Bài giảng Kế toán, kiểm toán - Chapter 3: International convergence of financial reporting

Chapter 3: InternationalConvergence of Financial ReportingLearning ObjectivesExplain the meaning of convergenceIdentify the arguments for and against international convergence of financial reporting standardsDiscuss major harmonization efforts under the IASCExplain the principles-based approach used by the IASB in setting accounting standardsDescribe the proposed changes to the IASB’s FrameworkDiscuss the IASB’s Standards related to the first-time adoption of IFRS and the presentation of financial statementsDescribe the support for, and the use of, IFRS across countries3-2Learning ObjectivesExamine the issues related to international convergence of financial reporting standards Describe the progress made with regard to IASB/FASB convergence projectExplain the meaning of “Anglo-Saxon” accounting3-3International Accounting Standard-settingEvolution of IASC and IASB shows international accounting standard-setting in the private sector:With the support of the accounting bodies, standard-setters, capital market regulators, government authorities, and financial statement preparersHarmonization allows countries to have different standards as long as they do not conflictAccounting harmonization considered in two waysHarmonization of accounting regulations or standards Harmonization of accounting practices3-4International Accounting Standard-settingOther factors leading to noncomparable accounting numbers despite similar accounting standardsQuality of auditsEnforcement mechanismsCulturelegal requirementsSocioeconomic and political systemsInternational convergence of accounting standards refers to both a goal and the process adopted to achieve it3-5Harmonization and ConvergenceHarmonization Reduction of alternatives while maintaining a high degree of flexibility in accounting practicesConvergence Enforcement of single set of accepted standards by several regulatory bodies 3-6HarmonizationCan be considered in two waysHarmonization of accounting regulations and standardsHarmonization of accounting practiceUltimate goal of international harmonization effortsHarmonization of standards may or may not result in harmonization of practiceDifferent from standardizationStandardization involves using the same standards in different countries Allows for different standards in different countries as long as they do not conflict3-7Arguments for ConvergenceFacilitate better comparability of financial statements Easier evaluation of companies Facilitate international mergers and acquisitionsReduce financial reporting costs Cost-listing would allow access to less expensive capitalReduce investor uncertainty and the cost of capitalReduce cost of preparing worldwide consolidated financial statementsSimplify auditingEasy transfer of accounting staff internationally3-8Arguments for ConvergenceRaise the quality level of accounting practices internationallyIncrease credibility of financial informationEnable developing countries to adopt a ready-made set of high-quality standards with minimum cost and effort3-9Arguments against ConvergenceSignificant differences in existing standards Enormous political cost of eliminating differencesNationalism and traditionsArriving at universally accepted principles is difficultNeed for common standards is not universally acceptedWell-developed global capital market exists already May cause standards overloadDifferences in accounting across countries might be necessary3-10Harmonization EffortsSeveral organizations were involved at global and regional levels International Organization of Securities Commissions (IOSCO)International Federation of Accountants (IFAC)European Union (EU)International Forum on Accountancy Development (IFAD)International Accounting Standards Committee(IASC)International Accounting Standard Board (IASB)3-11International Organization of Securities Commissions (IOSCO)Established in 1974 Initially limited its membership to regulatory agencies in AmericaOpened membership to agencies in other parts of the world in 1986Aims at ensuring a better regulation of markets on both domestic and international levelsWorks to facilitate cross-border securities offering and listings by multinational issuersAdvocates the adoption of a set of high-quality accounting standards3-12International Federation of Accountants (IFAC)Established in October1977 at 11th World Congress of Accountants in MunichPromotes adherence to high-quality professional standards of auditing, ethics, education, and trainingLaunched International Forum on Accountancy Development (IFAD) toEnhance the accounting profession in emerging nationsPromote transparent financial reportingEstablished the Forum of Firms with an aim ofProtecting the interests of cross-border investorsPromoting international flows of capital3-13European Union (EU)Founded in March 1957 with the signing of the Treaty of Rome by six European nationsIssued two directives aimed at harmonizing accountingFourth Directive: Dealt with valuation rules, disclosure requirements, and the format of financial statementsEstablished the true and fair view principleProvided considerable flexibilityAllowed countries to choose from among acceptable alternativesOpened the door for noncomparability in financial statements Seventh Directive: Dealt with consolidated financial statements3-14European Union (EU)Directives helped reduce differences in financial statementsComplete comparability was not achievedEuropean Commission decided not to issue additional accounting directivesAssociated itself with efforts undertaken by the IASC toward a broader international harmonization of accounting standards3-15International Forum on Accountancy Development (IFAD)Mission was to improve the market security and transparency, and financial stability on a global basisAssists in defining expectations from accountancy professionEncourages governments to focus on the needs of developing economies in transitionHarness funds and expertise to build accounting and auditing capacity in developing countries3-16International Accounting Standards Committee (IASC)Established in 1973 by leading professional accounting bodies in 10 countriesBroad objective of formulating international accounting standardsHarmonization efforts evolved in three mail phasesLowest-common-denominator approachIssuance of 26 generic International Accounting StandardsComparability projectPublication of Framework for the Preparation and Presentation of Financial StatementsComparability of Financial