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InternationalInternational Convergence in international accounting standards and consequences for Canadian standard setting
Ian P. N. HagueYork University
ObjectivesObjectivesDiversity in environments -> diversity of accountingAccounting differencesNational & international standard setting processesCurrent developments
Ian P.N. Hague York University
Approaches to International Approaches to International AccountingAccounting
World accounting - one best way
International accounting - legitimate ways by country
Entity accounting - differences between parts of entity in different jurisdictions
Ian P.N. Hague York University
International AccountingInternational AccountingEnvironmental Factors [Environmental Factors [Choi & Mueller, 1992]Choi & Mueller, 1992]
Legal systemPolitical systemNature of business ownershipSize and complexity of organizationsSocial climateSophistication of preparers & users
Ian P.N. Hague York University
International AccountingInternational AccountingEnvironmental Factors [Environmental Factors [Choi & Mueller, 1992]Choi & Mueller, 1992]
Legislative interferenceAccounting legislationSpeed of business innovationStage of economic developmentGrowth stage of economyStatus of professional education and organization
Ian P.N. Hague York University
Classification of accounting Classification of accounting systemssystems [Mueller, 1968] [Mueller, 1968]
U.S. / Canada / NetherlandsBritish Commonwealth (excl. Canada)
Germany / JapanContinental EuropeScandinavia
Ian P.N. Hague York University
Classification of accounting Classification of accounting systemssystems [Mueller, 1968] [Mueller, 1968]
Israel / MexicoSouth AmericaDeveloping nations of Near and Far EastAfrica (except South Africa)
Communist nationsGroups changing now
Ian P.N. Hague York University
Classification of accounting Classification of accounting systems systems [Mueller, Gernon & Meek, 1991][Mueller, Gernon & Meek, 1991]
British American
Continental European
South American
+ Islamic & Communistic
Ian P.N. Hague York University
Balance Sheet SimilaritiesBalance Sheet SimilaritiesHistorical costCurrent / non-current classificationInventory flow and valuation assumptionsAsset write downs for depreciationOperating leases v capital leases
Ian P.N. Hague York University
Balance Sheet SimilaritiesBalance Sheet SimilaritiesMark-to-market/revaluation
Generally conservativeBut may wait for realizationSome upward revaluation
Goodwill - many different methods
Owners equity and reservesMany differences within the
basicsIan P.N. Hague York University
Balance Sheet DifferencesBalance Sheet Differences
Financial instrumentsImpairment lossesProvisionsEmployee benefit liabilitiesIncome taxesBusiness combinations
Ian P.N. Hague York University
Income StatementIncome StatementObjectives:
fair presentation (Canada & U.S.)taxable income (Germany)distributable income (Japan)
Operating v ExtraordinaryChanges in accounting principlesPerformance statement
Ian P.N. Hague York University
Performance StatementPerformance StatementOperating / Business xx
Financing / Treasury xx
Net Income xx ?Other gains and losses xx
Total Performance xx__________________________________
Delete other?
Separately classify re-measurements?
Ian P.N. Hague York University
Consolidation/Joint VenturesConsolidation/Joint Ventures
Different concepts of control
Different extents to which consolidation required
Parent company reporting
Different bases for joint ventures
Ian P.N. Hague York University
Foreign Currency TranslationForeign Currency Translation
Current methodCurrent / non-current methodsMonetary / non-monetary methodsTemporal method
Convenience translation v revision of underlying GAAP
Ian P.N. Hague York University
Accounting Standards TodayAccounting Standards Today
Canada - Canadian GAAP
US - US GAAP
Rest of world - National or IASB
GAAP (+ some US GAAP)
Is this the most useful information?
Ian P.N. Hague York University
High quality financial
reporting is essential to an
efficient capital market
Ian P.N. Hague York University
Convergence - Why?Convergence - Why?
Capital Markets:
Greater transparency Less uncertainty
Reduced cost of capital
Also: reduced costs of compliance
Ian P.N. Hague York University
What is Convergence?What is Convergence?Goal of convergence
different standard setters arriving at high-quality national or international standards on the same topic that areas similar as possible
Process of convergenceusing all reasonable efforts to arrive at consensus
Ian P.N. Hague York University
Convergence - What?Convergence - What?
One set of high quality standards
comprehensive standards
leading to comparable and
transparent reporting
rigorously interpreted and applied
Ian P.N. Hague York University
The PlayersThe Players
IOSCO (including OSC and SEC)
Standard setters (including IASB,
FASB and AcSB)
Investors, preparers, etc.
