Harmonization of accounting standards ppt

WEEK 2

International Harmonization and International Financial Reporting Standards (IFRS)

IFRS Standards: Why do they matter?*

Financial Reports for the World Economy

· It is the life blood of capital markets

· Investors need information they can trust in cross-border investments.

IFRS – the global language of financial reports.

Why do they matter…three key benefits:

1. Transparency

a. High quality, comparable information

2. Accountability

a. Reduces the information gap between insiders and those outside the company

3. Efficiency

a. Single trusted global standard: lowers the cost of capital & reduces reporting costs

IFRS contributes the following to the global economy:

· Trust

· Growth

· Long-term financial stability

*Source: IFRS.com

Our focus this week is on major harmonization efforts worldwide and the major differences between IFRS and US GAAP

Harmonization

· Process of increasing the compatibility of accounting practices

· Sets limits on how much practices can vary

· More flexible and open

· Accommodates differences

includes….

· Accounting standards

· Disclosures

· Auditing standards

Standardization

· Set of rules

· Does not accommodate national differences

· More difficult to implement internationally

Comparability

· Financial information is comparable if it is similar in enough ways.

Convergence

· Convergence of international and national accounting standards involves gradual elimination of differences.

Other approaches to cross-border financials….

Reconciliation

· Preparing financials using home country accounting standards but providing reconciliation between critical accounting measures (net income and stockholder’s equity)

Mutual Recognition (Reciprocity)

· Regulators outside the home country accept foreign firm’s financial statements based on home country principles.

PROS AND CONS FOR HARMONIZATION OF ACCOUNTING STANDARDS

Arguments for Harmonization

· Financial statement from different countries would be more comparable, which in turn would make it easier for investors to evaluate multi-national companies (MNC).

· Raise the quality level of international accounting practices.

· Reduce costs for MNCs to consolidate foreign listed companies.

· Easier access to foreign capital markets.

· Simplify for MNC the evaluation of possible foreign takeover targets.

· Make it easier for MNCs and international accounting firms to transfer accounting personnel to other countries.

Arguments against Harmonization

· Considering the differences among countries in terms of socio-politico-economic systems, it would be almost impossible to arrive at a set of accounting standards that would satisfy all the parties involved.

· Nationalism…international standards could be perceived as a set of standards developed to suit the requirements of other countries and hence would not be received favorably.

· It is unnecessary to force all companies worldwide to follow a common set of rules.

· Today’s global capital market has evolved without harmonized accounting standards.

Efforts for harmonization…

began even before the creation of….

1973 International Accounting Standards Committee (IASC) - formed

Ten countries were involved: Australia, Canada, France, Germany, Ireland, Japan, Mexico, the Netherlands, the United Kingdom, and the United States.

Their objective was to create “international accounting standards”

The final work of the IASC began with the International Organization of Securities Commissions (IOSCO) agreement in 1993 and ended with the creation of the IASB.

For more information on IOSCO, http://www.iosco.org/

2001 International Accounting Standards Board (IASB) - replaced IASC

This group is an independent, private-sector, standards-setting body founded by professional accounting organizations in nine countries. The IFRS Foundation is the legal entity under which the IASB operates.

IASB Objectives:

1. To develop a single set of high-quality, understandable and enforceable global accounting standards….

2. To promote the use and rigorous application of those standards

3. To take in account the needs of all sizes and types of entities in diverse economic settings.

4. To bring about convergence of national accounting standards and IFRS.

The IASB represents accounting organizations from approximately 140 countries.

IASB Structure:

The IASB is organized under an independent foundation named the IFRS Foundation.

Number of trustees: Currently (2020) there are 22 Trustees. Initially the Foundation Board had 19 Trustees. https://www.iasplus.com/en/resources/ifrsf/governance/ifrsf-trustees

Geographic balance:

1. Trustees

a. Six from North America

b. Six from Europe

c. Six from Asia/Oceania region

d. One from Africa

e. Three from any area, subject to establishing overall geographical balance

2. IASB Board (14 members)

a. Establishes and improves standards of financials accounting and reporting for business. https://www.iasplus.com/en/resources/ifrsf/iasb-ifrs-ic/iasb-board

3. IFRS Advisory Council

a. 51 organizations across the globe are represented on the council with 50 individual members

b. Responsible to give board advice on its agenda and priorities

https://www.iasplus.com/en/resources/ifrsf/advisory/ifrs-advisory-cou