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 oThe 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. oThe United States moving toward converging U.S. GAAP with the IFRS that are followed by most of the rest of the world. oConvergence refers to the process by which U.S. GAAP and IFRS will eventually merge to become a single set of accounting standards. E-2

Critical Questions: Status and Timing of the Convergence process oWhy are these changes taking place? oWho are the key players? oWhat critical differences between U.S. and international GAAP exist currently? oHow can we keep up-to-date with this changing landscape of converging accounting standards? E-3

LO1 Differences in Accounting Practices ReasonFurther Explanation 1. Legal systemCommon 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 lawsFor 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 financingIn 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. E-4

Differences in Accounting Practices (Contd.) 4. InflationHistorically high inflation in some countries (Argentina and Brazil) has created a need to account for the effect of inflation on assets and liabilities. 5. CultureSome countries (Brazil and Switzerland) are more secretive, leading to fewer financial disclosures. 6. Political and economic tiesCountries that share strong political and/or economic ties (British colonies) often have similar accounting practices. 7. Economic developmentMore economically developed economies (the United States and the United Kingdom) have a need for more complex accounting standards. E-5

LO2 International Financial Reporting Standards oThe International Accounting Standards Committee (IASC) was formed in 1973 to develop a single set of global accounting standards. oThe IASC in 2001 created a new standard- setting body called the International Accounting Standards Board (IASB). oThe 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 E-6

oThe IASB endorsed the 41 International Accounting Standards (IAS) issued by IASC when it was formed in oIASB 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.” oCompliance to IFRS is voluntary as IASB has no enforcement authority. oThe International Organization of Securities Commissions (IOSCO) now permits its- IFRS International Financial Reporting Standards (Contd.) E-7

International Financial Reporting Standards (Contd.) o-members to use these standards to prepare their financial statements for cross-border offerings and listings. oOver 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 E-8

Norwalk Agreement oThe FASB and IASB signed the Norwalk Agreement (2002), formalizing their commitment to the convergence of U.S. GAAP and IFRS. oThe 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. oArguments Against Convergence to IFRS oU.S. standards should remain customized to fit the stringent legal and regulatory requirements of the U.S. business environment. IFRS E-9

Norwalk Agreement (Contd.) oThe differences in implementation and enforcement will make accounting appear more uniform than actually is the case. oA competition between alternative standard-setting regimes is healthy and can lead to improved standards. oWhere convergence currently stands? oActive efforts being taken since oRequirement for foreign companies to include in financial statements a reconciliation of IFRS to U.S.GAAP eliminated by SEC. oDiscussion on to allow U.S. companies to prepare their financial statements according to U.S. GAAP or IFRS. IFRS E-10

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. GAAPIFRS The FASB and the IASB are working together to develop a common conceptual framework that would underlie a uniform set of standards internationally. E-11

End of Appendix E E-12