1 Matakuliah: F0142/Akuntansi Internasional Tahun: 2006 Session 09 International Accounting Harmonization.

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Matakuliah : F0142/Akuntansi Internasional

Tahun : 2006

Session 09International Accounting

Harmonization

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Pressures for Harmonization

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Governments

• Government involvement in accounting determination varies across the world

• Do governments really use corporate reports?– Information needed by governments is often too

extensive to include in the report

– Governments can demand whatever information they need• Information needs are extensive and confidential

– These things suggest governments may not be important users of corporate reports

– Is this a paradox?• Explained by situations where governments might be users

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Government use of annual reports

• Use reports, along with segmental information, to check performance of local subsidiaries of MNEs

• Governments wish to monitor MNE operations as a whole

• Governmental needs in differing departments can be accommodated by an annual report

• Developing countries would have more information without bargaining for it with increased corporate disclosure

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Governmental use of annual reports

• Interest in extranational operations of MNEs• Intergovernmental organizations use this

information for policy formulation (UN, EU).• Many governments desire increased bargaining

power for information as members of intergovernmental organizations

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Intergovernmental Organizations

• United Nations– 1976 study revealed lack of information– 1979 – Working Group of Experts established

• Emphasis on developing countries• Have different interests from those of OECD and IFRS• Major aim is international disclosure standards• Intergovernmental Working Group of Experts on International Standards

of Accounting and Reporting (ISAR) established in 1983• Current issues deal with corporate governance• Monitoring role in endorsing desirable standards• UNCTAD – represented in

– Standards Advisory Council of the IASB– Advisory Panel of Small and Medium-sized Entities of the IASB

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Intergovernmental Organizations

• Organization for Economic Cooperation and Development (OECD)– Represents industrialized nations– Issued Guidelines for Multinational Enterprises

• Aimed at strengthening confidence between MNEs and governments

• Not required by law• Guidelines are becoming more of a benchmark

– Aim is to promote improvements in comparability and harmonization of standards

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Intergovernmental Organizations – European Union

• Involved in international harmonization of standards as part of company law harmonization

• Goal is to promote European economic integration and development

• No company should be at a disadvantage because of legal differences between countries

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International Organizations – European Union

• Interests of shareholders, lenders, suppliers, and other parties are protected

• Directives in the EU have the force of law and must be ratified by member nations

• Regulations become law without national ratification

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• Fourth Directive – approved in 1978– Requirements relate to

• Disclosure • Classification and presentation of information• Methods of valuation

– Compromise between European and Anglo-American systems

– Contains detailed requirements for historical cost accounting with some flexibility

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• Fourth Directive – Level of disclosure and transparency

increased– “true and fair view” concept adopted– Does not adequately address

• Foreign currency translation• Leases and funds• Cash flow statement

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• Seventh Directive – adopted in 1983– Control criteria other than ownership is applied

on an optional basis– Requirements

• Worldwide consolidations • “Fair value” approach for assets purchased through

acquisitions• Equity treatment of associated corporations• Segmental disclosures of turnover by line of

business and geographical area

– Disclosure has been substantially improved

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• Additional Directives– Eighth Directive – adopted in 1984

• Deals with qualification and work of auditors – Includes minimum educational requirements – Encourages mobility of professional auditors

– Proposed directive for employee disclosure was put aside due to MNE and government opposition• Issues readdressed in Charter of Fundamental

Social Rights

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• Harmonization of stock exchange regulations and securities laws is also a prerogative– Ensure investor access to sufficient information– Promote capital market and stock exchanges

• No plans for new directives

• “Mutual Recognition” approach was once considered more effective

• IFRS adopted in 2005

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Trade Unions and Employees

• International Trade Union Confederations – European Trade Unions Confederation– International Confederation of Free Trade Unions– World Confederation of Labor

• Industry-specific trade unions– Deal with individual MNEs

• National Trade Unions– Influence MNEs on a variety of levels

• Information needs depend on contact with MNEs and purpose of information

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Trade Unions and Employees

• Power exists in the nation where they operate• Unions have not grown beyond national

boundaries as MNEs have• Trade union pronouncements are aimed at

establishing policies concerning MNEs• Main concern centers on subsidiaries

– Transfer pricing policies are a major concern– MNE subsidiary transactions have received little

attention to date by regulatory bodies

• Information about the terms, conditions, scale, security, and location of employment are of concern

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Investors

• Owners or potential owners of shares in the MNE parent corp. or a subsidiary

• Interests are represented by international financial analyst organizations and IOSCO

• Concerned with current lack of comparability• Some want information approach rather than a

market approach to disclosure

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Investors

• International organizations– ICCFAA and IOSCO

• IOSCO - works for multilisting and international trading

• IOSCO is closely associated with the IASB

• Want comparable information– Interested in segmental information of MNEs– Interested in consolidated results

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Bankers and Lenders

• Information needs are focused on financial positions, performance, and future prospects

• Concerned with security of loans advanced • Significant impact in France, Germany, Japan• Have more direct access to required info• International banks are involved in harmonization

and often require special financial reports (IFC, World Bank, etc.)

