1. RICHARD G. SCHROEDER MYRTLE W. CLARK JACK M. CATHEY
FINANCIAL ACCOUNTING
THEORY AND ANALYSIS: TEXT AND CASES
11TH EDITION
RICHARD G. SCHROEDER
MYRTLE W. CLARK
JACK M. CATHEY 4

2. INTERNATIONAL ACCOUNTING
CHAPTER 3
INTERNATIONAL ACCOUNTING 42 42 42

3. International Accounting Standards
Financial accounting is influenced by the environment in which it operates
Companies develop financial reports directed at their primary users
Previously most were residents of the same country as the corporation
Transnational financial reporting has become more commonplace because of the European Union, GATT and NAFTA
U. S. companies must be able to compete in global markets with transnational financial reporting 43 43 43

4. International Business Accounting Issues
A company’s first exposure to international accounting is frequently the result of a purchase or sale
Problems:
Exchange gains or losses
Obtaining credit information
Evaluation of financial statements
Next step may be to open an international division
Another issue is raising capital in foreign markets
Must prepare financial statements in a format acceptable by appropriate securities market 44 44 44

5. Factors Influencing the Development of Accounting Systems:
Political System
Level of Education
Legal System
Economic Development 45 45 45

6. Influences on the Development of Financial Reporting
Agricultural
Resource Based
Tourist Based
Manufacturing
Type of economy
Legal System
Codified
Common Law
Political System
Democratic
Totalitarian
Nature of Ownership
Private Enterprise
Socialist
Communist 46 46 46

7. Influences on the Development of Financial Reporting
Growth Pattern of economy
Growing
Stable
Declining
Social Climate
Stability of currency
Sophistication of management
Sophistication of financial community
Existence of accounting legislation
Education System 46 46 46

8. Approaches to Preparing Financial Statements for Use in Other Countries:
Same to all
Translate language
Translate language and currency
Two sets
World-wide standards 48 48 48

9. The International Accounting Standards Committee
The preparation of financial statements for foreign users under option #5 is being increasingly advocated
IASC
Formed in 1973 to aid in this process
International Accounting Standards Board
Replaced IASC in 2001 49 49 49

10. Standard Setting by the IASC
Original intent:
Avoid complex details
Concentrate on basic standards
Steps in the process
Similar to FASB
Steering Committee
Identify issues and prepare point outline
Board prepares comments
Steering Committee prepares final Statement of Principles
Exposure Draft
Steering Committee reviews comments and prepares final standard 50 50 50

11. Standard Setting by the IASC
Two treatments
Benchmark - point of reference
Alternative
Improvements Project
2003
Removed some of the existing alternative accounting treatments 
Where an IAS retains alternative treatments
IASB removed references to 'benchmark treatment'
Now termed 'alternative treatment'
Using descriptive references
‘Cost model'
‘Revaluation model'  51 51 51

12. Restructuring the IASC
In its early years, IASC acted mainly as a harmonizer
Recently, it has begun to combine that role with the role of a catalyst
Harmonizer
Catalyst
Coordinator of national initiatives
Initiator of new work at national level

13. Restructuring the IASB
Future IASB role as catalyst and initiator should become more prominent
Important for the IASB to focus objectives more precisely, as follows:
To develop international accounting standards that require high-quality, transparent, and comparable information that will help participants in capital markets and others to make economic decisions; and
To promote the use of international accounting standards by working with national standard setters.

14. Restructuring the IASB
Structural changes needed
So that IASB can anticipate the new challenges facing it and meet those challenges effectively.
Issues that need to be addressed:
Partnership with national standard setters.
IASB should enter into a partnership with national standard setters
So that IASB can work together with them to accelerate
Convergence between national standards
And international accounting standards around solutions requiring high-quality, transparent, and comparable information
That will help participants in capital markets and others to make economic decisions.

15. Restructuring the IASB
Wider participation in the IASB Board.
A wider group of countries and organizations should take part in the IASB Board
Without diluting the quality of the Board's work
Appointment.
The process for appointments to the IASB Board and key IASB committees should be the responsibility of a variety of constituencies
Those appointed must be competent , independent, and objective.

