-based,


compared to more general and principle-based standards
of the IASB.

In September 2002 FASB agreed with the ISAB to


develop and maintain compatible accounting standards.

In 2008, the SEC issued a road map for possible adoption


of IFRSs by domestic issuers as early as 2014

The U.S. Does not permit its domestic public companies


to report using IFRSs (one of 30 countries)

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 13

LO4

The United States

By December 2012 FASB had issued new or amended


standards to converge with some of IASBs standards
for inventory, asset exchanges, accounting changes,
financial instruments, business combinations, and
subsequent events.

IASB issued new or amended standards to converge with


FASBs standards for borrowing costs and segmented
reporting.

In November 2007 the Securities Exchange Commission (SEC)


permitted qualifying foreign companies listed on U.S. Exchange to
report using IFRS without reconciling to U.S. GAAP

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 14

LO4

The United States


SEC has issued 7 milestones that could lead to adoption of
IFRS by U.S. Public companies by 2014.

Milestones 1-4 focus on improvements in IFRSs and IASB


accountability, and U.S. Education on IFRS
Milestones 5-7 provide a transition plan for the potential
mandatory adoption of IFRS in the U.S.

There are hundreds of differences between U.S. GAAP


and IFRS as of December 2012. (see Exhibit 1.4)

Will rules-based U.S. GAAP or principles-based IFRS


become the international standard?

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 15

LO5

Where is Canada going?

In December 2012 there were 5 parts of the CICA


Handbook.
Part I Public accountable entities had to report under
IFRSs -- effective January 1, 2011 with some exceptions.

Part II Private enterprises use ASPE


-- effective January 1, 2011 (may use IFRS)

Part III Not-for-profit organizations


-- effective January 1, 2012

Part IV Pension Plans --- effective January 1, 2011

Part V All other entities not using Parts I-IV will use
Pre-Changeover GAAP until new parts adopted.

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 16

LO5

Where is Canada going?

All levels of government should follow the PSA


Handbook.

Government business enterprises are expected to


follow IFRSs

Non-Government NFPOs can follow IFRSs (Part I)


or Standards for NFPOs (Part III)

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 17

LO6

Financial Statement Ratios

U.S. GAAP is different than IFRSs

ASPE is different from IFRSs

Different accounting methods have different impacts


on key financial statement ratios

disclosure of accounting policies in the notes to


the
financial statements is key

check notes carefully when comparing entities


(See Self Study Problem 2)

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 18

LO7

IFRS versus ASPE

ASPE sometimes allows a choice between different


reporting methods.

Key differences between IFRSs and ASPE include:

disclosure requirements
impaired loans
revaluation and depreciation of components of
property, plant and equipment
impairment losses and subsequent reversal of loss
development costs
post-employment benefits
interest capitalization
classification of preferred shares

2013 McGraw-Hill Ryerson Limited

Chapter 2 Slide 19