1. Chapter Eleven Worldwide Accounting Diversity and International Accounting Standards McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Reasons for Accounting Diversity Legal System Tax Regimes Inflation Culture Financial Providers Political and Economic Ties All these interact!!! LO 1 11-2

3. Gray’s Framework for the Development of Accounting Systems Internationally Cultural Dimensions Individualism Uncertainty Avoidance Power Distance Masculinity Institutional Conseq. Legal system Corporate Ownership Capital Markets Professional Associations Education & Religion Accounting Values Professionalism Uniformity Conservatism Secrecy Accounting Systems Authority Enforcement Measurement Disclosure 11-3

4. 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)  Less conservative  Greater disclosure  Financial and tax accounting separate Class B (Weak equity-outsider financing system)  More conservative  Less extensive disclosure  Financial reporting follows tax rules 11-4

5. Problems Caused By Diverse Accounting Standards Problems 1.Subs use local standards for financial statements. The parent must adjust the subs’ statements to GAAP. Statements must be re-stated in common standards. 2.To access foreign capital markets, costly measures must be taken to prepare financial statements that comply with local standards. 3.Financial statements from different countries are simply not comparable. Accounting rules differ from country to country. LO 2 11-5

6. International Accounting Standards Board (IASB)  International Accounting Standards committee (IASC) established in 1973.  IASB superseded IASC in April 2001.  14-member board  (12 full-time, 2 part-time)  The IASB has sole responsibility for establishing IFRSs (“IASB GAAP”)  IASB has no enforcement authority!! LO 3 11-6

7. 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 in preparing their consolidated financial statements (3) allowing domestic listed companies to use IFRS (4) requiring or allow foreign companies listed on a domestic stock exchange to use IFRS. LO 4 11-7

8. Norwalk Agreement: FASB-IASB Convergence  In Norwalk, Connecticut, FASB and IASB held a joint meeting in September 2002.  The “Norwalk Agreement” states that the two bodies will “use their best efforts” to: 1. Make existing financial reporting standards compatible “as soon as is practicable” and 2. Coordinate efforts to “ensure that once achieved, compatibility is maintained” LO 5 11-8

9. FASB-IASB Convergence FASB initiatives include:  Short-term convergence project  Joint projects  Convergence research project  Liaison IASB member at FASB offices  Monitoring of IASB projects  Explicit consideration of convergence potential in FASB agenda decisions 11-9

10. SEC Acceptance Of IFRS IFRS Roadmap:  In November 2008, SEC issued a proposed rule that set milestones toward the use of IFRS by U.S. public companies by 2014.  In February 2010, SEC pushed that date back to “approximately 2015 or 2016.”  Large companies with market capitalization greater than $700 million (so-called large accelerated filers) would be the first required to use IFRS. 11-10

11. SEC Acceptance Of IFRS IFRS Roadmap Milestones:  Improvements in IFRS  Accountability and funding for the IASB  Improvement in the ability to use interactive data for IFRS reporting  Education and training However, in May 2011, the SEC published a suggested framework for an “endorsement process” incorporating IFRS into U.S. GAAP. 11-11

12. Steps To prepare opening IFRS balance sheet: 1. Determine the applicable IFRS. 2. Recognize assets and liabilities not recognized under GAAP and derecognize those not allowed under IFRS. 3. Measure the balance sheet accounts under IFRS at the balance sheet date. 4. Reclassify certain assets and liabilities in accordance with IFRS. 5. Comply with disclosure and presentation requirements. First-time Adoption of IFRS 11-12

13. IFRS Accounting Policy Hierarchy IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, establishes the hierarchy that firms must follow when dealing with an accounting issue: 1. Apply specifically relevant standards (IASs, IFRSs, or Interpretations). 2. Refer to other IASB standards. 3. Refer to the IASB Framework for guidance. 4. Consider the most recent pronouncements of other standard-setting bodies 11-13

14. Current Differences Between IFRSs and US GAAP Measurement: How is cost determined? Disclosure: If allowed, How? Inventory Fixed Assets Extraordinary Items Recognition: If recognized, how? When ? Discontinued Operations Presentation: Principles? Financial Statement Components? LO 6 11-14

15. Significant Differences Between IFRSs and US GAAP U.S. GAAP Reconciliations:  Interest Capitalization  Business Combinations  Purchase vs. Pooling Methods  Goodwill  Amortization vs. Impairment  Leases  Revaluation of Fixed Assets  Fixed Asset Impairment Losses LO 7 11-15