Kế toán, kiểm toán - Chapter three: International convergence of financial reporting

Chapter ThreeInternational Convergence of Financial ReportingCopyright © 2012 The McGraw-Hill Companies,All Rights ReservedInternational Convergence of Financial ReportingChapter TopicsConvergence—the buzz word in international financial reporting.Other organizations involved in harmonization.The International Accounting Standards Committee.Evolution of the International Accounting Standards Board (IASB). IASB framework and IFRS.Use of and support for IFRS.Principles-based vs. rules-based accounting.IAS 1 and IFRS 1.Arguments for and against convergence.International convergence towards and the adoption of IFRS.International Convergence of Financial ReportingLearning Objectives1. Explain the meaning of convergence.2. Identify the arguments for and against international convergence of accounting standards.3. Discuss major harmonization efforts.4. Explain the principles-based approach used by the International Accounting Standards Board (IASB).5. Describe the proposed changes to the IASB’s Framework.International Convergence of Financial ReportingLearning Objectives6. Discuss the IASB’s Standards related to first-time adoption of IFRS and the presentation of financial statements.7. Describe the support for and the use of IFRS across countries.8. Examine the issues related to international convergence.9. Describe the progress made in the IASB/FASB convergence project.10. Explain the meaning of “Anglo-Saxon” accounting. Harmonization and ConvergenceHarmonization The process of reduction of alternatives while maintaining a high degree of flexibility in accounting practices.Term is now becoming “antiquated.”Convergence -- the adoption of one set of standards internationally. This is the main objective of the IASB.Learning Objective 1 HarmonizationThe two “levels” of harmonizationHarmonization in accounting standards, which is increased agreement in accounting rules.Harmonization in practice, which is increased agreement in actual accounting practices.Harmonization in standards may or may not result in harmonization in practice. Learning Objective 1HarmonizationIs different from standardization.Harmonization allows for different standards in different countries as long as there are not logical conflicts.Standardization involves using the same standards in different countries. Learning Objective 1Convergence: The Pros and ConsPros:Expedite the integration of global capital markets and make easier the cross-listing of securities.Facilitate international mergers and acquisitions.Reduce investor uncertainty and the cost of capital.Reduce financial reporting costs.Allow for easy and cost effective adoption of high-quality standards by developing countries.Easier to transfer accounting staff internationally.Learning Objective 2Convergence: The Pros and ConsCons: Significant differences in standards currently exist.The political cost of eliminating differences.Overcoming “Nationalism” and traditions.Perhaps it will not provide significant benefits.Will cause “Standards Overload” for some firms.Diverse standards for diverse places is acceptable.Learning Objective 2Harmonization EffortsOrganizations involvedAssociation of South East Asian Nations (ASEAN)United Nations (UN) European Union (EU)International Accounting Standards Committee(IASC)—dissolved in 2001International Organization of Securities Commissions (IOSCO)International Federation of Accountants (IFAC)IASB (successor to IASC) and FASBLearning Objective 3Harmonization EffortsOrganizations involvedIOSCO – is essentially the international equivalent of the U.S. Securities and Exchange Commission (SEC).IFAC – is similar, at the international level, to the American Institute of Certified Public Accountants (AICPA).IASB – is essentially the international equivalent of FASB.Learning Objective 3Harmonization EffortsIOSCOWorks to achieve improved market regulation internationally.Works to facilitate cross-border listings.Advocates for the development and adoption of a single-set of high quality accounting standards.Learning Objective 3Harmonization EffortsIFACWorks to develop international standards of auditing, ethics, and education.Began International Forum on Accountancy Development (IFAD) to enhance the accounting profession in emerging countries.Started the Forum of Firms to raise global standards of accounting and auditing.Learning Objective 3Harmonization EffortsEUHas worked to harmonize accounting standards within the EU, primarily by way of two directives.Fourth Directive – a set of comprehensive accounting rules built on the principle of a “true and fair view.”---valuation rules, disclosure and format.Seventh Directive – requires consolidated financial statements for company groups of a certain size.Learning Objective 3Harmonization EffortsIASBPreceded by the IASC (International Accounting Standards Committee).Works toward convergence of national and international accounting standards.IASC was established in 1973.Learning Objective 3Harmonization EffortsIASBComprised of 16 members (13 full, 3 part-time).Represents a geographical mix.Develops IFRS and Exposure Drafts using due process.Approves IFRIC (International Financial Reporting Interpretations Committee) Interpretations.Standards are principles-based.Since establishment of IASB, focus is on global standard-setting rather than harmonization per se.Learning Objective 3Harmonization EffortsIASB – Major InitiativesComparability Project (through IASC)Comprehensive review of existing IAS (International Accounting Standards).Begun in 1989.In order to eliminate most of the choices permitted under IAS.eg IAS 11 requiring use of percentage of completion method when certain criteria are met.Learning Objective 3Harmonization EffortsIASB – Major InitiativesIOSCO AgreementEstablishment of a core set of 30 accounting standards.Standards agreed upon by IOSCO and IASC.Learning Objective 3Principles-Based Approach to Accounting Standard SettingIASB PerspectiveFollows a principles-based approach to standard setting vs a rules-based approach.As such, accounting standards are grounded in the IASB Framework.Limits guidance and encourages professional judgment in applying general principles to entities or industries.Learning Objective 4IASB Framework and IFRSIASB Framework Created to develop accounting standards systematically.Provides the basis for financial statements presented in accordance with IFRS.Similar to the relationship between