Financial

Accounting
Theory and Analysis:
Text and Cases
13th Edition

Richard G. Schroeder
Myrtle W. Clark
Jack M. Cathey
 Chapter 3

INTERNATIONAL ACCOUNTING
International Accounting Standards
▪ Financial accounting is influenced
by the environment in which it operates
▪ Companies develop financial reports directed at
their primary users
Previously most were residents of the same country as
the corporation
Transnational financial reporting has become more
commonplace because of the European Union, GATT
and NAFTA
▪ U. S. companies must be able to compete in global
markets with transnational financial reporting
International Business Accounting Issues
▪ A company’s first exposure to
international accounting is frequently
the result of a purchase or sale
 Problems:
1. Exchange gains or losses
2. Obtaining credit information
3. Evaluation of financial statements

 Next step may be to open an international division

 Another issue is raising capital in foreign markets

 Must prepare financial statements in a format acceptable
to the appropriate securities market
 Level of Political
Education System

Legal System Economic

Development

Tech

Factors Influencing Development of Accounting Systems

 Agricultural
Type of Resource Based
economy Tourist Based
Manufacturing

Legal Codified
System Common Law

Technology
Political Democratic
System Totalitarian

Nature of Private Enterprise

Ownership Socialist
Communist

Influences on the Development of Financial Reporting

 Growth Growing
Pattern of Stable
Economy Declining

Social Climate
Stability of currency
Sophistication of management
Sophistication of financial community
Existence of accounting legislation
Education System

Influences on the Development of Financial Reporting

Approaches to Preparing Financial
Statements for Use in Other Countries:

1. Same statements to all users

2. Translate into local language
3. Translate language and currency
4. Two sets of statements: Local & Foreign
5. One set of statements based on World-
wide standards
The International Accounting
Standards Committee (IASC)
▪ The preparation of financial statements for foreign
users under option #5 is being increasingly
advocated
 IASC
 Formed in 1973 to aid in this process
 Founding nine countries: Australia, Canada,
France, Japan, Mexico, the Netherlands, UK, and
the US.

 International Accounting Standards Board

 Replaced IASC in 2001
 Standard Setting by the IASB
▪ Original intent:
▪ Avoid complex details
▪ Concentrate on basic standards
▪ Principles based standards
▪ Standard-Setting Process
Prior to 2012, similar to FASB
1. Setting the Agenda: Needs of investors
2. Project Planning: Alone or Joint
3. Discussion Paper: Overview of the issue; invite comment
4. Exposure Draft: Specific proposal of a standard
5. IFRS: Revised proposed draft and formalized standards
6. After IFRS: Continue to educate public and provide implementation
guides
Standard Setting by the IASC

▪ Two treatments
1. Benchmark - point of reference
2. Alternative

▪ Improvements Project (2003)

▪ Removed some of the existing alternative accounting treatments 
▪ Where an IAS retained alternative treatments:
▪ IASB removed references to 'benchmark treatment'
retermed references with ‘allowed alternative treatment'
 Standard Setting by the IASC
▪ 2012: new standard‐setting procedure established
▪ 2013 to 2015: the IASB initiated a research and
development program
▪ Results in discussion papers being developed
▪ Staff provides
▪ information to help understand the problem;
▪ an assessment of potential solutions; and
▪ a preliminary assessment of relative costs / benefits of each
approach

▪ Standards-level projects initiated only when solutions are high

quality and implementable
Restructuring the IASC
▪ In its early years, IASC acted mainly as a harmonizer
▪ Recently, it has begun to combine that role with the
role of a catalyst

Harmonizer Catalyst

Coordinator of national initiatives

Initiator of new work
at national level
Restructuring the IASB
▪ Future IASB role as catalyst and initiator
should become more prominent
▪ Important for the IASB to focus objectives
more precisely:
1. Develop international accounting standards that
require high-quality, transparent and comparable
information that will help participants in capital
markets, and others, to make economic decisions;
and
2. Promote the use of international accounting
standards by working with national standard
setters
 Restructuring the IASB

▪ Structural changes needed

▪ IASB must anticipate new challenges and meet those
challenges effectively

Issues needing to be addressed:

