Purpose of International Accounting Worldwide Accounting Diversity Basic Terminology
International Accounting The word International in International Accounting can be defined at three different levels. 1. The first level is the supranational accounting, which denotes standards, guidelines and rules of accounting, auditing and taxation issued by supranational organisations (for example European Union). 2. At the second level, the company level, international accounting can be viewed in terms of the standards, guidelines and practices that company follows related to its international business activities and foreign investments. These would include standards for accounting denominated in foreign currency and techniques for evaluating the performance of foreign operations. 3. At the third and broadest level, international accounting can be viewed as the study of the standards, guidelines and rules of accounting that exist within each country and comparison of these rules with International Financial Reporting Standards (IFRS) set by International Accounting Standards Board.
Reasons for accounting diversity in the world Legal system (common law or codified Roman law) Taxation (in some countries, published financial statements form a basis for taxation) Providers of financing (family members, banks, governments and shareholders) Inflation (some countries, for example in Latin America apply so called Inflation Accounting) Political and economic ties (for example through colonialism, England and France have transferred their accounting systems to a variety of countries) Language barriers
Problems caused by accounting diversity Incomparability of financial statements and lack of high-quality accounting information in some countries Preparation of Consolidated financial statements Access to Foreign capital markets
Supranational accounting EU Accounting Directives 1. Fourth Directive: annual accounts of companies with limited liability 2. Seventh Directive: consolidated accounts of companies with limited liability 3. Eight Directive: statutory audits of annual accounts and consolidated accounts
Fourth Directive (1978) The Directive lay down the principles which govern the drawing up of the balance sheet and the profit and loss account. The balance sheet: the Directive provides for two balance sheet layouts, leaving it to the Member States to choose. It then lists the balance sheet items and comments on them. The profit and loss account: four layouts are proposed from which Member States are free to choose. The Directive provides a commentary on certain items here too. The Directive states general principles for the valuation of items in the annual accounts, such as prudence, consistency in the application of the methods of valuation, etc. They also set out specific valuation rules. The Directive lists the information which must be provided in the notes to the accounts: the valuation methods applied to the various items, undertakings in which the company holds a certain percentage of the capital, certain types of the company's debts, financial commitments not included in the balance sheet, etc. 2
The annual report must include a fair review of the development of the company's business and of its position. It must also provide information on any important events that have occurred since the end of the financial year, the company's likely future development and activities in the field of research and development. The Directive lays down certain rules on publication (documents which must be published, etc.). Lastly, the Directive provides for a system of auditing under which companies must have their annual accounts audited by one or more persons authorised by national law to audit accounts. Such a person or persons must also verify that the annual report is consistent with the annual accounts for the same financial year. Less strict rules are laid down for small and medium-sized companies. Member States may lighten their obligations in respect of the publication of annual accounts or dispense small companies from the requirement that the annual accounts be audited.
Seventh Directive (1983) This Directive defines the circumstances in which consolidated accounts are to be drawn up. Any company (parent company) which legally controls another company (subsidiary company) is under a duty to prepare consolidated accounts. In most cases, legal control takes the form of the holding of a majority of voting rights. Member States may also require consolidated accounts to be prepared in other cases where a parent company has only a minority shareholding but exercises de facto control. They may provide for exemption from this obligation. The Directive sets out the methods of drawing up consolidated accounts: Consolidated accounts comprise the consolidated balance sheet, the consolidated profit and loss account and the notes to the accounts. Consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the companies included therein taken as a whole. The book values of shares in the capital of companies included in a consolidation must be set off against the proportion which they represent of the capital and reserves of those companies. Such set-off must be effected on the basis of book values as at the date on which the companies are included in the consolidation for the first time. The consolidated accounts must be drawn up on the same date and by the same methods as the annual accounts of the parent company. The Annex states that certain information must be provided in the notes, on such things as valuation methods, the names and the registered offices of the undertakings included in the consolidation, total of certain types of debts, etc. The Directive also regulates the contents of the consolidated annual report. This must include at least a fair review of the development of business and the position of the undertakings included in the consolidation taken as a whole, and certain indications for each of those undertakings (number and nominal value of shares, etc.). The Directive establishes a system of auditing under which a company which prepares consolidated accounts must have them audited by one or more persons authorised to audit accounts under the laws of the Member State which govern that company. The person or persons responsible for auditing the consolidated accounts must also verify that the consolidated annual report is consistent with the consolidated accounts for the same financial year.
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IFRS International Financial Reporting Standards IFRS began as an attempt to harmonise accounting across the European Union but the value of harmonisation quickly made the concept attractive around the world. They are sometimes still called by the original name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards International Financial Reporting Standards (IFRS). IFRS due process International Financial Reporting Standards (IFRSs) are developed through an international consultation process, the "due process", which involves interested individuals and organisations from around the world. The due process comprises six stages: 1. Setting the agenda 2. Planning the project 3. Developing and publishing the discussion paper (DP) 4. Developing and publishing the exposure draft (ED) 5. Developing and publishing the standard 6. After the standard is issued After an IFRS is issued, the staff and the IASB members hold regular meetings with interested parties, including other standard-setting bodies, to help understand unanticipated issues related to the practical implementation and potential impact of its proposals. The IFRS Foundation also fosters educational activities to ensure consistency in the application of IFRSs.
