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International Harmonization ofFinancial Reporting
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Summary of Diversity Research
Findings as of 1995
Micro/macro, code-law and common law, were foundto consistently be highly correlated with patterns of
financial reporting around the world. Culture appeared to play an important role
everywhere, but what characteristics dominatedremained unclear.
Inflation and trading relationships, in some countries,seem to matter a great deal.
Economic variables were implicated but theimportance of their role was unclear.
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These findings left many questions
unanswered, including the following:
Could diversity be reduced throughout theworld? If so, how?
Would it be wise to reduce diversity?
If so, how much? What are the costs vsbenefits of imposing upon the business world
a reporting system with far less diversity? Would it happen by itself naturally?
How could mandated changes be enforced?
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Beginning in the 1970s:
Efforts began to reduce financial reporting diversity.
These early fledgling efforts were met with great
resistance.
Most of the early effort began in Europe, as an
extension of the dream of many for economic and
political unity on the European continent.
The International Accounting Standards Committee
(IASC) was also formed by professional accounting
groups in 1973.
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In the 1980s:
Progress, though incomplete and imperfect,was made in Europe. The EU began to endorse changes in reporting
practices.
The 4th and 7th directives were implemented.
EU directives were given the force of law.
For the first time, some reporting diversity,especially in the extremes, was reduced.
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On the other hand:
The IASC floundered with a small staff and little
support.
It mostly issued low level, anything goes standards
copied from others.
Many countries, regardless of how economically
significant, around the world were equally
represented on the IASC.
Most major economic players ignored the IASC.
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In the 1990s:
Berlin wall falls, and not long after, the USSRcollapses with it.
US capital markets take off, continuing anunprecedented bull run that drives share prices up,on average, over 1500% from 1982-1999.
Many economies around the world go into steepdecline (e.g., Japan and Russia).
Bank capital becomes scarce. The Asian crisis occurs in 1998, sparked by the
collapse of Indonesias currency, markets andeconomy.
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In the wake of these events:
American (corporate?) influence expanded
dramatically.
The importance of equity financing grew and shaped
business interests around the world.
Currency manipulations and shifts reached
unprecedented levels as attempts were made to
stabilize the world economy.
The concept of harmonized financial reporting was
given new credibility and support.
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What is harmonization?
Harmonizat ion-- the process of increasing thelevel of agreement in accounting standards and
practices between countries.
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Harmonization
The two levels of Harmonization
Harmonization 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.
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Harmonization
Harmonization
Is different from Standardization. Harmonization allows for different standards
in different countries as long as there are not
logical conflicts.
Standardization involves using the samestandards in different countries.
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Some of the Significant Harmonization
Efforts of the 1990s and 2000s:
IOSCO
Worked to achieve improved marketregulation internationally.
Worked to facilitate cross-border listings.
Advocated for the development and adoption
of a single-set of high quality accountingstandards.
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The EU
The EU achieved in monetary union in a
phased-in fashion between 1999-2002. The EU also added many new members
from Eastern Europe.
The EU stopped making separate standards.
As of 2005, it requires members to useIFRSs.
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Harmonization Efforts
IASB
Preceded by the IASC (InternationalAccounting Standards Committee).
Works toward harmonization of international
accounting standards.
IASB was created in 2001.
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The Question of Credibility
The crucial problem was how to be effective.
SEC indicated an international standard-setter would have to be FASB-like, i.e.,
driven by expertise, not geography.
EU wanted geographical representation to be
emphasized.
IASB decided to be expert-driven.
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History of IASB Why now (2001)?
1987&89- Beginning of effective attempts at IASC to
reduce flexibility. IOSCO lobbies for common
standards. E32 issued.
1995- IOSCO demands acceptable set of standards.
Agreement between IASB and IOSCO that IASs can
be used in cross-border listings as an alternative to
national standards IF core standards were created.
Core standards are completed in 1998.
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Major Players Jump on Board
1998-Germany allows internationallyrecognized rules for consolidatedstatements.
2000-IOSCO recommends acceptance of30 IAS core standards for cross-border
listings. 2005- EU makes IASs compulsory for all
firms preparing consolidated statements.
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IASB- Structure and Process
Comprised of 14 members (12 full, 2 part-
time). 7 members are liaison with a national board.
Standard development process is open.
Standards are principles-based.
Since establishment of IASB, focus is onglobal standard-setting rather than
harmonizationper se.
