State which company you have chosen for your paper and write 1,000 words about your company that addresses the issues discussed in chapters 3 of the book. we just need 1000 words, it’s a discussion.

International Accounting Fifth Edition Chapter 3: International Convergence of Financial Reporting Timothy Doupnik | Mark Finn Giorgio Gotti | Hector Perera ©2020 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Learning Objectives 1 Explain the meaning of convergence. Identify the arguments for and against international convergence of financial reporting standards. Discuss major harmonization and convergence efforts under the IASC and IASB, respectively. Explain the principles-based approach in setting accounting standards. Describe the difference in approaches taken by the IASC and FASB in setting accounting standards. Describe the support for, and the use of, IFRS across countries. 3-2 ©2020 McGraw-Hill Education Learning Objectives 2 Examine the issues related to international convergence of financial reporting standards. Describe the current status of the IASB/FASB convergence project. Explain the meaning of “Anglo-Saxon” accounting. 3-3 ©2020 McGraw-Hill Education International Harmonization of Accounting Standards 1 Evolution of IASC and IASB shows international accounting standard-setting in the private sector: • With the support of the accounting bodies, standard-setters, capital market regulators, government authorities, and financial statement preparers. Harmonization allows countries to have different standards as long as they do not conflict Accounting harmonization can be considered in two ways • Harmonization of accounting regulations or standards. • Harmonization of accounting practices. 3-4 ©2020 McGraw-Hill Education International Harmonization of Accounting Standards 2 Other factors leading to noncomparable accounting numbers despite similar accounting standards. • Quality of audits. • Enforcement mechanisms. • Culture. • Legal requirements. • Socioeconomic and political systems. 3-5 ©2020 McGraw-Hill Education Harmonization Efforts through IASC 1 First Phase [Lowest-Common-Denominator Approach]. • • • • First 15 years 1973 to 1988. Issuance of 26 IAS Standards. Usually allowed multiple options. Produced little if any comparability of financial statements across countries. Second Phase [Comparability Project]. • Next 5 years 1989 to 1993. • Publication of “Framework.” • • • • ©2020 McGraw-Hill Education Objectives of financial statements. Qualitative characteristics of financial information. Definitions of elements of financial statements. Criteria for recognition of financial statement elements. 3-6 Harmonization Efforts through IASC 2 Final Phase IOSCO Agreement 1993 to 2001. • Core set of international Standards. • 30 in total ending with Financial Instruments. • Ended with creation of IASB. 3-7 ©2020 McGraw-Hill Education Other Harmonization Efforts 1 Several international organizations involved. • • • • • • • REGIONALLY. European Union. Association of Southeast Asian Nations. WORLDWIDE. United Nations. OTHER ORGANIZATIONS INVOLVED. IOSCO. • Facilitate cross-border listing of high-quality accounting standards. • IFAC. • Over 120 countries and 150 member bodies. • Promotes adherence to high-quality professional standards on: • Auditing. • Ethics. • Education. • Training. ©2020 McGraw-Hill Education 3-8 Other Harmonization Efforts 2 IFAD launched by IFAC. • To help developing and emerging nations. • Membership includes: • • • • • • • World Bank. International Monetary fund. Asian Development Bank. IOSCO. IASB. SEC. Large Accounting Firms. • Primary aim: promote transparent financial reporting, duly audited to high standards by a strong accounting and auditing profession. 3-9 ©2020 McGraw-Hill Education Other Harmonization Efforts 3 European Union. • Aim: create a unified business environment. • Harmonization of company laws and taxation. • Promote full freedom in the movement of goods and labor. • Creation of community capital market. • 2 Directives to Harmonize Accounting. • Fourth Directive: provides considerable flexibility. • Valuation rules. • Disclosure requirements. • Format of Financial Statements. • Seventh Directive: Consolidated Financial Statements. • Led to reduced differences but not complete comparability. ©2020 McGraw-Hill Education 3-10 International Forum on Accounting Development (IFAD) Created as working group. • • • • • • • Basel Committee. IFAC. IOSCO. Large Accounting firms. OECD (Organization for Economic Cooperation and Development). UNCTAD (United Nations Conference on Trade & Development). World and regional banks. OBJECTIVES. • • • • Promote importance of transparent financial reporting. Accounting responsibility to support public interest. Focus on accounting/auditing needs of developing countries. Cooperation between: • Governments. • Accountants and other professions. • International financial institutions. • Regulators. • Standard setters. • Capital providers. • Issuers of financial statements. ©2020 McGraw-Hill Education 3-11 IASB 1 Problems of IASC led to creation of IASB. • Lacked legitimacy due to being created by accounting profession (self interest). • Lacked legitimacy due to part-time board members not selected due to technical expertise. • IFAC tried to take control of IASC twice. IASB focus on convergence rather than harmonization. 