U.S. GAAP financial statements and the FASB Conceptual Framework.Learning Objective 5IASB Framework and IFRSIASB FrameworkThe objective and underlying assumptions of financial statements.Qualitative characteristics of information.Definition, recognition, and measurement of elements in financial statements.Concepts of capital and capital maintenance. Learning Objective 5IASB Framework and IFRSIASB FrameworkPrimary objective is to provide information useful to decision making.Underlying assumptions include accrual basis and going concern.Learning Objective 5IASB Framework and IFRSQualitative characteristics of informationUnderstandability – should be understandable to people with reasonable financial knowledge.Comparability – allows for meaningful comparisons to financial statements of previous periods and other companies.Learning Objective 5IASB Framework and IFRSQualitative characteristics of informationRelevance – useful for making predictions and confirming existing expectations.Reliability – free from bias (neutral) and represents that which it claims to represent (representational faithfulness).Learning Objective 5IASB Framework and IFRSElements of Financial StatementsDefinition – assets, liabilities, and other financial statement elements are defined.Recognition – guidelines as to when to recognize revenues and expenses.Measurement – various bases are allowed: historical cost, current cost, realizable value, and present value.Learning Objective 5IASB Framework and IFRSConcepts of capital maintenanceFinancial capital maintenance.Physical capital maintenance.Learning Objective 5Proposed Changes to IASB Framework by IASB and FASBPhases:Objectives and qualitative characteristics.Elements and recognition.Measurement.Reporting entity.Presentation and disclosure.Purpose and status.Application to not-for-profits.Finalization.Learning Objective 5Proposed Changes to IASB Framework by IASB and FASBProposed Changes:Decision-useful objective encompassing information relevant to assessing stewardship (actually two parallel objectives with different emphases).Stakeholder approach (vs. U.S. framework— shareholder approach)--users other than capital providers explicitly acknowledged.Asset of an entity = present economic resource to which, through an enforceable right or other means, entity has access or can limit others’ access.Emphasis on fair value measurements in IFRS—exit price as measurement base, or, if not—develop additional guidance.Learning Objective 5Proposed Changes to IASB Framework by IASB and FASBJoint statement in November 2009 affirmed June 2011 as target date for completing major projects.March 2010—joint exposure draft issued— “Conceptual Framework for Financial Reporting: The Reporting Entity” GOAL: to significantly improve and converge IFRS and U.S. GAAP.Presentation of Financial Statements (IAS 1)This standard provides guidance in the following areasPurpose of financial statements – to provide decision-useful information.Components of financial statements – balance sheet, statements of income, cash flows, changes in equity, and notes to the financial statements.Learning Objective 6Presentation of Financial Statements (IAS 1)Fair presentation – the overriding principle of financial statement presentation.Accounting policiesShould be consistent with all IASB standards.When specific guidance is lacking, use standards on similar issues, and definitions of the financial statement elements.Learning Objective 6 Presentation of Financial Statements (IAS 1)Basic principles and assumptionsReiteration of underlying assumptions.Accrual basis/going concern/comparability.Structure and content of financial statementsProvides information on presentation format:Current/noncurrent.Items to be included on face of financial statements.Content of notes.Learning Objective 6First Time Adoptions of IFRS (IFRS 1)Provides guidance for first time adoption.Requires compliance with all effective IFRS.Allows exemptions when costs deemed to outweigh benefits.Learning Objective 6Use of IFRSEvidence of support for IFRSAdoption by the EU – public companies in the EU were required to begin using IFRS in 2005.IOSCO has endorsed IFRS for cross-listings.IFAC G20 accountancy summit in July 2009 issued renewed mandate for adoption of global accounting standards.Latest IFAC Global Leadership Survey—emphasized that investors and consumers deserve simpler and more useful information.Adoption of IFRS in 2011: Japan, Canada, India, Brazil and Korea.Learning Objective 7International Convergence IssuesThe complicated nature of standards such as financial instruments and fair value accounting.The tax-driven nature of the national accounting regime.Disagreement with significant IFRS, such as financial statements and fair value accounting.Insufficient guidance on first time application of IFRS.Limited capital markets = little benefit.Investor satisfaction with national accounting standards.IFRS difficulties in language translation.Learning Objective 8IASB/FASB ConvergenceThe Norwalk Agreement Reached in 2002.Between the IASB and FASB.To work toward accounting standards convergence.Learning Objective 9IASB/FASB ConvergenceFASB’s key initiatives in the Norwalk Agreement :Joint projects – boards will work together to address some issues (e.g., revenue recognition).Short-term convergence – to remove differences between IFRS and U.S. GAAP for issues where convergence is deemed most likely.IASB liaison – IASB member in residence at FASB.Monitoring IASB projects – FASB monitors IASB projects of most interest.Convergence research project – identification of all major differences between IFRS and U.S. GAAP.Convergence potential – FASB assesses agenda items for possible cooperation with IASB.Learning Objective 9IASB/FASB ConvergenceFollowing global financial crisis both groups formed Financial Crisis Advisory Group (FCAG).July 2009 FCAG report addresses:Effective financial reporting.Limitations of financial reporting.Convergence of accounting standards.Standard-setting independence and accountability.Anglo-Saxon AccountingCountries include U.S., U.K., Canada, Australia and New Zealand.Accounting systems not identical but share fundamental features:Micro orientation (firm level) with emphasis on professional rules and self-regulation.Investor orientation—primary aim is efficient operation of capital markets (very transparent).Less emphasis on prudence and measurement of taxable income or distributable income—substance over form.Learning Objective 10