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Chapter 3:

of Financial

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Learning Objectives
Explain the meaning of convergence
Identify the arguments for and against international
convergence of financial reporting standards
Discuss major harmonization efforts under the IASC
Explain the principles-based approach used by the
IASB in setting accounting standards
Describe the proposed changes to the IASBs
Discuss the IASBs Standards related to the first-
time adoption of IFRS and the presentation of
financial statements
Describe the support for, and the use of, IFRS
across countries

Learning Objectives
Examine the issues related to international
convergence of financial reporting standards
Describe the progress made with regard to
IASB/FASB convergence project
Explain the meaning of Anglo-Saxon

International Accounting Standard-setting

Evolution of IASC and IASB shows

international accounting standard-setting in
the private sector:
With the support of the accounting bodies,
standard-setters, capital market regulators,
government authorities, and financial statement
Harmonization allows countries to have
different standards as long as they do not
Accounting harmonization considered in two
Harmonization of accounting regulations or
standards 3-4
International Accounting Standard-setting

Other factors leading to noncomparable

accounting numbers despite similar
accounting standards
Quality of audits
Enforcement mechanisms
legal requirements
Socioeconomic and political systems
International convergence of accounting
standards refers to both a goal and the
process adopted to achieve it

Harmonization and Convergence
Reduction of alternatives while maintaining a
high degree of flexibility in accounting practices
Enforcement of single set of accepted standards
by several regulatory bodies

Can be considered in two ways
Harmonization of accounting regulations and
Harmonization of accounting practice
Ultimate goal of international harmonization efforts
Harmonization of standards may or may not
result in harmonization of practice
Different from standardization
Standardization involves using the same
standards in different countries
Allows for different standards in different
countries as long as they do not conflict

Arguments for Convergence
Facilitate better comparability of financial
Easier evaluation of companies
Facilitate international mergers and
Reduce financial reporting costs
Cost-listing would allow access to less expensive
Reduce investor uncertainty and the cost of
Reduce cost of preparing worldwide
consolidated financial statements
Simplify auditing
Easy transfer of accounting staff
Arguments for Convergence
Raise the quality level of accounting practices
Increase credibility of financial information
Enable developing countries to adopt a ready-
made set of high-quality standards with
minimum cost and effort

Arguments against Convergence
Significant differences in existing standards
Enormous political cost of eliminating
Nationalism and traditions
Arriving at universally accepted principles is
Need for common standards is not universally
Well-developed global capital market exists
May cause standards overload
Differences in accounting across countries
might be necessary
Harmonization Efforts
Several organizations were involved at global
and regional levels
International Organization of Securities
Commissions (IOSCO)
International Federation of Accountants (IFAC)
European Union (EU)
International Forum on Accountancy
Development (IFAD)
International Accounting Standards
International Accounting Standard Board (IASB)

International Organization of Securities Commissions (IOSCO)

Established in 1974
Initially limited its membership to regulatory
agencies in America
Opened membership to agencies in other parts
of the world in 1986
Aims at ensuring a better regulation of
markets on both domestic and international
Works to facilitate cross-border securities
offering and listings by multinational issuers
Advocates the adoption of a set of high-quality
accounting standards

International Federation of Accountants (IFAC)

Established in October1977 at 11th World

Congress of Accountants in Munich
Promotes adherence to high-quality
professional standards of auditing, ethics,
education, and training
Launched International Forum on
Accountancy Development (IFAD) to
Enhance the accounting profession in emerging
Promote transparent financial reporting
Established the Forum of Firms with an aim of
Protecting the interests of cross-border investors
Promoting international flows of capital
European Union (EU)
Founded in March 1957 with the signing of
the Treaty of Rome by six European nations
Issued two directives aimed at harmonizing
Fourth Directive: Dealt with valuation rules,
disclosure requirements, and the format of
financial statements
Established the true and fair view principle
Provided considerable flexibility
Allowed countries to choose from among acceptable
Opened the door for noncomparability in financial
Seventh Directive: Dealt with consolidated
financial statements 3-14
European Union (EU)
Directives helped reduce differences in
financial statements
Complete comparability was not achieved
European Commission decided not to issue
additional accounting directives
Associated itself with efforts undertaken by the
IASC toward a broader international
harmonization of accounting standards

International Forum on Accountancy Development (IFAD)

Mission was to improve the market security

and transparency, and financial stability on a
global basis
Assists in defining expectations from
accountancy profession
Encourages governments to focus on the
needs of developing economies in transition
Harness funds and expertise to build
accounting and auditing capacity in
developing countries

International Accounting Standards Committee (IASC)

Established in 1973 by leading professional

accounting bodies in 10 countries
Broad objective of formulating international
accounting standards
Harmonization efforts evolved in three mail
Lowest-common-denominator approach
Issuance of 26 generic International Accounting
Comparability project
Publication of Framework for the Preparation and
Presentation of Financial Statements
Comparability of Financial Statements Project
IOSCO agreement 3-17
International Accounting Standards Board (IASB)

