INTERNATIONAL ACCOUNTING

INTERNATIONAL CONVERGENCE
OF FINANCIAL REPORTING

Disusun oleh : Meiliani Luckieta, SE., Ak., CA.,

ACPA., MM., BKP
 INTRODUCTION

Sir Bryan Carsberg, former secretary-general of the International Accounting Standards Committee (IASC),
explained how accounting diversity affects international capital markets :
Imagine the case of an international business, with operations in many different countries. It is like to be required to prepare accounts for its
operations in each country, in compliance with the rules of that country. It will then have to convert those accounts to conform to the rules of
the country in which the holding company is resident, for the preparation of group accounts. If the company has listings on stock exchanges
outside its home country, these exchanges or their regulators may require the accounts to be filed under some other basis. The extra cost could
be enormous. Heavy costs also fall on investors in trying to compare the results of companies based in different countries and they may just be
unable to make such comparisons. .. But the biggest cost may be in limiting the effectiveness of the international capital markets. Cross border
investment is likely to be inhibited.

The accounting profession and standard setters have been under pressure from multinational companies, stock
exchanges, securities regulators, and international lending institutions, such as the World Bank, and other
international bodies such as G20, to reduce diversity and harmonize accounting standards and practice
internationally.
This chapter focuses on the activities of the International Accounting Standards Board (IASB), which replaced
the IASC in 2001. The chapter also includes a discussion of the major harmonization efforts under the IASC.
We identify the arguments for and against convergence and discuss the adoption of International Financial
Reporting Standards (IFRSs), including national efforts to converge with those standards.
 CONVERGENCE AS THE BUZZ WORD IN
INTERNATIONAL FINANCIAL ACCOUNTING
The world harmonization appears to have had its day. It mean different things to different people. Some view
harmonization as the same as standardization. Harmonization allows different countries to have different standards as
long as the standards do not conflict.
Harmonization is a process that takes place over time. Accounting harmonization can be considered in two ways ..
(Explain ! )

Convergence, like harmonization, is a process that takes place over a period of time. Unlike harmonization, however,
convergence implies the adoption of one set of standards internationally.
The IASB’s main objective is to achieve international convergence with its standards. In other words, the efforts of the
IASB are directed toward developing a high-quality set of standards for use internationally for financial reporting
purposes (global standard setting).
Convergence means reducing international differences in accounting standards by developing high-quality standards in
partnership with national standard-setters. This process applies to all national regimes.
 MAJOR HARMONIZATION EFFORTS
Several international organizations were involved in harmonization efforts either regionally (such as the Association of
South East Asian Nations) or worldwide (such as the United Nations). The two most important players in this effort were
the European Union (regionally) and the International Accounting Standards Committee (globally). The International
Organization of Securities Commissions and the International Federation of Accountants also have contributed to the
harmonization efforts at the global level.
1. International Organization of Securities Commissions
2. International Federation of Accountants
3. European Union

Find the information about that three organization, and explain in the class !
THE INTERNATIONAL ACCOUNTING STANDARDS COMMITTE
The International Accounting Standards Committee (IASC) was established in 1973 by an
agreement of the leading professional accounting bodies in 10 countries (Australia,
Canada, France, Germany, Ireland, Japan, Mexico, the Netherlands, the United Kingdom,
and the United States) with the broad objective of formulating “international accounting
standards.” The IASC was funded by contributions from member bodies, multinational
companies, financial institutions, accounting firms, and the sale of IASC publications.
The “Lowest-Common-Denominator” Approach
The Comparability Project
The IOSCO Agreement
U.S. Reaction to International Accounting Standard
Compliance with International Accounting Standard
 CREATION OF THE IASB
The IASC faced problems of legitimacy with regard to constituent support, independence, and technical expertise. For
example, some interested parties perceived the fact that IASC board members worked at international standard setting
only part time and were not necessarily selected because of their technical expertise as an indication of the lack of
commitment on the part of the IASC to develop the highest quality standards possible .
Responsible to these concern, the IASC appointed a Strategy Working Party in 1996, which issued a discussion
document in December 1998 entitled “Shaping IASC for the Future.” This document proposed a vastly different
structure and process for the development of international accounting standards.
The final recommendations of the IASC Strategy Working Party were approved at its Venice meeting in November 1999.
These recommendations, designed to deal with the issue of legitimacy, attempted to balance calls for a structure based on
geographic representativeness and those based on technical competence and independence.
On April 1, 2001, the newly created International Accounting Standards Board (IASB) took over from the IASC as the
creator of international accounting standards, which were to be called International Financial Reporting Standards
(IFRS).
The process of restructuring the IASC into the IASB in 2001, with a change in focus from harmonization to convergence
of global standard setting, marked the beginning of a new era in international financial reporting.
 THE STRUCTURE OF THE IASB
The IASB is organized under an independent foundation called the IFRS foundation.
Components of the structure are as follows : Explain !
 THE IASB FRAMEWORK
The Need for a Framework
With no conceptual framework, accounting standards would be developed unsystematically. As a result, accounting
standards may be inconsistent and, according to Gresham’s law bad accounting practice will triumph over good
practices. Explain this !
The framework for the Preparation and Presentation of Financial Statements was first approved by the IASC board in
1989 and was reaffirmed by the newly formed IASB in 2001. The objective of the Framework is to establish the concepts
underlying the preparation and presentation of IFRS-based financial statements. It deals with the following :
1. Objective of financial statements and underlying assumptions.
2. Qualitative characteristics that affect the usefulness of financial statements.
3. Definitions, recognition, and measurement of the financial statements elements.
4. Concepts of capital and capital maintenance.
REVISION OF THE CONCEPTUAL FRAMEWORK
The IASB and FASB have agreed to work together to produce a conceptual framework that will be
built upon the IASB’s and FASB’s existing frameworks and will provide a basis for developing
future accounting standards by the boards.
The boards have agreed to the following phases of this project :
a. Objectives and qualitative characteristics
b. Elements and recognition
c. Measurement
d. Reporting entity
e. Presentation and disclosure
f. Purchase and status
g. Application to not-for-profit entities
h. Finalization
 INTERNATIONAL FINANCIAL REPORTING STANDARDS

