Intl Accounting Standards

Financial Reporting
International Harmonisation of Accounting

Standards
Learning Outcomes
Describe how the changing world environment
is leading to an increased focus on
international accounting standards.
Explain some differences in accounting
methods as they are applied internationally.
List five major classifications of accounting
models used in different geographical regions.
BM0157-3.5-2 Financial Reporting
Provision, Contingent Liabilities and Assets (FRS 137)
Slide 2 of 15
Learning Outcomes
Describe the role of the International
Accounting Standards Committee (IASC) and
the International Accounting Standards Board
(IASB) in establishing international accounting
standards.
Describe the advantages of International
Harmonisation of Accounting Standards
Slide 3 of 15
The Increasing Importance of International

Accounting Standards
Beginning in 2005, the European Union (EU)
mandated that accounting
standards for companies listed in its securities
markets conform to International Financial
Reporting Standards (IFRS).
In 2006, the total value of cross-border
transactions in bonds and equities was $90
trillion U.S. dollars annually.
Slide 4 of 15
Importance of International
Composition of the Global Equity and Debt Markets
by Each Countrys Domestic Securities
Slide 5 of 15
Composition of the Global Equity and Debt Markets
by Each Countrys Domestic Securities
Slide 6 of 15
Holdings of U.S. and Foreign Securities, 19942004
Market Value of Holdings of U.S. and Foreign
Securities, 1994-2004
Foreign holdings
of U.S. securities
(1.2 to 6 trillion
increase)
U.S. holdings of
foreign securities
(870 billion to 3.5
trillion increase)
Slide 7 of 15
The
demand
for
uniform
international
accounting standards has increased because:
Investors seek comparable standards to
evaluate investment opportunities,
Managers
seek
to
evaluate
the
performance of foreign subsidiaries and
competitors, and
Creditors and debt capital markets seek
comparable standards to determine credit
quality and bankruptcy risk.
Slide 8 of 15
Harmonisation of Worldwide
Financial accounting practices, required disclosures, and
auditing requirements which are not uniform across
countries. Variations exist in the accounting for:
Goodwill.
Business combination methods.
Tax allocation.
LIFO inventory costing.
Development costs.
Use of reserves
Slide 9 of 15
The International Accounting Standards Committee
(IASC) was founded in 1973.
41 standards were issued by January 2001.
In 2001, the IASC announced formation of the

International Accounting Standards Board
(IASB).
Goal is to develop high-quality internationally
accepted accounting standards.
Issues standards known as International
Financial Reporting Standards (IFRS).
Slide 10 of 15
Harmonization of accounting standards were enhanced
with the formation of this International Accounting
Standards Committee (IASC).
In 2002, the FASB and IASB agreed to begin

converging U.S. GAAP to IFRSs.
By 2005, over 90 countries had announced they

would be following IFRSs.
In 2005, European Union requires publicly traded

EU companies to follow IFRSs.
Slide 11 of 15
Advantages of International Harmonisation

of Accounting Standards
To International Investors - Ability to make useful and
meaningful comparisons of investments portfolios in
different countries.
To multi national companies:
Easy consolidation of financial statements.
Better management control would be improved, because
harmonisation would aid internal communication of financial
information.
Appraisal of foreign enterprise for takeovers and mergers would
be more straightforward.
It would be easier to comply with the reporting requirements of
overseas stock exchanges.
A reduction in audit costs might be achieved.
Transfer of accounting staff across national boarders would be
easier.
Slide 12 of 15

Governments and National standard setting bodies
Countries would save time and money as they can just adopt
International Accounting Standards in full.
Ability to counter transfer pricing by multinational companies as
these companies could not hide behind foreign accounting
practice which are difficult to understand.
Easy to calculate the tax liability of investors, including
multinationals who receive income from overseas sources.
Ensures availability of high quality and well-researched
standards to countries which otherwise could not have afforded to
issue standards.
Ensures accountability and transparency of operations of
enterprises in different countries.
Assist governments in attracting international investors as
adoption of IAS enables international investors easy monitoring of
overseas investments.
Slide 13 of 15