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Accountants and Auditors

• International Accounting Standards Board– Formerly the IASC– Governed by 14 board members– Objectives

• Propose international standards and promote their acceptance

• Work toward improvement and harmonization of standards

– Works for comparability of accounting standards

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• IASB– Adopted 41 IAS standards, completed 5 new standards,

and revised 15 existing standards

– Achievements• Completed a core set of standards in 2000 as agreed with IOSCO for

cross-board and national listings

• Recent efforts are focused on EU compliance with IFRS in 2005

– Endorsement by IOSCO was limited • Members of IOSCO are permitted to require reconciliation of certain

items, supplementary information, and eliminate some options existing in IAS

• Members will individually determine whether or not to endorse IFRS for cross-boarder listings

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Figure 7.2: The IASB’s Governance Structure

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• IFRS and U.S. GAAP– IASB and FASB are working toward similar

accounting standards– FASB is researching international

convergence• Objectives include

– Identify every substantive difference between U.S. GAAP and IFRS

– Catalog those differences according to the strategy for resolving them

– Recommend further agenda decisions to the Board to further the objective of convergence with IFRS

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• IFRS and U.S. GAAP– Benefits of convergence according to the FASB

• Increased efficiency in capital markets by increased comparability and transparency from nation to nation

• Reducing the administrative burden for MNEs by allowing only one set of financials to be prepared

• Enable U.S. companies access to capital markets throughout the world without reconciling U.S. GAAP to IFRS

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• IFRS and U.S. GAAP– Street, Nichols, and Gray (2000) suggest the

gap is narrowing – Major differences are in the areas of

• Property, plant and equipment revaluations• Deferred taxes• Goodwill • Capitalized borrowing costs

– SEC desires enforcement of international standards if they are in place

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• Rules versus Principles– Recent scandals and aftermath perhaps show

a need for principle-based standards– Sarbanes-Oxley requires the SEC to examine

the feasibility of principles-based standards– Problems with principles-based standards

• Guidance for application• Comparability • No guidance for complex transactions

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• Rules versus Principles– Survey by Mike Ng (2004)

• 93% of companies surveyed reported that is was possible to apply rules-based standards but not reflect the economic substance of the transaction

• Only 7% of companies surveyed believed principles-based standards would lead to a better reflection of economic reality

• Results show that neither approach will ensure that companies report the economic reality of transactions

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• Noncompliance with IFRS is problematic– IASI states that compliance means following IFRS and

each interpretation of IFRS• Improper accounting treatment is not condoned by

explaining accounting treatments applied or by footnotes (paraphrase IASI).

– Street and Gray (2000) found that only 775 of the companies in their sample stated they were fully compliant with IAS. • International accounting firms are not supporting the

enforcement of IAS – New structure of the IASB should help with

compliance

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• International Federation of Accountants – Sets international auditing guidelines– Promotes international convergence of

standards

• International Auditing and Assurance Standards Board– Independent body under the IFAC that creates

International Auditing Standards (ISA)

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Accounting and Auditors

• Reforms by the IFAC in cooperation with accounting firms, member bodies, regulators, and accounting organizations include:– Establishment of the Public Interest Oversight Board

to oversee IFAC’s standard setting process– Increased transparency with regard to IFAC

governance and international standard setting– Public participation in the standard-setting process– A more formal process of communicating with

international regulators

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• International Forum on Accountancy Development (IFAD)– Created after the Asian financial crisis to aid developing

nations

– Encourages conformity with IFRS

– Developed the International Financial Framework to aid in improving standards within national financial frameworks

– Conducted a GAAP Convergence Survey (2002)• 90% of countries surveyed plan to convert to IFRS

• Majority of countries surveyed plan to converge with IFRS by establishing a government regulation or a standard-setting body

• Half of the countries surveyed see a barrier to convergence in the complication of standards

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• International Association for Accounting Education and Research– Promotes excellence in accounting education

– Contributes to development of international standards

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The International Harmonization and Disclosure Debate

• Some see harmonization and disclosure as a means to create a balance of power between MNEs and domestic corporations

• More industrialized nations will not be totally supportive of increased regulation

• Regional integration – Long-term goal to remove market imperfections and

eliminate regulatory barriers (EU)

• Many countries are more concerned with protecting their own business community at the expense of others

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• Differences in reporting are due to differences in domestic needs

• With domestic corporations, there is little concern for international standards

• Natural accounting coordination will be a lengthy process according to research

• Regional economic groupings (EU) and intergovernmental organizations (UN) will help

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• Future developments will be centered on MNEs• May be less disclosure now in practice because

of the complex nature of MNEs

• National reporting requirements may limit disclosure

1 Matakuliah: F0142/Akuntansi Internasional Tahun: 2006 Session 09 International Accounting Harmonization.

Documents

iasb slide

information needs

report governments

lack of information

segmental information

national ratification

standards advisory council

company law harmonization