16. Restructuring the IASB
2001:
Responsibility for international standards-setting was transferred to the to the International Accounting Standards Board (IASB)

17. Restructuring the IASB
The new structure:
The IASC Foundation
The International Accounting Standards Board
The International Accounting Standards Advisory Council
International Financial Reporting Interpretations Committee

18. IASB Structure KEY: Appoints Reports To Advises Monitoring Board
Approve and Oversee Trustees
IASC Foundation
22 Trustees Appoint, Oversee, Raise Funds
Board: 16 (Maximum 3 part-time)
Set Technical Agenda. Approve Standards, Exposure Drafts, & Interpretations
IFRS Advisory Council Approx. 40 members
IFRS Interpretations Committee (14 members)
Working Groups For Major Agenda Projects

19. Revising the IASB’s Constitution
Key issues to be reviewed:
Whether the objectives of the IASC Foundation should expressly refer to the challenges facing small and medium-sized entities (SMEs)
Number of Trustees and their geographical and professional distribution
The oversight role of the Trustees
Funding of the IASC Foundation
The composition of the IASB
The appropriateness of the IASB's existing formal liaison relationships
Consultative arrangements of the IASB
Voting procedures of the IASB
Resources and effectiveness of the International Financial Reporting Interpretations Committee (UMC):
The composition, role, and effectiveness of the SAC

20. The Uses of International Accounting Standards
IASC noted that its standards are used in a variety of ways:
National requirements
Basis for national requirements
Benchmark to develop standards
By regulatory agencies
By companies
Also International Organization of Securities Commissions (IOSCO) looks to the IASC to provide standards that can be used in multinational securities offerings 52 52 52

21. Other Issues Partnership with the IOSCO December 17, 2003
Generate standards acceptable to IOSCO
December 17, 2003
IASB published 13 revised International Accounting Standards
Reissued two others
Gave notice of the withdrawal of its standard on price level accounting.
Revised and reissued standards mark near-completion of the IASBs Improvements project
2005: reaffirmed support and development of IFRS 54 54 54

22. IASB Annual Improvements Project
July 2006
Non-urgent issues
Amendments

23. The Use of IASC Standards
Adopted by approx. 120 countries EU
Australia
New Zealand
Planned option by others
Israel
Canada
Japan
China
US (?)

24. FASB Short-term International Convergence Project
The goal of this project is to remove a variety of individual differences between U.S. GAAP and International Financial Reporting Standards that are not within the scope of other major projects.
The project scope is limited to those differences in which convergence around a high-quality solution would appear to be achievable in the short-term, usually by selecting between existing IFRS and U.S. GAAP.

25. The Norwalk Agreement 12/18/2002:
FASB and IASB held joint meeting in Norwalk, Connecticut
Both standard setting bodies acknowledged…
Their commitment to the development of high-quality compatible accounting standards that can be used for both domestic and cross-border financial reporting.
Also committed to use their best efforts to make their existing financial reporting standards compatible as soon as practicable and to coordinate their future work programs to help ensure that once compatibility is achieved, it will be maintained.

26. The Norwalk Agreement Both Boards agreed to:
Undertake a short-term project aimed at removing a variety of differences between U. S. GAAP and IFRSs.
Remove any other differences between IFRSs and U. S. GAAP that may remain on January 1, 2005 by undertaking projects that both Boards would address concurrently.
Continue the progress on the joint projects currently underway.
Encourage their respective interpretative bodies to coordinate their activities.

27. The Roadmap to Convergence
2005 agreement between FASB & IASB:
Convergence best achieved with high-quality, common standards
Develop a new common standard rather than try to eliminate differences
Replace weaker standards with stronger standards

28. The Roadmap to Convergence
7 Original Milestones
Improvements to accounting standards
Funding of IASCF
Improved ability to use interactive data for IFRS reporting
Improved education and training in the US
Limited use in narrow group of companies
SEC to determine in 2011 if mandatory adoption is feasible
Mandatory use
2014
2015
2016

29. SEC staff report July 2012 final report
How can IFRS be incorporated into financial reporting system for US issuers?
Retain US GAAP while considering aspects of convergence and endorsement?
Options for US issuers
No final decision or recommendation

30. SEC staff report Key findings US standards perceived as high quality
IFRIC should do more to address practice issues on timely basis
IASB should consider placing greater reliance on national standard setters
Global application of IFRS and cooperation among regulators could be improved
Overall design of governance structure reasonable
IFRS Foundation has made progress in developing a broad-based funding mechanism
US investors’ current understanding of IFRS varies significantly

31. SEC staff report Identified 6 areas of consideration
Sufficient development and application of IFRS for US domestic reporting system
Independent standard setting for benefit of investors
Investor understanding and education regarding IFRS
Regulatory environment
Impact on issuers
Human capital readiness

32. International vs. GAAP Accounting Standards
Question: Should foreign companies be allowed to list their securities in United States markets
Form 20-F reconciliations
Pressure on the SEC to accept international accounting rules

33. SEC Staff Report
In 2011, the SEC staff issued a report analyzing the use of IFRS in practice.
Focused on how the recognition and measurement requirements of IFRS were applied in practice.
Compared their observations for all companies to identify trends on an overall basis as well as by country and industry.
Report is informational only and does not include conclusions or recommendations.
Found that company financial statements generally appeared to comply with IFRS requirements.