1. Partnership with national standard setters
▪ IASB should enter into a partnership with national standard setters
▪ Work together to accelerate
 Convergence between national standards
 Resulting international accounting standards include solutions
requiring high-quality, transparent and comparable information
 Will help participants in capital markets and others to make
economic decisions
 Restructuring the IASB

2. Wider participation in the IASB Board

▪ Wider group of countries and organizations should take part in the
IASB Board
 Being careful to not dilute the quality of the Board's work

3. Appointment
▪ Process for appointments to the IASB Board and key IASB
committees should be the responsibility of a variety of
constituencies
▪ Those appointed must be competent, independent and objective
Restructuring the IASB
 2001:
Responsibility for international standards-setting

transferred to

the International Accounting Standards Board

(IASB)
Restructuring the IASB
▪ New structure:
▪ The IFRS Foundation
▪ The International Accounting Standards Board
▪ The International Accounting Standards Advisory Council
▪ International Financial Reporting Interpretations Committee
▪ The Agenda Consultation Initiative
 KEY: Appoints
IASB Structure Reports To
Advises
Monitoring Board
Approve and Oversee Trustees

IFRS Foundation (22 Trustees)

Appoint, Oversee, Raise Funds

IASB (Maximum 16 Members) IFRS Interpretations Committee

Set Technical Agenda; Approve 14 members; Issue interpretations on
Standards, Exposure Drafts & the application of IFRS and
Interpretations develop other minor amendments

Accounting Standards Advisory

IFRS Advisory Council Forum (ASAF)
~ 40 members; Advise on Provide standard setter input into
agenda and priorities technical projects

Working Groups
For Major Agenda Projects
IFRS Foundation Trustees
▪ 22 Trustees:
o Six from North America
o Six from Europe
o Six from Asia-Oceania region
o Four from other areas
▪ Key duties of the trustees:
1. Appointing members of the Board
2. Appointing members of the SIC and SAC
3. Reviewing annual IASB Strategy
4. Approving annual IASB Budget
5. Promoting IASB and its work
6. Establishing and amending operating procedures
7. Approving amendments to the constitution
 Uses of International Accounting
Standards
▪ IASC noted that its standards are used in a variety of ways:
1. National requirements
2. Basis for national requirements
3. Benchmark to develop standards
4. By regulatory agencies
5. By companies

 International Organization of Securities Commissions

(IOSCO) looks to the IASC to provide standards that
can be used in multinational securities offerings
 Other Issues
▪ Partnership with the IOSCO
▪ Generate standards acceptable to IOSCO

▪ December 2003:
▪ IASB published 13 revised International Accounting Standards
▪ Reissued two others
▪ Gave notice of withdrawal of standard on price level accounting

▪ Revised and reissued standards mark the near-

completion of the IASB’s Improvements project
▪ 2005: reaffirmed support and development of IFRS
IASB-FASB Convergence
The FASB’s Short-term International
Convergence Project
 Goal of this project is to remove a variety of
individual differences between U.S. GAAP and
International Financial Reporting Standards that
are not within the scope of other major projects

▪ Project scope is limited to those differences

in which convergence around a high-quality
solution would appear to be achievable in
the short-term, usually by selecting between
existing IFRS and U.S. GAAP
 IASB-FASB Convergence
The Norwalk Agreement
▪ December 18, 2002:
▪ FASB and IASB held joint meeting in Norwalk, Connecticut
▪ Both standard setting bodies acknowledged…
Their commitment to the development of high-quality
compatible accounting standards that can be used for
both domestic and cross-border financial reporting

▪ Also committed to use best efforts to make existing financial

reporting standards compatible as soon as practicable and
to coordinate future work programs to help ensure that
once compatibility is achieved, it will be maintained
 IASB-FASB Convergence
The Norwalk Agreement

▪ Both Boards agreed to:

1. Undertake a short-term project aimed at removing a
variety of differences between U. S. GAAP and IFRSs
2. Remove any differences remaining on January 1, 2005,
between IFRSs and U. S. GAAP by undertaking projects
that both Boards would address concurrently
3. Continue progress on the joint projects currently
underway
4. Encourage respective interpretative bodies to coordinate
activities
Effects of International Versus
U.S. GAAP Accounting Standards
▪ 2000: the SEC voted to ask U.S. companies to
comment on whether it should allow foreign
companies to list their securities on U.S. stock
exchanges under international accounting rules
▪ Previously needed Form 20-F reconciliation

▪ 2007: “Acceptance from Foreign Private Issuers of

Financial Statements Prepared in Accordance with
International Financial Reporting Standards without
Reconciliation to GAAP”
 Effects of International Versus
U.S. GAAP Accounting Standards
▪ SEC staff report
▪ Focused on how recognition and measurement requirements
of IFRS were applied in practice
▪ Found that company financial statements generally appeared to
comply with IFRS requirements
▪ Two concerns
▪ Transparency and clarity of the financial statements in the sample
could be enhanced
▪ Diversity in the application of IFRS presented challenges to the
comparability of financial statements across countries and industries

▪ Is convergence a dead issue?

No final decision by the SEC

Standards Overload
Also a concern for IASB
2009: IASB published IFRS for
small to medium-sized businesses
 95% of all companies
 Provide simplified standards
 Review found it needed little change
 Another area of difference with U. S. GAAP
Framework for the Preparation and
Presentation of Financial Statements
▪ Purpose - to set out concepts that underlie the
preparation and presentation of financial statements by
1. Assisting the IASC in developing future standards
2. Promoting harmonization of accounting standards
3. Assisting national standard setters
4. Assisting preparers in applying international standards
5. Assisting auditors in forming an opinion as to
whether financial statements conform to
international standards
6. Assisting users in interpreting financial
statements prepared in conformity with
international standards
7. Providing interested parties with information
about the IASC’s approach to the formation
of international accounting standards
Framework for the Preparation and
Presentation of Financial Statements
Joint IASB FASB revision of CFs in 2010 which specified:
1. Objective of financial reporting
Phase A
2. Qualitative characteristics of useful financial information
3. Reporting entity Phase D

4. Definition, recognition and measurement of elements from which

financial statements are constructed Phase B,C
5. Concepts of capital and capital maintenance
The Joint IASB-FASB CFP was being conducted in a phased approach
• Phase E – Presentation and Disclosure
• Phase F – Purpose and Status
• Phase G – Application to Not-for-profit entities
• Phase H – Remaining Issues.
 IASB Standalone CFP
▪ No longer aimed at a substantial revision of the framework
▪ Phase A – Conceptual Framework completed in March 2018
▪ Focused on those five topics that were not yet covered:
Phase D 1. Reporting entity
2. Presentation (including other comprehensive income [OCI])
Phase E
3. Disclosure
Phase 4. Elements
B,C 5. Measurement

Phases F-H are discontinued or no

longer needed
 Revised Conceptual Framework (CF)

▪ Revised CF issued in 2018 (Nine Chapters)

▪ Introduction
▪ Chap 1—Objective of General-Purpose Financial Reporting
▪ Chap 2—Qualitative Characteristics of Useful Financial Information
▪ Chap 3—Financial Statements and the Reporting Entity
▪ Chap 4—Elements of Financial Statements
▪ Chap 5—Recognition and Derecognition
▪ Chap 6—Measurement
▪ Chap 7—Presentation and Disclosure
▪ Chap 8—Concepts of Capital and Capital Maintenance
IASB CF Introduction
▪ Primary purpose of the CF is to assist the IASB in
developing and revising IFRSs
▪ Assist in developing and revising IFRSs that are based on
consistent concepts
▪ Help preparers to develop consistent accounting policies
for areas that are not covered by a standard, or where
there is a choice of accounting policy
▪ Assist all parties to understand and interpret IFRS
Chapter 1: Objective of General-Purpose
Financial Reporting
▪ Objective of financial reporting is to provide financial
information that is useful to users in making decisions
relating to providing resources to the entity
▪ Users need information to help assess management’s stewardship

▪ Users are an entity’s existing and potential investors, lenders

and other creditors
▪ Rely on financial reports for much of the needed financial information