As of August 2010 International Accounting Standards (IAS) and 9 International Financial

Reporting Standards (IFRS) had been issued.
IFRS constitutes a comprehensive system of financial reporting addressing accounting concerns
ranging from accounting for income taxes to the recognition and measurement of financial
instruments to the preparation of consolidated financial statements.
A Principles-Based Approach to International Financial Reporting Standards
The IASB uses a principles-based approach in developing accounting standards, rather than a
rules-based approach. Principles-based standards focus on establishing general principles
derived from the IASB Framework, providing recognition, measurement, and reporting
requirements for the transactions covered by the standard.
By following this approach, IFRS tend to limit guidance for applying the general principles to
typical transactions and encourage professional judgment in applying the general principles to
transactions specific to an entity or industry.
 PRESENTATION OF FINANCIAL STATEMENT (IAS 1)
IAS 1, Presentation of Financial Statements, is a single standard providing guidelines for the
preparation and presentation of financial statements.
In September 2007, the IASB published a revised IAS 1, effective for annual periods beginning
on or after January 1, 2009. It provides guidance in the following areas :
Purpose of financial statements
Components of financial statements
Overriding principle of fair presentation
Accounting policies
Basic principles and assumptions
Structure and content of financial statements
 FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS
(IFRS 1)

IFRS 1, First time Adoption of International Financial Reporting Standards, issued in June 2003, was the first IFRS
developed by the IASB. IFRS 1 sets out the requirements for adopting IFRS and preparing a set of IFRS financial
statements for the first time. As companies make the transition from their previous GAAP to IFRS, guidance on this issue
is vey important.
In preparing its opening IFRS balance sheet, IFRS 1 requires an entity to do the following :
1. Recognize all assets and liabilities whose recognition is required by IFRS
2. Derecognize items previously recognized as assets or liabilities if IFRS do not permit such recognition.
3. Reclassify items that if recognized under previous GAAP as one type of asset, liability, or component of equity , but
are a different type of asset, liability, or component of equity under IFRS.
4. Apply IFRS in measuring all recognized assets and liabilities.
To understand the significance of these requirements, consider their implementation with respect to intangible assets. In
preparing its opening IFRS balance sheet, an entity would need to :
5. Exclude previously recognized intangible assets that do not meet the recognition criteria in IAS 38, Intangible
Assets, at the date of transition to IFRS and
6. Include intangible assets that do meet the recognition criteria in IAS 38 at that date, even if they previously had been
accounted for as an expense.
 ARGUMENTS FOR AND AGAINST INTERNATIONAL CONVERGENCE
OF FINANCIAL REPORTING STANDARDS
 Arguments for Convergence
 Explain !

 Arguments against Convergence

 Explain !
INTERNATIONAL CONVERGENCE TOWARD IFRS
The IASB has earned a great deal of goodwill from many interested parties. Its new approach
clearly reflects a change of role from a harmonizer to a global standard-setter. According to its
chairman, the IASB’s strategy is to identify the best in standards around the world and build a
body of accounting standards that constitute the “highest common denominator” of financial
reporting.
In 2002, the six largest public accounting firm worldwide conducted a survey of national efforts
in 54 countries to promote and achieve convergence with IFRS. The survey identified three
different convergence strategies :
1. Replacing national GAAP with IFRS ( supplemented for issues not addressed by IFRS)
2. Adopting IFRS as national GAAP on a standard-by-standard basis.
3. Eliminating differences between national GAAP and IFRS when possible and practicable.
 INTERNATIONAL CONVERGENCE TOWARD IFRS

The major concerns in achieving IFRS convergence as expressed by respondents to the 2002
survey included :
The complicated nature of particular standards, especially those related to financial instruments
and fair value accounting (51 percent of countries)
The tax-driven nature of the national accounting regime; using IFRS as the basis for taxation is
seen as a problem (47 percent of countries)
Disagreement with certain significant IFRS, especially those related to financial statements and
fair value accounting (39 percent of countries)
Insufficient guidance on first-time application of IFRS (35 percent of countries)
Limited capital markets, and therefore little benefit to be derived from using IFRS ( 30 percent
of countries).
Satisfaction with national accounting standards among investors/users (21 percent of countries).
IFRS language translation difficulties (18 percent of countries)
 THE ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS

These are a number of different ways in which a country might adopt IFRS, including requiring
(or permitting) IFRS to be used by the following :
1. All companies; in effect, IFRS replace national GAAP
2. Parent companies in preparing consolidated financial statements; natinal GAAP is used in
parent company-only financial statements.
3. Stock exchange listed companies in preparing consolidated financial statements. Nonlisted
companies use national GAAP.
4. Foreign companies listing on domestic stock exchanges. Domestic companies use national
GAAP.
5. Domestic companies that list on foreign stock exchanges. Other domestic companies use
national GAAP.
THE ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS

 IFRS in the European Union

 IFRS in the United States

Explain !
THANK YOU