Statements ProjectIOSCO agreement3-17International Accounting Standards Board (IASB)Replaced IASC in 2001IFRS Foundation appoints board of 16 members 13 full and 3 part-timeBoard approves standards, exposure drafts, and interpretationsShift in emphasis from harmonization to global standard-setting or convergenceMain aim is to develop a set of high-quality financial reporting standards for global use3-18EXHIBIT 3.2—The Structure of the IASB3-19Principles-Based Approach to InternationalFinancial Reporting StandardsIASB follows a principles-based approach to standard setting vs a rules-based approachStandards establish general principles for recognition, measurements, and reporting requirements for transactionsLimits guidance and encourages professional judgment in applying general principles to entities or industries3-20IASB FrameworkCreated to develop accounting standards systematicallyFramework for Preparation and Presentation of Financial Statement adopted by IASB in 2001 from IASC Scope of FrameworkObjective of financial statements and underlying assumptionsQualitative characteristics that affect the usefulness of financial statementsDefinition, recognition, and measurement of the financial statements elements Concepts of capital and capital maintenance3-21Qualitative Characteristics of Financial StatementsUnderstandability: Understandable to people with reasonable financial knowledgeRelevance: Useful for making predictions and confirming existing expectationsAffected by nature and materiality of informationReliability: Neutral and represents faithfully what it purports toReflecting items based on economic substance rather than their legal formComparabilty3-22Proposed Changes to existing frameworks by IASB and FASBIASB and FASB will work on existing frameworks to provide basis for developing future standards by boardsPhases of projectObjectives and qualitative characteristicsElements and recognitionMeasurementReporting entityPresentation and disclosurePurpose and statusApplication to not-for-profitsFinalization3-23Elements of Financial StatementsDefinitionAssets, liabilities, and other financial statement elements are definedRecognitionGuidelines as to when to recognize revenues and expensesMeasurement Various bases are allowed: historical cost, current cost, realizable value, and present value3-24The Norwalk AgreementProposed Changes as per the discussion paper published jointly by two boards:Decision-useful objective encompassing information relevant to assessing stewardship Stakeholder approach (vs. U.S. framework of shareholder approach) — users other than capital providers explicitly acknowledgedAsset of an entity would be present economic resource to which, through an enforceable right or other means, entity has access or can limit others’ accessEmphasis on principle and guidance development for fair value measurements in IFRS—exit price as measurement base, or, if not—develop additional guidance3-25Presentation of Financial Statements (IAS 1)Single standard providing guidelines for the presentation of financial statementsGuidance areasPurpose of financial statementsComponents of financial statements Overriding principle of fair presentationRequires the faithful representation of the effects of transactions and eventsAccounting policiesShould be consistent with all IASB standardsWhen specific guidance is lacking, use standards on similar issues, and definitions of the financial statement elements3-26Presentation of Financial Statements (IAS 1)Basic principles and assumptionsAdds to the guidance provided in the FrameworkImmaterial items should be aggregatedAssets and liabilities, and income and expenses should not be offsetStructure and content of financial statementsCurrent/noncurrentItems to be included on face of financial statementsItems to be disclosed in the notes3-27First Time Adoptions of IFRS (IFRS 1)Provides guidance to companies that are adopting IFRS for the first timeRequires compliance with all effective IFRS at the reporting date of an entity’s first IFRS financial statementsAllows exemptions when costs outweigh benefits3-28Use of IFRSEvidence of support for IFRSAdoption by the EU – public companies in the EU were required to begin using IFRS in 2005IOSCO has endorsed IFRS for cross-listingsIFAC G20 accountancy summit in July 2009 issued renewed mandate for adoption of global accounting standardsLatest IFAC Global Leadership Survey—emphasized that investors and consumers deserve simpler and more useful informationAdoption of IFRS in 2011: Japan, Canada, India, Brazil and Korea3-29International Convergence IssuesThe complicated nature of standards such as financial instruments and fair value accountingThe tax-driven nature of the national accounting regimeDisagreement with significant IFRS, such as financial statements and fair value accountingInsufficient guidance on first time application of IFRSLimited capital markets are less beneficialInvestor satisfaction with national accounting standardsIFRS difficulties in language translation3-30IASB/FASB ConvergenceThe Norwalk Agreement reached in 2002 between the IASB and FASB pledgedFor compatible financial reporting standardsProper coordination of work program to maintain compatibility3-31IASB/FASB ConvergenceIASB’s and FASB’s key initiatives in the Norwalk Agreement Joint projects – boards work jointly to address issues (e.g., revenue recognition)Short-term convergence –remove differences between IFRS and U.S. GAAP for issues where convergence is deemed most likelyIASB liaison – IASB member in residence at FASBMonitoring IASB projects – FASB monitors IASB projects of most interestConvergence research project – identification of all major differences between IFRS and U.S. GAAPConvergence potential – FASB assesses agenda items for possible cooperation with IASB3-32IASB/FASB ConvergenceFollowing global financial crisis both groups formed Financial Crisis Advisory Group (FCAG)July 2009 FCAG report addresses:Effective financial reportingLimitations of financial reportingConvergence of accounting standardsStandard-setting independence and accountability3-33Anglo-Saxon AccountingAccounting systems prevalent in English-speaking countries including U.S., U.K., Canada, Australia and New ZealandFundamental features:Micro orientation (firm level) with emphasis on professional rules and self-regulationInvestor orientationPrimary aim is efficient operation of capital markets Very transparentLess emphasis on prudence and measurement of taxable income or distributable incomeSubstance over form3-34End of Chapter 33-35