Regional economic groups:
Promotion of trade within the region through common
accounting practices.
Ability to compile meaningful data on the performance
of various enterprises within the region.
Slide 14 of 15

Standardisation
Develop, in the public interest, a single set of high
quality understandable and enforceable global accounting
standards that require high quality transparent and capable
information in financial
statements and other financial reporting to help the
participants in the various capital markets of the world and
other users of the information to make economic decisions.
Promote the use and rigorous application of those
standards.
Work actively with national standards-setters to bring
convergence of national accounting standards and
International Financial Reporting Standards (IFRS) to high
quality solution.
Slide 15 of 15
Obstacles of International Harmonisation of

the size of the present differences between the
accounting practices of different countries.
lack of strong professional accountancy bodies in

some countries, and the differences in political and
economic systems.
Nationalism poses a threat to harmonisation as
countries are wary of possibility of control of their
accounting regulation to outsiders, especially if it is
perceived as replacing their own accounting regulations
with those of other countries.
Slide 16 of 15

Difference in accounting measurement rules provide
insufficient information to enable reports to be
universally understood and interpreted.
Countries have substantial economic and cultural
differences that preclude simple interpretations, even
when the figures are generated using the same
accounting principles because accounting standards in
any society are an outgrowth of that society's needs and
perspectives.
Slide 17 of 15

Coordination of their accounting policies with policies
prevailing in other countries in order to minimize
negative externalities and to maximize positive
externalities.
users might have different needs in different nations
(e.g., debtor vs. creditor nations; countries that have
very active stock markets and those where banks
primarily accumulate and invest capital; investor vs.
investee countries; etc.).
Slide 18 of 15

divergence between the needs of large multinationals
and smaller business entities in developing countries
might spoil the harmonisation of accounting standards.
different levels of sophistication and influence among

different national accounting professions.
high cost of requiring issuers to change accounting
principles, or to keep a "separate set of books" for
multinational offerings.
Slide 19 of 15
Comparative Accounting Models

Differing accounting practices could result in the same
economic event being reported differently.
Differences in Net Income and Equity due to Differing GAAP
= ROE
Slide 20 of 15

Format and Terminology Differences
Some non-U.S. companies prepare statements in:
English still using their national GAAP.
Their local currency with a column that is translated
into U.S. dollars.
English conforming to U.S. GAAP or the IFRS.
The first step is to determine which GAAP is being used.
Slide 21 of 15

Examples of terminology differences:
Slide 22 of 15

Various formats are allowed in presenting financial
statements in different countries.
In the UK:
Noncurrent assets are listed first in the balance
sheets.
Current assets listed second and in order of
increasing liquidity (i.e., the most liquid assets are
listed last).
Assets and liabilities are combined to compute total
net assets.
Slide 23 of 15

Review:
A company located in Japan prepares an annual
report denominated in U.S. dollars. Any report
denominated in U.S. dollars is always prepared in
accordance with U.S. GAAP.
False
Slide 24 of 15

Review:
In the United Kingdom, stock refers to common
stock.
False,
stock refers to inventory
Slide 25 of 15

Review:
Since 2005, all European Union companies listed on a
regulated market are required to prepare consolidated
accounts in accordance IFRS accounting standards.
True
Slide 26 of 15
Classification of International
Accounting Models
Five Major Geographical Classifications:
Type of Accounting Practice
Region
Anglo-Saxon
United States
Anglo-Saxon
United Kingdom
German
Germany, Switzerland
Latin
France, Italy, Brazil
Asia-Pacific
Japan, China
Slide 27 of 15
Accounting Models
Accounting Standards in the United Kingdom
Standards referred
Standards (FRS).
Issued by the Accounting Standards Board (ASB).
The ASB strongly supports the IASB.
ASB is considering a full conversion to IFRS

implementation that would require companies to
comply completely by January 1, 2009.
to
as
Financial
Reporting
Slide 28 of 15
Accounting Models
Accounting Standards in Germany
Historically, standard setting has been the responsibility of

the Federal Ministry of Justice (FMJ).
In 1998, FMJ recognized a new independent body, the