34. SEC Staff Report
Noted that apparent compliance should be considered in light of the following two concerns:
Transparency and clarity of the financial statements in the sample could be enhanced
Diversity in the application of IFRS presented challenges to the comparability of financial statements across countries and industries. This diversity can be attributed to a variety of factors.
Explicit options permitted by IFRS or owing to the absence of IFRS guidance in certain areas.
Noncompliance with IFRS.

35. IS Adopting IFRS Feasible?
Miller and Bahnson:
SEC has already determined that adopting IFRS is legally impossible.
Allowing U.S. companies to choose between GAAP and IFRS would be unworkable.
Selling:
After Europe discovers that working with an IASB that doesn’t include the United States is of little benefit, the next step will be for every other country with mature standard setting mechanisms to revert to their previous standard-setting procedures

36. Standards Overload
2009: IASB published IFRS for small to medium-sized businesses
95% of all companies
Provide simplified standards
Now reviewing impact
Another area of difference with U. S. GAAP

37. Framework for the Preparation and Presentation of Financial Statements
Purpose - to set out concepts that underlie the preparation and presentation of financial statements by:
Assisting the IASC in developing future standards
Promoting harmonization of accounting standards
Assisting national standard setters
Assisting preparers in applying international standards
Assisting auditors in forming an opinion as to whether financial statements conform to international standards
Assisting users in interpreting financial statements prepared in conformity with international standards
Providing interested parties with information about the IASC’s approach to the formation of international accounting standards 57 57 57

38. Framework for the Preparation and Presentation of Financial Statement”
The Framework specifies:
Chapter 1: The Objective of General-Purpose Financial Reporting
This topic is discussed in Chapter 2 of this text.
Chapter 2: The Reporting Entity
The chapter on the Reporting Entity will be inserted once the IASB has completed its redeliberations following the Exposure draft issued in March 2010.
Chapter 3: Qualitative Characteristics of Useful Financial Information
Chapter 4: The Framework: The Remaining Text 58 58

39. Underlying Assumption
Going concern
If that presumption is invalid, appropriate disclosure and a different basis of reporting are required. 60 60

40. The Elements of Financial Statements
Asset
Liability
Equity
Income
Expense
The concept of recognition
Probable
Measurable 62 62 62

41. The Concepts of Capital Maintenance
Financial capital maintenance
Physical capital maintenance
Selection of the measurement bases and the concept of capital maintenance chosen will determine the accounting model
IASC does not intend to prescribe a model 63 63 63

42. The IASB–FASB Financial Statement Presentation Project
IASB and the FASB are undertaking a joint project to develop a new joint standard for presenting financial statements.
Ultimately, the new standard will replace IAS No. 1 , “Presentation and IAS No. 7 ,
The main objective of this project is to address fundamental issues relating to presentation and display of information in the financial statements, including:
The relationship between items across financial statements
The disaggregation of information so that it is useful in predicting an entity’s future cash flows
The provision of information to help users assess an entity’s liquidity and financial flexibility

43. Future work program
In July 2011, the IASB requested consultation on its future work plan.
This consultation sought input on the direction and the overall balance of its work.
Culminated in the release of a Feedback Statement issued by the IASB on December 18, 2012 that identified several key themes:
A period of calm.
Prioritize work on the Conceptual Framework
Targeted improvements to certain standards
Updates to assist implementation and maintenance.
Updates to assist in improving the standard-setting process. 63 63 63

44. Future work program As a result, the following initiatives developed:
Improved implementation
Resume work the Conceptual Framework
Developed a list of nine research projects that it will explore over the next three years
Emissions trading schemes
Business combinations under common control
Discount rates
Equity method of accounting
Intangible assets, extractive activities, and research and development activities
Financial instruments with the characteristics of equity
Foreign currency translation
Nonfinancial liabilities (amendments to IAS No. 37 )
Financial reporting in high inflationary economies
Each research project will result in a report or discussion paper 63 63 63

45. IAS No. 1 “Presentation of Financial Statements”
Considerations:
Fair presentation and compliance with IASC standards
Accounting policies
Going concern
Accrual basis of accounting
Consistency of presentation
Materiality and aggregation
Offsetting
Comparative information

46. IAS No. 1 “Presentation of Financial Statements” 2003 Amendments
“Presents fairly” definition
Elaboration of “misleading” results from complaince
Standards on selection of accounting policies moved to IAS No. 8
Certain disclosures no longer required
Specific disclosures required
Statement of Changes in Equity disclosure requirements

47. IFRS No. 1 “First Time Adoption of International Reporting Standards”
Compliance requirements
Recognition of assets and liabilities
Only when required by IFRSs
Requires reclassifying if necessary
Applies existing IFRSs in measuring

48. Prepared by Kathryn Yarbrough, MBA
End of Chapter 3
Prepared by Kathryn Yarbrough, MBA
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