▪ Users decisions include the following:

▪ Buying, selling or holding equity or debt instruments
▪ Providing or settling loans and other forms of credit
▪ Voting or otherwise influencing management’s actions
 Chapter 1: Objective of General-Purpose
Financial Reporting
▪ In making these decisions, users assess:
▪ The prospects for future net cash inflows to the entity
▪ Management’s stewardship of the entity’s
economic resources

▪ To make these assessments,

users need information about
▪ The entity’s economic resources, claims
against the entity and changes in those
resources and claims
▪ How efficiently and effectively
management has discharged its
responsibilities to use the entity’s
economic resources
 Chapter 2: Qualitative Characteristics of
Useful Financial Information
▪ Explicit reference to the notion of prudence
▪ Seen as important for achieving neutrality
▪ Fundamental qualities that make financial information useful
▪ Relevance
▪ Faithful representation
▪ Characteristics that enhance the usefulness of information
▪ Comparability
▪ Verifiability
▪ Timeliness
▪ Understandability
▪ Cost constraint
Chapter 3: Financial Statements
and the Reporting Entity
▪ Financial statements are prepared from the
perspective of the entity as a whole
▪ Not from the perspective of any particular group of investors,
lenders or other creditors
▪ Sets out the going concern assumption
▪ Discusses
▪ Statement of Financial Position
▪ Statement of Financial Performance
(Statement of Comprehensive Income)
▪ “Other Statements and Notes”
▪ Reporting Entity
▪ Financial Statements
Chapter 4: Elements of Financial
Statements
▪ Defines:
▪ Assets
▪ Liabilities
▪ Equity
▪ Income
▪ Expenses
Hands-On Research
IASB CF: Definitions
▪ Assets An asset is a present economic resource controlled
by the entity as a result of past events.

A liability is a present obligation of the entity to

▪ Liabilities transfer an economic resource as a result of past events.

Equity is the residual interest in the assets of the entity

▪ Equity after deducting all its liabilities.
Income is increases in assets, or decreases in liabilities,
▪ that result in increases in equity, other than those
Income
relating to contributions from holders of equity claims.
Expenses are decreases in assets, or increases in
▪ Expensesliabilities, that result in decreases in equity, other than
those relating to distributions to holders of equity
claims.
Chapter 5: Recognition and
Derecognition
▪ Recognize a financial statement element if such
recognition provides users with:
▪ Relevant information
▪ A faithful representation of the underlying transaction

▪ Derecognition (removal from financial statements)

should aim to represent faithfully
▪ Any assets and liabilities retained after the transaction that led to
the derecognition; and
▪ Changes in the entity’s assets and liabilities as a result of that
transaction
 Chapter 6: Measurement
▪ Different measurement bases and the information provided
▪ Historical cost
▪ Current value
▪ Fair value
▪ Value in use
▪ Current cost
▪ 3 Factors to consider when selecting a measurement basis
▪ Relevance
▪ Faithful representation
▪ Cost constraint
Chapter 7: Presentation and
Disclosure
▪ Concepts that determine what information is included in
the financial statements
▪ Statement of financial performance
▪ How that information should be presented and disclosed
▪ Including presentation and disclosure objectives in IASB
Standards leading to effective communication
▪ Reclassification of OCI items
Chapter 8: Concepts of Capital
Maintenance
▪ Concepts:
1. Financial capital maintenance
2. Physical capital maintenance

▪ Selection of “measurement basis” and the “concept of

capital maintenance” chosen will determine the
accounting model

▪ IASC does not intend to prescribe a model

IASB–FASB Project
Financial Statement Presentation
▪ Joint project to develop a new joint standard for
presenting financial statements
▪ Goal was a new standard to replace IAS No. 1 & IAS No. 7

▪ Main objective was to address fundamental issues

relating to presentation and display of information in the
financial statements, including the:
▪ Relationship between items across financial statements
▪ Disaggregation of information so that it is useful in predicting
an entity’s future cash flows
▪ Provision of information to help users assess an entity’s liquidity
and financial flexibility

Project has been suspended

 End of Chapter 3

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