German Accounting Standards Board (GASB).
As of 2005, preparation of financial statements according to

IFRS became mandatory for public companies.
Slide 29 of 15
Accounting Models
Accounting Standards in Japan
In February 2001, the

Financial Accounting Standards Foundation (FASF) and
Accounting Standards Board (ASB), were formed to
develop accounting standards.
Accounting Standards Board has been working with the

IASB in a path toward standards convergence. It plans to
reconcile these differences to IAS by 2008.
Slide 30 of 15
International Reporting Issues

Treatment of Goodwill
Since June 30, 2001, goodwill is

expensed if impaired under U.S. GAAP.
Amortization of goodwill is required under the

Japanese model, with a life of five years.
Under IAS standard 38, internally generated

goodwill is not capitalized.
only
Slide 31 of 15

Treatment of Goodwill
Since June 30, 2001, goodwill is

expensed if impaired under U.S. GAAP.
Amortization of goodwill is required under the

Japanese model, with a life of five years.
Under IAS standard 38, internally generated

goodwill is not capitalized.
only
Slide 32 of 15

Inventories
LIFO is not acceptable under IAS.
IASB recommends specific cost.

If
specific cost is not determinable, the
benchmark is FIFO or weighted average.
Slide 33 of 15

Research and Development
In the United States:

Research and development (R&D) costs are
expensed as incurred.
In acquisitions, in-process R&D is recognized as an
expense.
IAS No. 38:

Research costs are expensed as incurred.
Development costs are capitalized when a product
is determined to be commercially feasible.
Purchased R&D costs are capitalized and
amortized.
Slide 34 of 15

Business Combinations
Purchase method required under U.S.

GAAP.
Purchase method required under

International
Accounting
Standards
(IAS).
Slide 35 of 15

Fixed Assets and Depreciation
In several countries, fixed assets are valued at

depreciated historical cost (Japan and the United
States).
Under IAS 16, fixed assets are initially valued at cost.

Subsequently, they can be valued under either the:
Cost model, or the
Revaluation model.
Slide 36 of 15
In several countries, fixed assets are valued at

depreciated historical cost (Japan and the United
States).
Slide 37 of 15
Question and Answer Session
Q&A
Slide 38 of 15)
THANK YOU
Slide 39 of 15

Intl Accounting Standards

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Financial Reporting

International Harmonisation of Accounting

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

The Increasing Importance of International

Provision, Contingent Liabilities and Assets (FRS 137)

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

Business combination methods.

LIFO inventory costing.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

41 standards were issued by January 2001.

In 2001, the IASC announced formation of the

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

In 2002, the FASB and IASB agreed to begin

By 2005, over 90 countries had announced they

In 2005, European Union requires publicly traded

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

Advantages of International Harmonisation

Provision, Contingent Liabilities and Assets (FRS 137)

Advantages of International Harmonisation

Provision, Contingent Liabilities and Assets (FRS 137)

Advantages of International Harmonisation

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

Advantages of International Harmonisation

Provision, Contingent Liabilities and Assets (FRS 137)

Obstacles of International Harmonisation of

lack of strong professional accountancy bodies in

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

Obstacles of International Harmonisation of

Provision, Contingent Liabilities and Assets (FRS 137)

Obstacles of International Harmonisation of

Provision, Contingent Liabilities and Assets (FRS 137)

Obstacles of International Harmonisation of

different levels of sophistication and influence among

Provision, Contingent Liabilities and Assets (FRS 137)

Comparative Accounting Models

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

Comparative Accounting Models

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

Comparative Accounting Models

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

Comparative Accounting Models

Provision, Contingent Liabilities and Assets (FRS 137)

Comparative Accounting Models

BM0157-3.5-2 Financial Reporting