Chapter Eleven Worldwide Accounting Diversity and International Standards

Chapter Eleven Worldwide Accounting Diversity and International Standards Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

International Accounting Diversity Chinese companies use the direct method in preparing the statement of cash flows. Companies in Germany are allowed to report assets on the balance sheet at revalued amounts. Most companies in the United States and Europe use the indirect method. 11 -2

Learning Objective 11 -1 Explain the major factors influencing the international development of accounting systems. 11 -3

Reasons for Accounting Diversity Legal System Taxation All these interact!!! Political and Economic Ties Culture Inflation Financing Systems 11 -4

Reasons for Accounting Diversity Legal Systems: ► Common Law ► Roman (Codified) Law Major providers of financing: ►Family members ► Banks ► Other creditors ► Governments ► Shareholders ► Taxation ► Inflation ►Societal Values ► Individualism ► Power Distance ► Uncertainty Avoidance ► Masculinity 11 -5

Gray’s Framework for the Development of Accounting Systems Internationally Cultural Dimensions Individualism Uncertainty Avoidance Power Distance Masculinity Institutional Consequences Legal system Corporate Ownership Capital Markets Professional Associations Education & Religion Accounting Values Professionalism Uniformity Conservatism Secrecy Accounting Systems Authority Enforcement Measurement Disclosure 11 -6

Nobes’ Model of the Reasons for International Accounting Diversity Nobes’ simplified model has two explanatory factors: (1) national culture, including institutional structures, (2) the nature of a country’s financing system divided into two classes. Class A (Strong equity-outsider financing system) ØLess conservative ØGreater disclosure ØFinancial and tax accounting separate Class B (Weak equity-outsider financing system) ØMore conservative ØLess extensive disclosure ØFinancial reporting follows tax rules 11 -7

Learning Objective 11 -2 Understand the problems created by differences in accounting standards across countries and the reasons to develop a set of internationally accepted accounting standards. 11 -8

Harmonization of Diverse Accounting Standards Problems Caused by Diverse Accounting Standards 1. Subsidiaries use local standards for financial statements. 2. Costly to prepare financial statements that comply with local standards. 3. Accounting rules differ from country to country. Harmonization to reduce differences 1. The International Accounting Standards Committee (IASC) began the movement. 2. In 1987, the International Organization of Securities Commissions (IOSCO) 3. 2001, the International Accounting Standards Board (IASB) 11 -9

Learning Objective 11 -3 List the authoritative pronouncements that constitute International Financial Reporting Standards (IFRS). 11 -10

International Accounting Standards Committee- IASC Ø International Accounting Standards committee (IASC) established in 1973. Ø IASB superseded IASC in April 2001. ØThe IASB has sole responsibility for establishing IFRSs (“IASB GAAP”) ØIASB has no enforcement authority!! Ø All of the 41 IASs issued by the IASC were adopted by the IASB. 28 are currently in effect. Ø New standards are called “International Financial Reporting Standards” (IFRSs). Ø As of January 2013, 13 IFRSs have been issued. 11 -11

Learning Objective 11 -4 Describe the ways and the extent to which IFRS are used around the world. 11 -12

International Financial Reporting Standards (IFRSs) Countries can elect to use IFRS by: (1) adopting IFRS as its national GAAP (2) requiring domestic listed companies to use IFRS for their consolidated financial statements (3) allowing domestic listed companies to use IFRS (4) require or allow foreign companies listed on a domestic stock exchange to use IFRS. Ninety-two of the 153 countries using IFRS require all domestic listed companies to use IFRS for consolidated statements. (2) All publicly traded companies in the EU required to use IFRS. (3) Two significant exceptions – China and the U. S. 11 -13

Learning Objective 11 -5 Describe the FASB–IASB convergence process and the SEC recognition of IFRS. 11 -14

Norwalk Agreement: FASB-IASB Convergence In Norwalk, Connecticut, FASB and IASB held a joint meeting in September 2002 and agreed to “use their best efforts” 1) to make existing financial reporting standards compatible “as soon as is practicable” and 2) Coordinate efforts to “ensure that once achieved, compatibility is maintained” In 2006 - Memorandum of Understanding (Mo. U), FASB and IASB agreed that trying to eliminate differences between standards and create identical standards, is not realistic. Instead, they agreed that standards in need of improvement should be replaced with new jointly developed standards. 11 -15

FASB-IASB Convergence As of January 2013, the FASB‐IASB convergence process had resulted in changes made to U. S. GAAP, IFRS, or both: • • Business combinations ∙ Borrowing costs Consolidated financial statements ∙ Derecognition Non‐controlling interests ∙ Post‐employment benefits Acquired in‐process research costs ∙ Fair value option Non‐monetary asset exchanges ∙ Joint ventures Share‐based payment ∙ Fair value measurement Accounting changes ∙ Segment reporting Presentation of (OCI) ∙ Inventory accounting 11 -16

Learning Objective 11 -6 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS and U. S. GAAP. 11 -17

Current Differences Between IFRSs and US GAAP Recognition: If recognized, how? When? Disclosure: If allowed, How? Discontinued Operations Extraordinary Items Presentation: Principles? Financial Statement Components? Measurement: How is cost determined? Inventory Fixed Assets 11 -18

Learning Objective 11 -7 Determine the impact that specific differences between IFRS and U. S. GAAP have on the measurement of income and stockholders’ equity. 11 -19

U. S. GAAP Reconciliations IASB: Principles. Based Ø Ø Provide general principles with limited guidance. Requires greater professional judgment. FASB: Rules-Based Ø Provide detailed guidance. Ø May encourage mindset of looking for loop-holes. 11 -20