Introduction to International Accounting

1
Introduction to International Accounting

• Why accounting differs from place to place

2
Clusters of Accounting Models
Mixed Economy Model
Continental Model
South American Model
British-American Model
3
Forces toward differences

• Political and economic ties with other countries
• Economic system
• Relationship between business and the providers
  of capital
• Capital markets vs. large banks
• Numerous or few investors
• How well developed are the stock exchanges and
  bond markets
• Existence of a conceptual framework

4
Forces toward differences

• Legal System
• Legislative orientation (Common Law)
• Laws establish limits beyond which it is illegal
  to venture
• Considerable flexibility within the limits
• Judgment permitted and encouraged
• Tend to have accounting practices established by
  accountants rather than national legislators
• Legalistic orientation (Code Law)
• Laws stipulate minimum standards
• Citizens must comply with letter of the law
• Accounting is codified much like US tax code
• Reporting regime

5
Forces toward differences

• Level of Inflation
• Status of the accounting profession
• Culture
• Other
• Size complexity of business enterprises
• Sophistication of management financial
  community
• General level of education

6
DArcy 2001 paper
7
Usefulness of Classifications

• Classification or clustering groups countries
  according to distinctive features of their
  financial accounting systems
• Pedagogical demand
• Simplifies enormous amount of detail
• Informational demand
• Countries in a cluster may react to new
  circumstances in similar ways
• Justification demand
• Aid in standard setting (IASB, etc.)

8
The Drivers for Harmonization

• Growing cross-border economic transactions
• Globalization of capital markets
• Developments in telecommunications and the
  internet
• Access to financial statements from anywhere in
  the world
• Investors and creditors needs financial
  reporting that is
• Comparable
• Transparent

9
HISTORY - IASC

• 1973 - IASC formed
• Australia, Canada, France, Germany, Japan,
  Mexico, The Netherlands, the United Kingdom
  Ireland, U.S.
• 1974 - First Exposure Draft published
• IAS 1 Disclosure of Accounting Policies
• 1977 - Revised constitution adopted
• Board expanded to 11 countries
• Reference to 'basic' standards removed
• Link to IFAC established

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HISTORY - IASC

• 1987 - IOSCO joins Consultative Group
• 1988 - FASB joins Consultative Group and joins
  Board as observer
• 1990 - European Commission joins Consultative
  Group and joins Board as observer
• 1995 - Agreement with IOSCO to complete core
  standards by 1999 - on successful completion
  IOSCO will consider endorsing IASs for
  cross-border offerings
• First German companies report under IASs
• European Commission supports IASC/IOSCO agreement
  and use of IASs by EU multinationals

11
HISTORY - IASC

• 1999
• IOSCO review of IASC core standards begins
• IASC Board meetings opened to public observation
• IFAC commits to support the use of IASC standards
  as the minimum benchmark worldwide
• IASC Board unanimously approves restructuring
  into 14-member board (12 full-time) under
  independent trustees
• 2000
• IASC Board approves a new Constitution as part of
  restructuring
• IOSCO recommends that its members allow
  multinational issuers to use 30 IASC standards in
  cross-border offerings and listings
• IASC member bodies approve IASC's restructuring
  and the new IASC Constitution
• European Commission announces plans to require
  IASC standards for all EU listed companies from
  no later than 2005

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HISTORY IASC ? IASB

• 2001
• Trustees announce members of the International
  Accounting Standards Board
• European Commission presents legislation to
  require use of IASC Standards for all listed
  companies no later than 2005
• April 1, 2001
• IASB assumes responsibility for setting
  accounting standards, designated International
  Financial Reporting Standards (IFRS)

13
IASB Structure
14
Recent developments

• On January 1, 2005 companies listed on a European
  Union Stock Exchange were required to adopt IFRS
  resulting in a radical change in the way that
  many companies reflect their asset values on
  their balance sheet
• The most important single innovation of IFRS is
  to move away from historical cost
• Companies now have the option to carry their
  long-term real estate and other assets based on
  their original cost or at fair value, which
  typically equates to market value

15
Recent developments

• Companies listed on North American exchanges are
  still governed by t FASB in the U.S. and the
  AcSB in Canada
• FASB IASB working toward harmonization
• Timeline 2007-2009
• Major philosophical difference rules-based vs.
  principles-based approach
• November, 2007 SEC allows foreign companies to
  use IFRS instead of reconciling to US GAAP.

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Major Differences (PwC Report)

• Framework
• Allows fair value accounting for intangibles,
  PPE, financial instruments, and investments.
• Requires retrospective application in the first
  year a company uses IFRS
• Financial Statements
• No set format for I/S, B/S or SCF, just form
  basic guidelines
• Extraordinary items are prohibited
• SPEs are included when company has substantial
  control
• Consolidated entities methods are adjusted to
  match the investors methods
• Other issues
• Development costs can be capitalized
• Impairment estimates are a one-step process
  instead of a two-step process
• Prohibits LIFO
• Contingent liabilities are more common (lower
  threshold)

17
2002 Survey by Big CPA firms
18
2002 Survey
19
2002 Survey
20
2002 Survey
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Other International Organizations

• IOSCO - The International Organization of
  Securities Commissions
• IFAC The International Federation of
  Accountants
• IAASB - International Auditing and Assurance
  Standards Board
• PIOB - Public Interest Oversight Board
• IPSASB - International Public Sector Accounting
  Standards Board