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IASB Structure and Process
Up until 2000Issued IASs
After 2000- Issues IFRSs (Intl financialreporting standards)
Similar process to FASB- in the sunshine
due process.
SIC- final step- interprets the standards.
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IASB- Structure and Process
Publication of an exposure draft and/or
standard-requires 8 of the 14 membersapproval.
Financed mostly by selling publications.
At end of 1998, IASB found itself in
competition with FASB, as many firms soughtto be listed on US Exchanges.
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Geographical Backgrounds of IASC
Trustees- 2001-2002
0
1
2
3
4
5
Number
US
Japan
AustraliaCanada
S Africa
France
Germany
Switz
Brazil
China
Denmark
Italy
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IASB Members- 2001
0
1
2
3
4
5
Number
US
UK
Australia
Canada
S Africa
France
GermanyJapan
Switz
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Companies referring to the use of IAS
standards in 2001
0
10
20
30
40
5060
70
# of companies
Austria
Bahrain
ChinaCyprus
Czech Rep
Denmark
Switz
France
Germany
Hong Kong
Hungary
Kuwait
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IASB-Limitations
No Power to Enforce or require use of
standards. Result-Each country individually decides
whether to accept IASs.
Major holdouts that still do not accept IAS
standards- US, Canada, and Japan.
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Principles-Based Approach to
Accounting Standard Setting
IASB Perspective
IASB attempts to follow a Principles-Basedapproach to standard setting.
As such accounting standards are grounded
in the IASB Framework.
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Principles-Based Approach to
Accounting Standard Setting
A Principles-Based approach
Represents a contrast to a Rules-BasedApproach.
Attempts to limit additional accounting
guidance (e.g., FASB EITFs, FASB
Interpretations). Is designed to encourage professional
judgment and discourage over-reliance on
detailed rules.
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IASB Framework and IFRSs
IASB Framework
Similar to the relationship between U.S.GAAP financial statements and the FASB
Conceptual Framework.
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IASB Framework and IFRSs
IASB Framework Provides the basis for financial statements presented
in accordance with IFRS.
Includes: The objective and underlying assumptions of
financial statements. Qualitative characteristics of information. Definition, recognition, and measurement of
elements in financial statements. Concepts of capital maintenance.
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IASB Framework and IFRSs
IASB Framework
The objective and underlying assumptionsof financial statements: Primary objective is to provide information useful
to decision making.
Underlying assumptions include accrual-basis
and going concern.
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IASB Framework and IFRSs
Qualitative characteristics of
information Understandabi l i ty should be
understandable to people with reasonable
financial knowledge.
Comparabi l i ty allows for meaningfulcomparisons to financial statements of
previous periods and other companies.
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IASB Framework and IFRSs
Qualitative characteristics of
information Relevance useful for making predictions
and confirming existing expectations.
Reliabi l i ty free from bias (neutral) and
represents that which it claims to represent(representational faithfulness).
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IASB Framework and IFRSs
Elements of Financial Statements
Defini t ion assets, liabilities, and otherfinancial statement elements are defined.
Recogni t ion guidelines as to when to
recognize revenues and expenses.
Measurement various bases are allowed,historical cost, current cost, realizable value,
and present value.
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IASB Framework and IFRSs
Concepts of Capital maintenance
Financial cap ital maintenance One approach to income measurement.
Net income represents the increase in net
financial assets, excluding owner
transactions. The approach in U.S. GAAP.
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IASB Framework and IFRSs
Concepts of Capital maintenance
Phys ical capi tal maintenance Another approach to income measurement.
Net income represents increase in physical
productive capacity.
Excluding owner transactions. Requires current costs for measurement of
certain physical assets.
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IASB/FASB Convergence
The Norwalk Agreement
Reached in 2002. Between the IASB and FASB.
To work toward accounting standards
convergence.
Learning Objective 7
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IASB/FASB Convergence
FASBs key initiatives in the NorwalkAgreement
Joint pro jects boards will work together toaddress some issues (e.g., revenue recognition).
Short-term convergence to remove differencesbetween IFRSs and U.S. GAAP for issues whereconvergence is deemed most likely.
IASB l iaison IASB member in residence at FASB.
Learning Objective 7
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IASB/FASB Convergence
Moni tor ing IASB pro jects FASB monitors
IASB projects of most interest.
Convergence research p roject
identification of all major differences between
IFRSs and U.S. GAAP.
Convergence po tent ial FASB assessesagenda items for possible cooperation with
IASB.
Learning Objective 7