International accounting practices

Various accounting systems

Accounting systems emerge from their environments What about IFRSs?!
international financial accounting system? complementing or displacing domestic systems? what about international financial accounting practices?

Harmonization and convergence

Harmonization
reducing alternatives is concerned with accounting, disclosure and auditing past practice

Convergence
towards one standard is not the equivalent of harmonization current practice

Benefits of convergence
Increases comparability
improves investment decisions improves allocation of capital

Facilitates international mergers and take-overs Facilitates cross listings Reduces reporting costs incurred by multinationals
facilitates consolidation

Facilitates audits Improves the corporate governance

improves funtioning of audit committee
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Costs of convergence
Decreases competiton among capital markets Information loss resulting from decrease in national flexibility
but also loss of credibility through increase in flexibility

Increases direct reporting costs

for example, when IFRS was introduced in the EU in 2005

Increase of social costs

additional rule makers and supervisors reaching consensus is becoming more difficult: high political costs unnecessary accounting standards

Decrease in profitablity of audit firms

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Who have been involved?

IOSCO
organization of securities regulators

IFAC
organization of accountancy professionals

European Union
issuing of directives (4th in 1978 and 7th in 1983) 1990: no directives, but adopting IAS/IFRS making a fist against US-GAAP
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IASC
International Accounting Standards Committee
established in 1973 by professional accounting associations from nine countries

Original objective
until 1988: harmonizing the international diversity in accounting standards and improving these standards by developing International Accounting Standards (IASs)

Framework
1989: framework for the preparation and presentation of financial statements 1993: elimination of choice options: 10 IASs adjusted

Transition
1993-2000: development of core set of 30 standards in cooperation with IOSCO

IASB
2001: IASC became IASB
from part-time to full-time board members more independence IASC became IASC Foundation (now IFRS Foundation) objective: to develop a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles. principles-based, true and fair view

Responsibilities:
developing and issuing IFRSs approving interpretations of IFRSs (and IFRICs)
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Other important commissions

IFRS Interpretations Committee
formerly known as IFRIC engaged in formulating official interpretations of the standards (IFRICs)

IFRS Advisory Council

formerly known as standards advisory council advises the IASB on important accounting issues

Working Groups
are formed on the occasion of important projects

Structure and functioning of IASB

See the internet
http://www.iasb.org/NR/rdonlyres/0A5A767C-E7DE-49E58B12-499F62F8870C/0/who_we_are.pdf

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List of IFRSs and IFRICs

41 IASs, 13 IFRSs, 33 SICs, and 20 IFRICs
http://en.wikipedia.org/wiki/List_of_International_Financial_R eporting_Standards

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General characteristics IFRSs

IAS 1 adjusted per 2007
guidelines for preparation and presentation name changes of the main statements: statement of financial position (instead of balance sheet) statement of comprehensive income (instead of income statement) statement of changes in equity (new) statement of cash flows (instead of cash flow statement)

IFRS 1
first time adoption

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Adoption of IFRS
Different ways in adopting IFRSs:
all enterprises: IFRSs replace local GAAP consolidated financial statements of parent companies idem, but listed companies only listed foreign companies only; domestic companies use local GAAP domestic companies with a listing on a foreign exchange

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Use of IFRSs world-wide

Country Status
Brazil Required for consolidated financial statements of banks and listed companies from 31 December 2010 and for individual company accounts progressively since January 2008

China
EU

Substantially converged national standards

All member states of the EU are required to use IFRSs as adopted by the EU for listed companies since 2005

Japan
Mexico, Russia US

Permitted from 2010 for a number of international companies; decision about mandatory adoption by 2016 expected around 2012
Required from 2012 Allowed for foreign issuers in the US since 2007; awaiting decision regarding use of IFRSs for domestic companies

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IFRS and US GAAP

IFRS-US GAAP conversion
principles-based versus rules-based (IFRSs more flexible) Norwalk Agreement (2002) IFRSs accepted since 2007 by the Securities and Exchange Commission (SEC) revision of conceptual frameworks (Joint Project) several phases (8) first phase (A) completed in 2010: objectives and qualitative characteristics

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Joint conceptual framework

Objective financial reporting
provide financial information about the reporting entity that is useful to investors, lenders and other creditors in making decisions about providing recources to the enity.

Qualitative characteristics
financial information is useful when it is relevant and faithfully represents what it purports to represent capable of making a difference in the decisions made by users complete, neutral, and free from error usefulness is enhanced if the information is comparable, verifiable, timely, and understandable

Cost-benefit tradeoff
cost to report information should be justified by the benefits of it
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Present state of Joint Project

Suspended
SEC: adopting IFRS as authoritative guidance in the United States is not supported by the vast majority of participants in the US capital markets

Back ground
SEC supported a single set of high-quality, globally accepted accounting standards, and acknowledged that IFRS is best positioned to serve this role (2010)

IASB reactivated the project in 2012 as an IASB only project

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ASAF
Accounting Standards Advisory Forum
newly established advisory body comprising twelve standard setters from across the globe created by the IFRS Foundation (2013) provide technical advice and feedback to the IASB

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Differences between IFRS and US-GAAP

Types of differences
definition recognition measurement alternatives guidance presentation disclosure

IFRS principles-based, US GAAP rules-based

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Does it really matter?

de jure and de facto
convergence of accounting practices ultimate goal

real impact?
lower cost of capital management choices

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