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Chapter 10

Chapter 10. International Accounting. Lecture. National accounting differences Anglo-Saxon model Continental model Role of EU toward harmonization IASB. Relevant Internationals Terms. Multinational or transnational corporation Crossborder financings Harmonization Convergence.

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Chapter 10

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  1. Chapter 10 International Accounting

  2. Lecture • National accounting differences • Anglo-Saxon model • Continental model • Role of EU toward harmonization • IASB

  3. Relevant Internationals Terms • Multinational or transnational corporation • Crossborder financings • Harmonization • Convergence

  4. National Accounting Differences • Anglo-Saxon model • Continental model

  5. Anglo-Saxon model typically includes • USA • United Kingdom • Canada • Australia • New Zealand • ASEAN

  6. Continental Modeltypically includes • France • Germany • Japan

  7. Noncapital leases Partial income tax allocation LIFO not used Goodwill charged against SE Extensive capitalization of software development France United Kingdom UK and Australia UK Japan Accounting Differences between USA and EVENT COUNTRY

  8. Harmonization • Material harmonization • also known as de facto harmonization • refers to harmonization among accounting practices of different enterprises whether or not stemming from regulations • Formal harmonization • also called de jure harmonization • refers to the process or degree of harmonization present among the accounting rules or regulations of different countries or groups

  9. European Union (EU) • An important political grouping which brought, in its wake, an attempt to harmonize accounting standards and reporting • Comprised of 27 countries with 23 different official languages (as of 2007) • Council of Ministers of the EU nations has issued several directives with important implications for accounting

  10. EU Directives • become binding upon the member countries • contain some degree of flexibility and choice that is left to each member nation’s discretion

  11. Fourth Directive from EU • Adopted in 1978. • Concerns basic issues of financial reporting that are applicable to companies within the EU community. • In addition to providing standard formats for financial statements, the directive states that financial statements be based on four concepts: • consistency • going concern • prudence, and • accrual accounting

  12. Seventh Directive from EU • passed in 1983 • extends consolidation accounting to firms within the member states of the EU under a very wide group of circumstances where one firm has substantive control over one or more other firms

  13. International Harmonization of Accounting Standards • IASB • IFAC • European Union • United Nations • OECD • IOSCO

  14. International “Convergence” of Accounting Standards • Work of harmonization, now being called convergence, continues at an accelerated pace. • EU began requiring the use of IASB standards for consolidated financial statements in 2005. • Formal convergence projects in process between • IASB-FASB • IASB-ASBJ (Japan ) • Clearly, IASB has taken the lead in global harmonization.

  15. Harmonization • The idea of a single global set of accounting standards is conceptually appealing. • Actual implementations, however, now • question the “one-size-fits-all” approach • dislike IFRS’ complexity • question its costs • see a paradigm shift that is unsettling Valuation Stewardship

  16. Harmonization-Convergence Train • The train has left the station and will be difficult to stop. • Momentum for some semblence of convergence is here, now. • If the critics are correct, it will take another 20 years to undo what is taking place today.

  17. IASC Foundation International Accounting Standards Board SAC IFRIC Working Groups

  18. IASB • Founded in 1973 as IASC; renamed in 2001 • Is an international accounting standards setter located in London, UK • 2002, a watershed year • EU requires IFRS for listed companies 2005 • Norwalk Agreement

  19. Norwalk Agreement • 2002 IASB-FASB meeting in Norwalk, Connecticut • Commitment to eliminate differences between IFRS and U.S. GAAP • Commitment to maintain compatibility, once achieved

  20. IFRS • International Financial Reporting Standard(s), better known as IFRS(s) • Narrowly refers to the new numbered series of pronouncements that the IASB is issuing and • More broadly refers to the entire body of IASB • pronouncements, including standards and interpretations approved by the IASB, • IASs, • its Conceptual Framework, • Standing Interpretations Committee (SIC) interpretations approved by the predecessor International Accounting Standards Committee, and • International Financial Reporting Interpretations Committee (IFRIC) interpretations.

  21. IFRS • Consists primarily of 41 IASs issued 1973-2001 before the renaming of the board, • Some IASs have been revised and the old numbers kept. • Others have been superseded, therefore, only 29 of the original 41 IAS numbers are currently referenced as IASB standards. • the new series of IFRS standards issued after IASB’s formation in 2001.

  22. IASB’s Conceptual Framework • Is a single document, not a series of Concept Statements as in U.S. GAAP. • Is authoritative in nature. • Preparation of financial statements under IFRS explicitly requires that management consider IASB’s Framework for the Preparation and Presentation of Financial Statements. • U.S. GAAP has no such authoritative requirement.

  23. Memorandum of Understanding • Reaffirmed annually. • In 2004 • the IASB and FASB initiated a project to develop a converged conceptual framework. • Not part of the original Norwalk Agreement.

  24. Fair Value • Principles-based standards • tell accountants how to decide what to do rather than dictating by rule what to do • are generally seen as characteristic of IFRSs • Users make decisions based on fair value, not historical cost • Fair value implementation problems

  25. Fair Value Implementation Issues • Measurement • International Valuation Standards Committee (IVSC), the international authority on asset valuation methodologies. • How frequently will companies measure? • Accounting for the changes in fair value • More volatile earnings • Will accounting standards affect portfolio mix?

  26. Challenges facing the IASB • IFRS is an excellent marketing tool aimed at attracting capital from the largest market, the USA. • Mass adoption of IFRSs by 7,000 companies strained the IASB’s resources • Moratorium on new IFRS adoptions until January 1, 2009 allows companies to digest all the changes. • Resources • Financial, funding is dependent on contributions. • Staffing is one-half the size of FASB. • Number of projects is growing

  27. Questions to Ask • Once converged, what justification will support two standards-setting bodies (IASB and FASB) issuing duplicative standards? • Can “one size fit all” as harmonization proponents contend?

  28. Summary • National accounting differences • Anglo-Saxon model • Continental model • Role of EU toward harmonization • IASB

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