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INTERNATIONAL

ACCOUNTING
STANDARDS
What is Accounting?
The purpose of accounting is to:
videntify,
identify record,
record and
communicate the economic
events of an
vorganization to

vinterested users.
 Accounting Standards

 Definition: Accounting standards are


authoritative statements of how
particular types of transaction and
other events should be reflected in
financial statements. (definition from
International Accounting Standards
Board)

 GAAP: Generally Accepted Accounting


The Building Blocks of
Accounting
Financial Statements
Various users
Balance Sheet
need financial Income Statement
information Statement of Owner’s Equity
Statement of Cash Flows
Note Disclosure
The accounting
profession has
attempted to develop a Generally
Generally
set of standards that Accepted
Accepted
are generally accepted Accounting
Accounting
and universally Principles
Principles (GAAP)
(GAAP)
practiced.
Standardization
• Standardization: the imposition of a rigid and
narrow set of rules that in the case of
international accounting standards would
ensure full compatibility.

• Standardization is more associated with the


international accounting standards committee,
since it is more concerned with setting new
accounting standards for countries to follow, in
an attempt to unify the accounting practices
around the world.
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Internationalization
• There is considerable evidence that companies are
increasingly operating in a global marketplace.
– Trade: from 1970 to 1998, world trade has grown
from 600 billion to 10,500 billion
– Strategic alliances
– Foreign direct investment
– Portfolio investment

• Today the world’s capital markets know no borders.


• The participants in those markets need high quality,


transparent, and comparable financial information
to enable them to make sound economic decisions.

• The diverse accounting and reporting practices across


the world have been one of the major obstacles to
economic globalization.
International accounting standards
committee (IASC)

• It was founded in 1973 to harmonize


international accounting standards; the original
members were the accountancy bodies of nine
countries: Australia, Canada, France, Japan, the
Netherlands, UK with Ireland, and USA with
western Germany.

• 1975: first International Accounting Standard


(IAS) was published.

Why Global Accounting
Standards?
• Enhanced worldwide comparability
for investors
• Enhanced quality of reporting
– Some national GAAPs are week
• More company-friendly securities
market for foreign listings

• Reduced reporting costs
• No need to develop and
maintain national standards
• For audit firms and
companies:
–Easier movement of auditors
and accountants across
borders
 GOING INTERNATIONAL
AND
INTERNATIONAL ACCOUNTING
STANDARDS
Globalization of Business :
 Ways to Export
Ways to Manufacture Overseas
Reasons for Manufacturing Overseas
International Accounting
Standards :
The Diversity of Worldwide GAAP
Efforts to Harmonize Worldwide GAAP
IASC Restructured

• The IASC was restructured in April 2001


resulting in an organization called
international accounting standards board
(IASB).
• the IASB announced that future accounting
standards would be called “International
Financial Reporting Standards” (IFRSs).
Standards issued by the IASC that are still in
circulation are referred to as “International
Accounting Standards” (IASs).
• 2003: IASB issues first new standard – IFRS 1
• 2009 budget: £18.4 million
Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)


http://www.sec.gov/

Financial Accounting Standards Board (FASB)


http://www.fasb.org/

International Accounting Standards Board


http://www.iasb.org/
(IASB)

Governmental Accounting Standards Board


Securities and Exchange Commission

Established by federal government


Accounting and reporting for public companies

Securities
Securities Securities
Securities
Act
Act of
of 1933
1933 Act
Act of
of 1934
1934
Encouraged private standard-setting body
SEC requires public companies to adhere to GAAP
SEC Oversight
Enforcement Authority
S e cu ritie s a n d E xch a n g e
C o m m issio n

l R e g u la te s a llp u b licly h e ld co m p a n ie s a n d a ll
co m p a n ie s
with more than a specified number of shareholders or
owners .
l D e te rm in e s th e fo rm a n d co n te n t o f a cco u n tin g
re p o rts
file d b y co m p a n ie s u n d e r its ju risd ictio n .
l Has authority to define accounting terms and to
prescribe
accounting principles.
l Lets the accounting profession develop principles and
standards, but has the final authority.
Financial Accounting Standards
Board

l Seven member board — each having distinguished


accounting backgrounds — who are full-time employees.
l Responsible for developing financial accounting
standards and principles.
l Develops and issues Statements of Financial
Accounting
Standards.
l Has issued about 150 standards that the SEC
recognizes
as authoritative.
American Institute of CPAs
National professional organization
Established the following:

Committee
Committee on
on Accounting
Accounting
Accounting
Accounting Principles
Principles Board
Board
Procedures
Procedures
l1939 to 1959 l1959 to 1973
lIssued 51 Accounting lIssued 31 Accounting
Research Bulletins Principle Board
(ARBs) Opinions (APBOs)
lProblem-by-problem lWheat Committee
approach failed recommendations
l adopted in 1973

http://www.aicpa.org/
Governmental Accounting Standards Board
Created in 1984 to address state and local governmental reporting
issues.
Financial
Financial
Accounting
Accounting
Foundation
Foundation

Financial
Financial Governmental
Governmental
Accounting
Accounting Accounting
Accounting
Standards
Standards Board
Board Standards
Standards Board
Board

Financial
Financial Accounting
Accounting Governmental
Governmental
Standards
Standards Advisory
Advisory Accounting
Accounting Standards
Standards
Council
Council Advisory
Advisory Council
Council

http://www.gasb.org/
IASB Structure
k at
Loo IASB
Who issues standards?
 International Accounting
Standards (IASs) were issued by the IASC from 1973 to
2000. The IASB replaced the IASC in 2001. Since then, the
IASB has amended some IASs and has proposed to
amend others, has replaced some IASs with new
International Financial Reporting Standards (IFRSs), and
has adopted or proposed certain new IFRSs on topics for
which there was no previous IAS. Through committees,
both the IASC and the IASB also have issued
Interpretations of Standards. Financial statements may
not be described as complying with IFRSs unless they
comply with all of the requirements of each applicable
standard and each applicable interpretation.

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International Accounting
Standard
• In 1973, International Accounting
Standards Committee (IASC) was
established by professional
accounting bodies from nine
countries: the U.S., Canada,
Australia, France, Germany, Japan,
Mexico, Netherlands, and U.K.
• I A S Committee – became IASB
in early 2001(Also IFRIC came
into being)
• The organization was renamed
• 1n 1975, first International
Accounting Standard (IAS) was
published.
– IAS No. 1 “Disclosure of Accounting
Policies”

• Since there, 41 international
accounting standards have been
issued.

TYPES OF IAS
• GAAP(GENERALLY ACCEPTED
ACCOUNTING PRINCIPLE)

• IFRS(INTERNATIONAL FINANCIAL
REPORTING STANDARD

• And 41 OTHER STANDARD



Generally Accepted Accounting
Principles (GAAP)

l Ensure that financial statements are


meaningful and
useful.
l Are used whether the business is large
or small.
l Allow financial statements of different
companies to
be compared.
l Allow a company to compare its own
financial
statements from period to period.
Accounting The House of GAAP
The role that accounting standards play in establishing the rules for
disclosing both public and private financial reporting assumes levels of
authority of "more to less" which guide reliance on and determines the
weight of the standards. Understanding this hierarchy is paramount to
grasping the meaning of "generally accepted accounting
principles" (GAAP), and the many supporting documents.
The concept of the "house of GAAP" was introduced in a 1984 article from
the Journal of Accountancy. The author describes and defines the vast
universe of accounting standards as a hierarchy structured along the
lines of the floor plan of a house. "Like any other structure, the house
of GAAP rests on a foundation, in this case a foundation of the basic
concepts and broad principles that underlie financial reporting, without
which, like a house of cards, the house of GAAP would tumble."
In 199I the AICPA's Auditing Standards Board remodeled the house of
GAAP by changing some of the levels of authority of certain accounting
pronouncements and distinguishing between the standards defining
state and local government entities, established by the Government
Accounting Standards Board (GASB) and those for all others, falling
under the FASB's jurisdiction.

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•Principle of consistency: This principle states that when a business
has once fixed a method for the accounting treatment of an item, it will
enter all similar items that follow in exactly the same way.

•Principle of sincerity: According to this principle, the accounting unit
should reflect in good faith the reality of the company's financial status.

