Introduction to International Accounting Why accounting differs from place to place
Nov 16, 2014
Introduction to International Accounting
Why accounting differs from place to place
Mixed Economy Model
South American Model British-American
Model
Continental Model
Clusters of Accounting Models
Forces toward differences• Political and economic ties with
other countries• Economic system
• Relationship between business and the providers of capital
• Capital markets vs. large banks•Numerous or few investors•How well developed are the stock
exchanges and bond markets
• Existence of a conceptual framework
Forces toward differences• Legal System
• Legislative orientation (Common Law)•Laws establish limits beyond which it is illegal
to venture•Considerable flexibility within the limits• Judgment permitted and encouraged•Tend to have accounting practices
established by accountants rather than national legislators
• Legalistic orientation (Code Law)•Laws stipulate minimum standards•Citizens must comply with letter of the law•Accounting is “codified” much like US tax
code
• Reporting regime
Forces toward differences• Level of Inflation• Status of the accounting
profession• Culture• Other
• Size & complexity of business enterprises
• Sophistication of management & financial community
• General level of education
D’Arcy 2001 paper
Usefulness of Classifications• Classification or clustering groups
countries according to distinctive features of their financial accounting systems• Pedagogical demand
•Simplifies enormous amount of detail
• Informational demand•Countries in a cluster may react to new
circumstances in similar ways
• Justification demand•Aid in standard setting (IASB, etc.)
The Drivers for Harmonization• Growing cross-border economic
transactions• Globalization of capital markets• Developments in telecommunications
and the internet• Access to financial statements from
anywhere in the world
• Investors and creditors needs – financial reporting that is • Comparable • Transparent
HISTORY - IASC• 1973 - IASC formed
• Australia, Canada, France, Germany, Japan, Mexico, The Netherlands, the United Kingdom & Ireland, U.S.
• 1974 - First Exposure Draft published • IAS 1 Disclosure of Accounting Policies
• 1977 - Revised constitution adopted• Board expanded to 11 countries• Reference to 'basic' standards removed• Link to IFAC established
HISTORY - IASC• 1987 - IOSCO joins Consultative Group• 1988 - FASB joins Consultative Group
and joins Board as observer • 1990 - European Commission joins
Consultative Group and joins Board as observer
• 1995 - Agreement with IOSCO to complete core standards by 1999 - on successful completion IOSCO will consider endorsing IASs for cross-border offerings • First German companies report under IASs • European Commission supports IASC/IOSCO
agreement and use of IASs by EU multinationals
HISTORY - IASC• 1999
• IOSCO review of IASC core standards begins • IASC Board meetings opened to public
observation • IFAC commits to support the use of IASC
standards as the minimum benchmark worldwide • IASC Board unanimously approves restructuring
into 14-member board (12 full-time) under independent trustees
• 2000• IASC Board approves a new Constitution as part
of restructuring• IOSCO recommends that its members allow
multinational issuers to use 30 IASC standards in cross-border offerings and listings
• IASC member bodies approve IASC's restructuring and the new IASC Constitution
• European Commission announces plans to require IASC standards for all EU listed companies from no later than 2005
HISTORY – IASC → IASB• 2001
•Trustees announce members of the International Accounting Standards Board
•European Commission presents legislation to require use of IASC Standards for all listed companies no later than 2005
•April 1, 2001 •IASB assumes responsibility for setting accounting standards, designated International Financial Reporting Standards (IFRS)
IASB Structure
Recent developments• On January 1, 2005 companies listed on a
European Union Stock Exchange were required to adopt IFRS resulting in a radical change in the way that many companies reflect their asset values on their balance sheet
• The most important single innovation of IFRS is to move away from historical cost• Companies now have the option to carry their
long-term real estate and other assets based on their original cost or at “fair value”, which typically equates to market value
Recent developments• Companies listed on North American
exchanges are still governed by t FASB in the U.S. and the AcSB” in Canada• FASB & IASB working toward
harmonization• Timeline 2007-2009• Major philosophical difference = rules-
based vs. principles-based approach
• November, 2007 – SEC allows foreign companies to use IFRS instead of reconciling to US GAAP.
Major Differences (PwC Report)• Framework
• Allows fair value accounting for intangibles, PPE, financial instruments, and investments.
• Requires ‘retrospective application’ in the first year a company uses IFRS
• Financial Statements• No set format for I/S, B/S or SCF, just form basic guidelines• Extraordinary items are prohibited• SPEs are included when company has substantial control• Consolidated entities methods are adjusted to match the
investor’s methods
• Other issues• Development costs can be capitalized• Impairment estimates are a one-step process instead of a two-
step process• Prohibits LIFO• Contingent liabilities are more common (lower threshold)
2002 Survey by Big CPA firms
2002 Survey
2002 Survey
2002 Survey
Other International Organizations
• IOSCO - The International Organization of Securities Commissions
• IFAC – The International Federation of Accountants
• IAASB - International Auditing and Assurance Standards Board
• PIOB - Public Interest Oversight Board • IPSASB - International Public Sector
Accounting Standards Board