Replaced IASC in 2001

IFRS Foundation appoints board of 16
13 full and 3 part-time
Board approves standards, exposure drafts, and
Shift in emphasis from harmonization to
global standard-setting or convergence
Main aim is to develop a set of high-quality
financial reporting standards for global use

EXHIBIT 3.2The Structure of the

Principles-Based Approach to International
Financial Reporting Standards

IASB follows a principles-based approach to

standard setting vs a rules-based approach
Standards establish general principles for
recognition, measurements, and reporting
requirements for transactions
Limits guidance and encourages professional
judgment in applying general principles to
entities or industries

IASB Framework
Created to develop accounting standards
Framework for Preparation and Presentation
of Financial Statement adopted by IASB in
2001 from IASC
Scope of Framework
Objective of financial statements and underlying
Qualitative characteristics that affect the
usefulness of financial statements
Definition, recognition, and measurement of the
financial statements elements
Concepts of capital and capital maintenance
Qualitative Characteristics of Financial Statements

Understandability: Understandable to people

with reasonable financial knowledge
Relevance: Useful for making predictions and
confirming existing expectations
Affected by nature and materiality of
Reliability: Neutral and represents faithfully
what it purports to
Reflecting items based on economic substance
rather than their legal form

Proposed Changes to existing frameworks by IASB and FASB

IASB and FASB will work on existing

frameworks to provide basis for developing
future standards by boards
Phases of project
Objectives and qualitative characteristics
Elements and recognition
Reporting entity
Presentation and disclosure
Purpose and status
Application to not-for-profits

Elements of Financial Statements
Assets, liabilities, and other financial statement
elements are defined
Guidelines as to when to recognize revenues
and expenses
Various bases are allowed: historical cost,
current cost, realizable value, and present value

The Norwalk Agreement
Proposed Changes as per the discussion paper
published jointly by two boards:
Decision-useful objective encompassing information
relevant to assessing stewardship
Stakeholder approach (vs. U.S. framework of
shareholder approach) users other than capital
providers explicitly acknowledged
Asset of an entity would be present economic resource
to which, through an enforceable right or other means,
entity has access or can limit others access
Emphasis on principle and guidance development for
fair value measurements in IFRSexit price as
measurement base, or, if notdevelop additional

Presentation of Financial
Statements (IAS 1)
Single standard providing guidelines for the
presentation of financial statements
Guidance areas
Purpose of financial statements
Components of financial statements
Overriding principle of fair presentation
Requires the faithful representation of the effects of
transactions and events
Accounting policies
Should be consistent with all IASB standards
When specific guidance is lacking, use standards
on similar issues, and definitions of the financial
statement elements
Presentation of Financial
Statements (IAS 1)
Basic principles and assumptions
Adds to the guidance provided in the Framework
Immaterial items should be aggregated
Assets and liabilities, and income and expenses should
not be offset
Structure and content of financial statements
Items to be included on face of financial
Items to be disclosed in the notes

First Time Adoptions of IFRS (IFRS
Provides guidance to companies that are
adopting IFRS for the first time
Requires compliance with all effective IFRS at
the reporting date of an entitys first IFRS
financial statements
Allows exemptions when costs outweigh benefits

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
The tax-driven nature of the national
accounting regime
Disagreement with significant IFRS, such as
financial statements and fair value accounting
Insufficient guidance on first time application
Limited capital markets are less beneficial
Investor satisfaction with national accounting
IFRS difficulties in language translation 3-30
IASB/FASB Convergence
The Norwalk Agreement reached in 2002
between the IASB and FASB pledged
For compatible financial reporting standards
Proper coordination of work program to maintain

IASB/FASB Convergence
IASBs and FASBs key initiatives in the Norwalk
Joint projects boards work jointly to address issues
(e.g., revenue recognition)
Short-term convergence remove differences between
IFRS and U.S. GAAP for issues where convergence is
deemed most likely
IASB liaison IASB member in residence at FASB
Monitoring IASB projects FASB monitors IASB
projects of most interest
Convergence research project identification of all
major differences between IFRS and U.S. GAAP
Convergence potential FASB assesses agenda items
for possible cooperation with IASB
IASB/FASB Convergence
Following global financial crisis both groups
formed Financial Crisis Advisory Group (FCAG)
July 2009 FCAG report addresses:
Effective financial reporting
Limitations of financial reporting
Convergence of accounting standards
Standard-setting independence and

Anglo-Saxon Accounting
Accounting systems prevalent in English-
speaking countries including U.S., U.K.,
Canada, Australia and New Zealand
Fundamental features:
Micro orientation (firm level) with emphasis on
professional rules and self-regulation
Investor orientation
Primary aim is efficient operation of capital markets
Very transparent
Less emphasis on prudence and measurement
of taxable income or distributable income
Substance over form

End of Chapter 3