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Current use of IFRSs in the countries of the G20 Country Status for listed companies as of December 2013 Argentina Required for fiscal years beginning on or after 1 January 2012 Australia Required for all private sector reporting entities and as the basis for public sector reporting since 2005 Brazil Required for consolidated financial statements of banks and listed companies from 31 December 2010 and for individual company accounts progressively since January 2008 Canada Required from 1 January 2011 for all listed entities and permitted for private sector entities including not-for-profit organisations China Substantially converged national standards European Union All member states of the EU are required to use IFRSs as adopted by the EU for listed companies since 2005 France Required via EU adoption and implementation process since 2005 Germany Required via EU adoption and implementation process since 2005 India India is converging with IFRSs at a date to be confirmed. Indonesia Convergence process ongoing Italy Required via EU adoption and implementation process since 2005 Japan Permitted from 2010 for a number of international companies Mexico Required from 2012 Republic of Korea Required from 2011 Russia Required from 2012 Saudi Arabia Required for banking and insurance companies; full convergence with IFRSs currently under consideration South Africa Required for listed entities since 2005 Turkey Required for listed entities since 2005 United Kingdom Required via EU adoption and implementation process since 2005 United States Allowed for foreign issuers in the US since 2007
Since 2001, almost 120 countries have required or permitted the use of IFRSs. Source: http://www.ifrs.org/The-organisation/Documents/2013/Who-We-Are-English-2013.pdf 5
List of IFRS and Interpretations in 2014 IFRS Conceptual Framework for Financial Reporting International Accounting Standards (IASs) IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 7 Statement of Cash Flows IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Reporting Period IAS 11 Construction Contracts IAS 12 Income Taxes IAS 14 Segment Reporting IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 18 Revenue IAS 19 Employee Benefits IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 23 Borrowing Costs IAS 24 Related Party Disclosures IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 27 Separate Financial Statements IAS 28 Investments in Associates IAS 29 Financial Reporting in Hyperinflationary Economies IAS 31 Interests in Joint Ventures IAS 32 Financial Instruments: Presentation IAS 33 Earnings per Share IAS 34 Interim Financial Reporting IAS 36 Impairment of Assets IAS 37 Provision, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment Property IAS 41 Agriculture International Financial Reporting Standards (IFRSs) IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments IFRS 9 Financial Instruments IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities IFRS 13 Fair Value measurement
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Interpretations SIC-7 Introduction of the Euro SIC-10 Government Assistance No Specific Relation to Operating Activities SIC-15 Operating Leases Incentives SIC-25 Income Taxes Changes in the Tax Status of an Enterprise or its Shareholders SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease SIC-29 Service Concession Arrangements: Disclosures SIC-31 Revenue Barter Transactions Involving Advertising Services SIC-32 Intangible Assets Web Site Costs IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 2 Members` Shares in Co-operative Entities and Similar Instruments IFRIC 4 Determining whether an Arrangement contains a Lease IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 6 Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of Embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment IFRIC 12 Service Concession Arrangements IFRIC 13 Customer Loyalty Programmes IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction IFRIC 15 Agreements for the Construction of Real Estate IFRIC 16 Hedges of a Net Investment in a Foreign Operation IFRIC 17 Distributions of Non-cash Assets to Owners IFRIC 18 Transfers of Assets from Customers IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine IFRIC 21 Levies
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US GAAP Generally Accepted Accounting Principles are accounting rules used in the United States. These are used to prepare, present and report financial statements for a wide variety of entities, including publicly traded and privately held companies, non-profit organizations, and government authorities, with the Financial Accounting Standards Board (FASB) establishing rules for public and private companies, and non-profit organizations; the Governmental Accounting Standards Board (GASB) determining a different set of assumptions, principles for local and state governments - and the Federal Accounting Standards Advisory Board (FASAB) performing a similar role for federal government entities.
These organizations influence the development of GAAP in the United States. United States Securities and Exchange Commission (SEC) The SEC was created as a result of the Great Depression. At that time there was no structure setting accounting standards. The SEC encouraged the establishment of private standard- setting bodies through the AICPA and later the FASB, believing that the private sector had the proper knowledge, resources, and talents. The SEC works closely with various private organizations setting GAAP, but does not set GAAP itself. In the past: American Institute of Certified Public Accountants (AICPA) In 1939, urged by the SEC, the AICPA appointed the Committee on Accounting Procedure (CAP). During the years 1939 to 1959 CAP issued 51 Accounting Research Bulletins that dealt with a variety of timely accounting problems. However, this problem-by-problem approach failed to develop the much needed structured body of accounting principles. Thus, in 1959, the AICPA created the Accounting Principles Board (APB), whose mission it was to develop an overall conceptual framework. It issued 31 opinions and was dissolved in 1973 for lack of productivity and failure to act promptly. Financial Accounting Standards Board (FASB) FASB has 4 major types of publications: 1. Statements of Financial Accounting Standards (SFAS) - the most authoritative GAAP setting publications. 168 SFAS have been issued to date. 2. Statements of Financial Accounting Concepts (SFAC) - first issued in 1978. They are part of the FASB's conceptual framework project and set forth fundamental objectives and concepts that the FASB use in developing future standards. However, they are not a part of GAAP. There have been 7 concepts published to date. 3. Interpretations - modify or extend existing standards. There have been around 50 interpretations published to date. 4. Technical Bulletins - guidelines on applying standards, interpretations, and opinions. Usually solves some very specific accounting issue that will not have a significant, lasting effect.
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