•Principle of the permanence of methods: This principle aims at
allowing the coherence and comparison of the financial information
published by the company.

•Principle of non-compensation: One should show the full details of


the financial information and not seek to compensate a debt with an
asset, a revenue with an expense, etc.


• Principle of continuity: When stating financial information, one should
assume that the business will not be interrupted. This principle mitigates the
principle of prudence: assets do not have to be accounted at their
disposable value, but it is accepted that they are at their historical value

• Principle of periodicity: Each accounting entry should be allocated to a
given period, and split accordingly if it covers several periods. If a client pre-
pays a subscription (or lease, etc.), the given revenue should be split to the
entire time-span and not counted for entirely on the date of the transaction.

• Principle of Full Disclosure/Materiality: All information and values
pertaining to the financial position of a business must be disclosed in the
records.

• Principle of Utmost Good Faith: All the information regarding to the firm
should be disclosed to the insurer before the insurance policy is taken.

What is IFRSs’
 The term International Financial
Reporting Standards (IFRSs) has both a narrow and a broad
meaning. Narrowly, IFRSs refers to the new numbered series of
pronouncements that the IASB is issuing, as distinct from the
International Accounting Standards (IASs) series issued by its
predecessor. More broadly, IFRSs refers to the entire body of
IASB pronouncements, including standards and
interpretations approved by the IASB and IASs and SIC
interpretations approved by the predecessor International
Accounting Standards Committee. [On this website, consistent
with IASB policy, we abbreviate International Financial
Reporting Standards (plural) as IFRSs and International
Accounting Standards (plural) as IASs.]

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IFRS

• International Financial Reporting Standards Preface to


International Financial Reporting Standards
• IFRS 1 First-time Adoption of International Financial Reporting
Standards
• IFRS 2 Share-based Payment
• IFRS 3 Business Combinations
• IFRS 4 Insurance Contracts
• IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations
• IFRS 6 Exploration for and Evaluation of Mineral Assets
• IFRS 7 Financial Instruments: Disclosures
• IFRS 8 Operating Segments Framework for the Preparation and
Presentation of Financial Statements
• Framework for the Preparation and Presentation of Financial
Statements

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Which are
international accounting standards(IAS)
• IAS 1 Presentation of Financial Statements
• IAS 2Inventories IAS 3 Consolidated Financial Statements
Originally issued 1976, effective 1 Jan 1977. Superseded in 1989 by
IAS 27 and IAS 28.
• IAS 4 Depreciation Accounting
Withdrawn in 1999, replaced by IAS 16, 22, and 38, all of which
were issued or revised in 1998. IAS 5 Information to Be Disclosed
in Financial Statements
Originally issued October 1976, effective 1 January 1997.
Superseded by IAS 1 in 1997. IAS 6 Accounting Responses to
Changing Prices
Superseded by IAS 15, which was withdrawn December 2003 IAS 7
Cash Flow Statements IAS 8Accounting Policies, Changes in
Accounting Estimates and Errors IAS 9 Accounting for Research
and Development Activities Superseded by IAS 38 effective 1.7.99
IAS 10 Events After the Balance Sheet Date IAS 11 Construction
Contracts IAS 12Income Taxes IAS 13 Presentation of Current
Assets and Current Liabilities
Superseded by IAS 1. IAS 14 Segment Reporting.

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• Segment Reporting
• IAS 15 Information Reflecting the Effects of
Changing Prices
Withdrawn December 2003
• IAS 16 Property, Plant and Equipment
• IAS 17 Leases
• IAS 18 Revenue
• IAS 19 Employee Benefits
• IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance
• IAS 21 The Effects of Changes in Foreign Exchange
Rates
• IAS 22 Business Combinations
Superseded by IFRS 3 effective 31 March 2004.
• IAS 23 Borrowing Costs
• IAS 24 Related Party Disclosures