Ian P.N. Hague York University
IASCIASCEstablished 1973
Early role - “easy” standards, many alternatives - codify practice
1989 - improvements project
Since 1995: IOSCO agreement
2001: Restructured as IASBIan P.N. Hague York University
IASC / IOSCO AgreementIASC / IOSCO Agreement
“Core” standards by 1998
to be considered by IOSCO for
acceptance for cross-border
listings
Ian P.N. Hague York University
IASC / IOSCO AgreementIASC / IOSCO Agreement“Core” standards by 1998
Income taxesEarnings per shareSegmentsPresentation of F/SDiscontinuing operationsInterim reportingInvestment property
Intangible assetsEmployee benefitsProvisionsLeasesImpairmentPost B/S eventsFinancial instruments
Ian P.N. Hague York University
IASB Standards TodayIASB Standards Today
41 Standards
Interpretations programme
Similar concepts & style to Canada
Handbook Section 1501 analyzes differences
Ian P.N. Hague York University
IASC Old StructureIASC Old StructureIASC Board - approves Standards
Standing Interpretations Committee - develops Interpretations
Advisory Council - oversight, policy, and fund raising
Consultative Group - link to non-accounting bodies
Ian P.N. Hague York University
IASC Board - old structureIASC Board - old structure16 Members
AustraliaCanadaFranceGermanyIndia / Sri LankaJapanMalaysiaMexico
NetherlandsNordicS. Africa/ZimbabweSwiss IndustrialsU.K.U.S.A.F.E.I. (Preparers)Analysts
Ian P.N. Hague York University
Concerns about old structureConcerns about old structure
Key attributes should be
Independent
Open
Technically expert
Result: High quality standards
Ian P.N. Hague York University
IASB New StructureIASB New Structure
Full - time Board members
Link to national standard
setters
Independent trustees
Ian P.N. Hague York University
Board (14)(approves IAS
[IFRS], ED, SIC [IFRIC])
7 Liaison Members
Intnl. Financial Reporting Interpretations Committee (12+1)(publishes draft Interpretations
and prepares draft of final Interpretations)
Standards Advisory Council (SAC)(advises Board)
Trustees (19)(appoint Board, IFRIC and SAC)
(6 North America, 6 Europe, 4 Asia/Pacific, 3 Other)
National standard setters (Australia/NZ, Canada, France, Germany, Japan, UK, US.)
IASBNew Structure
Ian P.N. Hague York University
IOSCO Endorsement IOSCO Endorsement Recommendation to allow use of IASC 2000 standards for cross-border offerings and listingsSupplemental treatments to address outstanding substantive issues
limited reconciliationsadditional disclosureslimits on choice of alternatives
Ian P.N. Hague York University
EuropeEurope
2005: All public companies follow IAS for consolidated accounts
Those using US GAAP allowed until 2007
Also Australia
Ian P.N. Hague York University
IASB - IASB - Relevance to Canada?Relevance to Canada?1. IASB liaison role
partnership with national standard setters to promote convergence of national and international standardsalign agendas as far as possiblekey communication link with national board and constituentsregular meetings of liaison members and national board chairs
Ian P.N. Hague York University
IASB - IASB - Relevance to Canada?Relevance to Canada?2. IOSCO responsibilities - questions
Should Canadian regulators accept IASs for foreign issuers? If foreign issuers can use IASs should Canadian issuers also be able to do so?What about US GAAP?• Use US GAAP in Canada?• Reconcile US to IAS in Canada?
Ian P.N. Hague York University
More Questions!More Questions!
Confusion in the Canadian market?
Unlevel playing field?
Infrastructure?
Interest in pursuing the issues?
Ian P.N. Hague York University
What Next?What Next?SEC Concepts release issued 2000
CSA Discussion paper - March 16, 2001
Continuous Disclosure proposals – 2002
(see www.osc.gov.on.ca)
Likely to be some allowance of US GAAP in Canada.
Maybe some allowance of IAS in US?
Ian P.N. Hague York University
Canadian Standard Setting?Canadian Standard Setting?
International harmonization –
but with who?
U.S.?
IASC?
TFOSS v CGA Canada
Ian P.N. Hague York University
AcSB Harmonization PolicyAcSB Harmonization PolicyHarmonization with US – eliminate
significant unjustifiable differences
Global convergence with highest
quality US and international
standards –improvements to existing
standards and development of new
standards
Ian P.N. Hague York University
AcSB PrioritiesAcSB PrioritiesConvergenceConvergence
Share-based payments
Impairment, disposals, discops.
Asset retirement obligations
Financial instruments incl. hedging
Business combinations – phase II
Reporting financial performance
Ian P.N. Hague York University
Other projects in the AcSB pipelineOther projects in the AcSB pipelineOil and gas guidelineRate-regulated operations ConsolidationsInsurance contractsIntangible assets - disclosureLiabilities and equityRevenue / Liability recognition
Ian P.N. Hague York University
Other AcSB PrioritiesOther AcSB Priorities
Differential reporting
Cash flow per share
GAAP
Ian P.N. Hague York University
IASB Work ProgrammeIASB Work Programme
Convergence / Improvements – EDs 2003
Including employee benefits & joint ventures
Financial activities
Ian P.N. Hague York University
IASB Research ProjectsIASB Research ProjectsAccounting measurements – impairment
Lease accounting
Intangibles (incl. R&D)
Small and medium sized enterprises
Financial instruments – further aspects
Extractive industries
Ian P.N. Hague York University
SummarySummary
Considerable differences in different environments
To extent reflect environments are legitimate
Move to converge
Ian P.N. Hague York University