Appendix E

International Financial Reporting Standards

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

The Globalization of Accounting Standards

o The U.S. Securities and Exchange Commission votes to accept from “foreign private issuers” financial statements that are prepared using International Financial Reporting Standards (IFRS) without reconciliation to U.S. Generally Accepted Accounting Principles.

o The United States moving toward converging U.S. GAAP with the IFRS that are followed by most of the rest of the world.

o Convergence refers to the process by which U.S. GAAP and IFRS will eventually merge to become a single set of accounting standards.

o The U.S. Securities and Exchange Commission votes to accept from “foreign private issuers” financial statements that are prepared using International Financial Reporting Standards (IFRS) without reconciliation to U.S. Generally Accepted Accounting Principles.

o The United States moving toward converging U.S. GAAP with the IFRS that are followed by most of the rest of the world.

o Convergence refers to the process by which U.S. GAAP and IFRS will eventually merge to become a single set of accounting standards.

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Critical Questions: Status and Timing of the Convergence process

o Why are these changes taking place? o Who are the key players? o What critical differences between U.S. and

international GAAP exist currently? o How can we keep up-to-date with this changing

landscape of converging accounting standards?

o Why are these changes taking place? o Who are the key players? o What critical differences between U.S. and

international GAAP exist currently? o How can we keep up-to-date with this changing

landscape of converging accounting standards?

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LO1 Differences in Accounting Practices

Reason Further Explanation

1. Legal system Common law countries (the United States, the United

Kingdom, and Canada) place greater emphasis on public

information, while code law countries (Germany and

France) rely more heavily on private information.

2. Tax laws For countries whose tax standards are closely tied

to financial reporting standards (Continental Europe

and Japan), accounting earnings tend to be lower so

companies can minimize tax payments.

3. Sources of financing

In countries where debt financing is more common

(Germany and Japan) compared to equity financing,

there is greater emphasis on reporting the ability of the

company to repay debt rather than earn profits for its

investors.

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Differences in Accounting Practices (Contd.)

4. Inflation Historically high inflation in some countries (Argentina

and Brazil) has created a need to account for the effect

of inflation on assets and liabilities.

5. Culture Some countries (Brazil and Switzerland) are more secretive, leading to fewer financial disclosures.

6. Political and economic ties

Countries that share strong political and/or economic

ties (British colonies) often have similar accounting

practices.

7. Economic development More economically developed economies (the United

States and the United Kingdom) have a need for more

complex accounting standards.

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LO2 International Financial Reporting Standards

o The International Accounting Standards Committee (IASC) was formed in 1973 to develop a single set of global accounting standards.

o The IASC in 2001 created a new standard-setting body called the International Accounting Standards Board (IASB).

o The IASB has two objectives: 1) To develop a single set of high-quality, understandable

and enforceable global accounting standards, and

2) To cooperate with national accounting standard-setters to achieve convergence in accounting standards around the world.

o The International Accounting Standards Committee (IASC) was formed in 1973 to develop a single set of global accounting standards.

o The IASC in 2001 created a new standard-setting body called the International Accounting Standards Board (IASB).

o The IASB has two objectives: 1) To develop a single set of high-quality, understandable

and enforceable global accounting standards, and

2) To cooperate with national accounting standard-setters to achieve convergence in accounting standards around the world.

IFRS

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o The IASB endorsed the 41 International Accounting Standards (IAS) issued by IASC when it was formed in 2001.

o IASB has revised many of the previous standards and has issued standards of its own, called International Financial Reporting Standards (IFRS) and often pronounced “eye-furs.”

o Compliance to IFRS is voluntary as IASB has no enforcement authority.

o The International Organization of Securities Commissions (IOSCO) now permits its-

o The IASB endorsed the 41 International Accounting Standards (IAS) issued by IASC when it was formed in 2001.

o IASB has revised many of the previous standards and has issued standards of its own, called International Financial Reporting Standards (IFRS) and often pronounced “eye-furs.”

o Compliance to IFRS is voluntary as IASB has no enforcement authority.

o The International Organization of Securities Commissions (IOSCO) now permits its-

IFRS

International Financial Reporting Standards (Contd.)

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International Financial Reporting Standards (Contd.)

o -members to use these standards to prepare their financial statements for cross-border offerings and listings.

o Over 100 jurisdictions, including China, Australia, and all of the countries in the European Union (EU), either require or permit the use of IFRS or a local variant of IFRS.

o -members to use these standards to prepare their financial statements for cross-border offerings and listings.

o Over 100 jurisdictions, including China, Australia, and all of the countries in the European Union (EU), either require or permit the use of IFRS or a local variant of IFRS.

IFRS

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Norwalk Agreement

o The FASB and IASB signed the Norwalk Agreement (2002), formalizing their commitment to the convergence of U.S. GAAP and IFRS.

o The two boards pledge to remove existing differences between their standards and coordinate their future standard-setting agendas so that major issues are worked on together.

o Arguments Against Convergence to IFRSo U.S. standards should remain customized to fit the

stringent legal and regulatory requirements of the U.S. business environment.

o The FASB and IASB signed the Norwalk Agreement (2002), formalizing their commitment to the convergence of U.S. GAAP and IFRS.

o The two boards pledge to remove existing differences between their standards and coordinate their future standard-setting agendas so that major issues are worked on together.

o Arguments Against Convergence to IFRSo U.S. standards should remain customized to fit the

stringent legal and regulatory requirements of the U.S. business environment.

IFRS

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Norwalk Agreement (Contd.)

o The differences in implementation and enforcement will make accounting appear more uniform than actually is the case.

o A competition between alternative standard-setting regimes is healthy and can lead to improved standards.

o Where convergence currently stands?o Active efforts being taken since 2002.o Requirement for foreign companies to include in

financial statements a reconciliation of IFRS to U.S.GAAP eliminated by SEC.

o Discussion on to allow U.S. companies to prepare their financial statements according to U.S. GAAP or IFRS.

o The differences in implementation and enforcement will make accounting appear more uniform than actually is the case.

o A competition between alternative standard-setting regimes is healthy and can lead to improved standards.

o Where convergence currently stands?o Active efforts being taken since 2002.o Requirement for foreign companies to include in

financial statements a reconciliation of IFRS to U.S.GAAP eliminated by SEC.

o Discussion on to allow U.S. companies to prepare their financial statements according to U.S. GAAP or IFRS.

IFRS

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LO3 Differences between U.S. GAAP and IFRS

Consider the major differences between U. S. GAAP and IFRS in the context of the chapters of this book

U.S. GAAP IFRS

The FASB and the IASB are working together to develop a common conceptual framework that would underlie a uniform set of standards internationally.

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End of Appendix E

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