3-12 ©2020 McGraw-Hill Education Structure of IASB Organized under independent IFRS Foundation. Monitoring Board. IFRS interpretations Committee (IFRSIC). IFRS advisory council (IFRSAC). Working groups. 3-13 ©2020 McGraw-Hill Education IASB-Monitoring Board Members: • • • • • European Commission. Japanese Financial Services Agency. SEC. Emerging Market Committee of IOSCO. Technical Committee of IOSCO. Function. • Enhance public accountability of IASC foundation. • Participate in trustee nominations. • Oversite of IASB activities. • Agenda-setting process. • IASB efforts to improve accuracy/effectiveness of financial reporting. ©2020 McGraw-Hill Education 3-14 EXHIBIT 3.2—The Structure of the IASB Access the text alternative for these images ©2020 McGraw-Hill Education 3-15 IASB 2 Responsibilities. • Develop/issue IFRS and Exposure Drafts. • Approve interpretations of IFRIC [interpretation committee]. Board. • 16 members. • At least 13 full time. • Selected based on professional competence and practical experience: • • • • • • 4 from Asia/Oceania region. 4 from Europe. 4 from North America. 1 from Africa. 1 from South America. 2 at large from any area. 3-16 ©2020 McGraw-Hill Education IASB: IFRS Advisory Council Provide forum for participation by those with interest in international financial reporting. OBJECTIVES. • Advise IASB on its priorities. • Inform IASB of their views on IASB major standardsetting projects. Approximately 40 members serving 3-year terms. 3-17 ©2020 McGraw-Hill Education IASB: IFRS Interpretations Committee Responsibilities. • Interpret application of IFRS/provide guidance on issues not specifically addressed in IFRS or IAS’s. • Publish Draft Interpretations for public comment. • Obtain Board approval for final interpretations. 3-18 ©2020 McGraw-Hill Education From Harmonization to Convergence IASB: From Harmonizer to global standard-setter. • Goal of convergence can be interpreted in different ways: • Diminishing differences among accounting standards. • Agreement on core set of common standards with varying interpretations of non-core issues. • Efforts of IASB are directed toward developing a high-quality set of standards for use internationally for financial reporting purposes. • Build “highest common denominator” of financial reporting. • Adopted principles-based approach to standard setting. • IASB’s structure similar to FASB since FASB has best institutional structure for developing accounting standards. ©2020 McGraw-Hill Education 3-19 Concerns with IFRS Convergence Complicated nature of specific standards such as financial instruments and fair value. Tax-driven national accounting…is IFRS basis for taxation a good approach? Insufficient guidance on first-time application of standards. Cost/benefit for countries with limited capital markets. Investor/user satisfaction with national accounting standards. Language translation difficulties. ©2020 McGraw-Hill Education 3-20 Presentation of Financial Statements (IAS 1/IFRS 1) Provides guidance on: • • • • Purpose of the financial statements. Components of the financial statements. Overriding rule of fair presentation. Accounting policies: if guidance lacking. • Refer to requirements/guidance in other IASB standards. • Definitions for assets, liabilities, etc. • Pronouncements of other standard-setting bodies. • Basic principles and assumptions: • • • • ©2020 McGraw-Hill Education Accrual basis. Going-concern assumption. Consistency/comparability. No offsetting of assets/liabilities/revenues/expenses. 3-21 Presentation of Financial Statements Structure and Content of Financial Statements. • Current/noncurrent distinction. • Items to be on face of financial statements. • Items to be disclosed in the notes. 3-22 ©2020 McGraw-Hill Education Principles-Based Approach to International Financial Reporting Standards IASB follows a principles-based approach to standard setting versus a rules-based approach. • Standards establish general principles for recognition, measurements, and reporting requirements for transactions. • Limits guidance and encourages professional judgment in applying general principles to entities or industries. 