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• IAS 25 Accounting for Investments
Superseded by IAS 39 and IAS 40 effective 2001.
• IAS 26 Accounting and Reporting by Retirement Benefit Plans
• IAS 27 Consolidated and Separate Financial Statements IAS 28
Investments in Associates
• IAS 29 Financial Reporting in Hyperinflationary Economies
• IAS 30 Disclosures in the Financial Statements of Banks and Similar
Financial Institutions
Superseded by IFRS 7 effective 2007.
• IAS 31 Interests In Joint Ventures
• IAS 32 Financial Instruments: Presentation
Disclosure provisions superseded by IFRS 7 effective 2007.
• IAS 33 Earnings Per Share
• IAS 34 Interim Financial Reporting
• IAS 35 Discontinuing Operations
Superseded by IFRS 5 effective 2005.
• IAS 36 Impairment of Assets
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets
• IAS 38 Intangible Assets
• IAS 39 Financial Instruments: Recognition and Measurement
• IAS 40 Investment Property
• IAS 41 Agriculture

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IASB

Formed in January 2001, the
ISAB replaced its predecessor, the International
Accounting Standards Committee (IASC), as the
international standards setting body. Looking
towards greater formalization of international
accounting standards, IASB is structured similarly
to the FASB. It is currently the focus of the IASB, in
collaboration with the FASB and other accounting
focused organizations, to "converge" standards and
develop a single, universally accepted set of biding
international accounting standards. The IASC, and
now IASB, issue a series of standards known as
International Financial Reporting Standards (IFRS),
formerly called International Accounting Standards
(IAS).

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IASB, IASCF, and IASC Defined

The
International Accounting Standards Board is an independent, private-
sector body that develops and approves International Financial
Reporting Standards. The IASB operates under the oversight of the
International Accounting Standards Committee Foundation. The IASB
was formed in 2001 to replace the International Accounting Standards
Committee.

 IASCF: International Accounting


Standards Committee Foundation
 The
International Accounting Standards Committee Foundation is the
independent, non-profit foundation, created in 2000 to oversee the
IASB. Click for more information about the IASCF Structure.

 IASC: International Accounting Standards


Committee
 From 1973 until a comprehensive
reorganization in 2000, the structure for setting International
Accounting Standards was known as the International Accounting
Standards Committee. There was no actual "committee" of that name.
The standard-setting board was known as the IASC Board. 36
Key to Understanding
International Accounting
Ø Political,
Economic, Cultural
and Infrastructure
Influences on:
ØExternal Reporting
ØTaxes/Capital
Markets/Gov.
Regulation/Standard
Setting/Reporting
Requirements/Users
ØInternal Reporting
ØPlanning and Decision
 External Accounting
 Standard Setters, Preparers and Users
 Underlying Institutional Structures
 Required reports

 Internal Accounting
 Decision Rights Assignment
 Planning and Control
 Performance Measurement and Evaluation


Scope of application of international
standards

§
§ Widespread general purpose reporting obligations
for enterprises other than “public interest entities”

§ COMPARING THE GAAP OF ALL COUNTRIES


 Addressing gaps/weaknesses in international
standards
§
§ Linking the application of IFRS and ISA

§ ISAs suitable for all audits (or is a non-ISA audit an


audit?)
§
Uses of International
Accounting Standards
• As national standards
• As basis for national standards
• As benchmark to develop
national standards
• By regulatory authorities
• By companies themselves
The world is getting smaller
Conclusion
In te rn a tio n a lize A cco u n tin g
S ta n d a rd s: The Grand Dream
World GAAP -- so many hurdles.
All are for it -- BUT few countries are
willing to change their own GAAP.
International Accounting
Standards: World GAAP’s
Advantages
ØHaving a Uniform World GAAP:
Would greatly streamline the quarterly and
year-end consolidation process for the
accountants of publicly-owned companies.
Efforts To Internationalize
Accounting Standards:

Progress Has Been Slow


Efforts To Internationalize
Accounting Standards: Capital
Market Forces
The Capital Markets --
A much-needed injection:
Relatively recent trend of
raising capital in world markets
has given greatly added
emphasis to the desirability of
having a world GAAP. The BIG
advantage :
Would greatly streamline the
process by eliminating the need
to comply with multiple GAAPs
in offering securities.
Advantages
• Same basis with foreign competitors,
easy to make comparison
• Easy to consolidate the parent’s
company and the foreign subsidiaries
Disadvantages

• Effectiveness of GAAP will be lost


• Discourage the domestic public
companies which have no significant
market outside the US

Time to Clear Things Up--
Any Questions?

Thank You