3-23 ©2020 McGraw-Hill Education Arguments for Convergence 1 Facilitate better comparability of financial statements • Easier evaluation of potential investments in foreign securities. Facilitate international mergers and acquisitions. Reduce financial reporting costs. • Cross-listing would allow access to less expensive capital. Reduce investor uncertainty and the cost of capital Reduce cost of preparing worldwide consolidated financial statements. • Simplify auditing. Easy transfer of accounting staff internationally. ©2020 McGraw-Hill Education 3-24 Arguments for Convergence 2 Raise the quality level of accounting practices internationally. • Increase credibility of financial information. • Enable developing countries to adopt a ready-made set of high-quality standards with minimum cost and effort. 3-25 ©2020 McGraw-Hill Education Arguments against Convergence Significant differences in existing standards. • Enormous political cost of eliminating differences. Nationalism and traditions. • Arriving at universally accepted principles is difficult. Need for common standards is not universally accepted. • Well-developed global capital market exists already. May cause standards overload. Differences in accounting across countries might be necessary. 3-26 ©2020 McGraw-Hill Education IASB Conceptual Framework 1 Framework for Preparation and Presentation of Financial. Statements deals with: • Objectives of financial statements and underlying assumptions. • Qualitative characteristics that affect the usefulness of financial statements. • Definition, recognition and measurement of the financial elements. • Concepts of capital and capital maintenance. Purpose of Framework: assist IASB in developing standards and revising existing standards. Framework Id’s potential users of financial statements • • • • • • • Investors. Creditors. Employees. Suppliers. Customers. Governmental agencies. General public. ©2020 McGraw-Hill Education 3-27 IASB Conceptual Framework 2 PRIMARY OBJECTIVE OF FINANCIAL STATEMENTS IS TO PROVIDE INFORMATION USEFUL FOR DECISION MAKING. • Must be on Accrual basis. • Must be a going-concern. QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS. • Understandability. • Relevance: used to make predictions of the future or confirm expectations from past. • Reliability: neutral, (free from bias) and represents faithfully what it purports to. • Comparability. 3-28 ©2020 McGraw-Hill Education Elements of Financial Statements: Definition, Recognition, and Measurement Assets: resources controlled by enterprise which will provide future economic benefits; only recognized when probable economic benefits will come. Liabilities: present obligations arising from past events to be settled through outflow of resource; recognized when probable outflow will occur. Income: increases in equity other than from transactions with owners. • Expenses part of income that decreases in equity. • Revenues part of income that increases in equity. Equity: assets minus liabilities. ©2020 McGraw-Hill Education 3-29 Concepts of Capital Maintenance Financial Capital Maintenance. • Historical cost. Physical Capital Maintenance. • Current cost. 3-30 ©2020 McGraw-Hill Education Adoption of IFRS Several different ways to adopt IFRS. • All companies: IFRS replaces national GAAP. • Consolidated with IFRS parent company with national GAAP. • Stock exchange-listed: listed companies use IFRS non-listed companies use national GAAP. • Foreign companies use IFRS domestic companies use national GAAP. • Domestic companies that list on foreign exchanges use IFRS others use national GAAP. • European Union requires domestic-listed companies to use IFRS for consolidated accounts. 3-31 ©2020 McGraw-Hill Education IAS/IFRS in the European Union All listed companies use IFRS since 2005. • • • • Improve quality of corporate financial reporting. Increase comparability and transparency. Promote development single capital market in Europe. Denmark and Estonia require IFRS even non-listed companies. • EU allows “carve out” of IAS 39 “Financial Instruments” • Some claim “Using IFRS as adopted by EU.” European accounting enforcement systems: • Germany, Finland, Netherlands…no institutional oversight of financial reporting. • Considerable cross-jurisdictional variation due to existing legal/cultural differences. ©2020 McGraw-Hill Education 3-32 IAS/IFRS in United States 1 1996 SEC announces 3 criteria for cross-listing: • Comprehensive generally accepted basis of accounting. • High quality, comparability, transparency and full disclosure. • Rigorously interpreted and applied. • 1996 FASB publishes comparison of IFRS/GAAP. • • • • 26% Similar approach and guidance. 36% Similar approach but different guidance. 26% Different approach. 12% Alternative approaches permitted. • 2007 SEC removes requirement foreign private issuers using IFRS must reconcile to U.S. GAAP [20f no longer needed]. • 2007 AICPA recommends to SEC allowing U.S. Companies to use IFRS. ©2020 McGraw-Hill Education 3-33 IAS/IFRS in United States 2 2008 SEC: Roadmap for Potential use of IFRS by U.S. Companies. 2008: AICPA private companies allowed to adopt IFRS. • Beneficial to subsidiaries of foreign companies. 2011 National Association of State Boards of Accountancy, support convergence of IFRS and GAAP instead of adoption of IFRS. • Actual narrowing of differences. • International companies no longer have to reconcile IFRS to GAAP. 3-34 ©2020 McGraw-Hill Education FASB and IFRS Convergence Ultimate goal: single set of high-quality, international accounting standards that companies world-wide would use for both domestic and cross-border financial reporting. 3-35 ©2020 McGraw-Hill Education The Norwalk Agreement Proposed Changes as per the discussion paper published jointly by two boards: • Decision-useful objective encompassing information relevant to assessing stewardship. • Stakeholder approach (versus U.S. framework of shareholder approach) — users other than capital providers explicitly acknowledged. • Asset of an entity would be present economic resource to which, through an enforceable right or other means, entity has access or can limit others’ access. • Emphasis on principle and guidance development for fair value measurements in IFRS—exit price as measurement base, or, if not—develop additional guidance. 3-36 ©2020 McGraw-Hill Education FASB Initiatives to further Convergence Joint projects with IASB. • Revenue recognition. • Business combinations. • Review Conceptual Framework. Short-term Convergence Project. • SFAS 123. • SFAS 151. • SFAS 153. Liaison IASB member: full time IASB member in residence at FASB headquarters. Monitoring of IASB projects. Convergence research project. Consideration of convergence potential in Board agenda decisions 2011 FASB IASB completed Fair Value Measurement project. 3-37 ©2020 McGraw-Hill Education Challenges to International Convergence What is or should be primary purpose of financial statements. • U.S. investors most important. • Germany creditors most important. • France needs of government high priority. Politics: did IFRS (fair value accounting) cause financial crisis? SEC world’s most respected securities regulator. Effectiveness of enforcement of IFRS in different countries. Differences in education philosophy. Visible repercussions for financial statements in different countries. Efficacy of mandating high-quality accounting standards when low regulatory quality exists. 3-38 ©2020 McGraw-Hill Education FASB IASB Joint Conceptual Framework Project Began October 2004. • Single document instead of series of concept statements. • Reflect changes in markets, business practices, economic environment. • November 2006 IASB discussion paper on fair value measurement. • February 2007 FASB issues SFAS 159 “The Fair Value Option for Financial Assets and Financial Liabilities.” • March 2010 Joint Exposure Draft “Conceptual Framework for Financial Reporting –The Reporting Entity.” • Reporting entity: “an entity for which there are users who rely on the financial statements as their major source of financial information about the entity.” • September 2010 completion of first phase. • IASB required consideration of conceptual framework if no standard or interpretation exists….FASB not required to consider framework. ©2020 McGraw-Hill Education 3-39 Harmonization Efforts Several organizations were involved at global and regional levels. • International Organization of Securities Commissions (IOSCO). • International Federation of Accountants (IFAC). • European Union (EU). • International Forum on Accountancy Development (IFAD). • International Accounting Standards Committee (IASC). • International Accounting Standard Board (IASB). 3-40 ©2020 McGraw-Hill Education Future of IASB/FASB Convergence IASB Chairman suggests IASB would no longer seek to converge with U.S. GAAP. IASB no longer feels failure to converge equals fatal for IFRS project. Previous thought is without U.S. IFRS separates based on regions, now not so. Inconceivable IFRS adopters reverse decision due to cost. Consultations between IASB/FASB continue. 3-41 ©2020 McGraw-Hill Education End of Chapter 3 3-42 ©2020 McGraw-Hill Education

State which company you have chosen for your paper and write 1,000 words about your company that addresses the issues discussed in chapters 3 of the book. we just need 1000 words, it’s a discussion.

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