1. Chapter 1 Electronic Presentations in Microsoft ® PowerPoint ® Prepared by James Myers, C.A. University of Toronto © 2008 McGraw-Hill Ryerson Limited

2. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 2 Chapter 1 A Survey of International Accounting

3. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 3 Learning objectives To identify factors that can influence a country’s accounting standards To describe areas where Canada’s accounting standards differ from those used in other countries To identify the role the IASB intends to play in the establishment of uniform worldwide accounting standards Identify the direction that the CICA intends to follow

4. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 4 Introduction Prior to the 1990’s, the study of accounting principles as set out in the CICA Handbook was all that was necessary for Canadian students intending to pursue accounting careers, however that has changed Canadian companies are exporting more than ever before, and have a presence in many foreign locations Canadian companies that used to raise capital just at home are now raising capital in markets around the world With their shares trading on foreign stock exchanges, Canadian companies are often required to prepare financial reports using foreign accounting principles

5. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 5 A Survey of International Accounting Generally accepted accounting principles vary from country to country Accounting rules and practices differ among virtually all jurisdictions, often in major ways The range of differences is wide, affecting –Terminology and style of presentation –Methods of measurement –Disclosure

6. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 6 A Survey of International Accounting Differences in measurement affect the reported results and/or financial position of the company Differences in measurement include departures from historical cost such as asset revaluations Measurement differences allowed for income- smoothing techniques in some countries, for example by transferring income to and from reserve accounts.

7. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 7 A Survey of International Accounting Differences in disclosure relate to the nature, quantity, and scope of information presented in the financial statements, and associated financial reporting and disclosures. For example, there are differing standards for disclosure of geographic segments.

8. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 8 A Survey of International Accounting Differing national accounting principles reduce comparability of financial information. Securities regulators often require foreign companies listed on their stock exchanges to prepare financial statements using domestic accounting standards, or to prepare reconciliations from foreign to domestic standards. For example, Canadian companies listed on U.S. exchanges are required to reconcile income under Canadian GAAP to income under U.S. GAAP.

9. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 9 Factors that Influence a Country’s Accounting Standards The following factors can affect national accounting standards: –Taxation: how closely is taxable income based on accounting income. –Capital markets: in countries where publicly traded debt and equity are the major source of business financing, disclosure standards are greater. –Legal systems: Code law countries set GAAP in legal statutes; private bodies (e.g. CICA or FASB) set GAAP in common law countries. –Ties between countries: GAAP can be similar between countries with political or economic ties. –Inflation levels: Countries with high inflation often diverge from historical cost.

10. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 10 Towards Accounting Harmonization and Convergence European Union 27 European Union (EU) member countries 13 of these countries share a common currency, the Euro EU has attempted to harmonize accounting principles of member countries by issuing “directives” which often allowed alternative reporting practices. Starting in 2005 all EU companies whose shares trade on EU stock exchanges are required to prepare consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs).

11. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 11 Towards Accounting Harmonization and Convergence International Accounting Standards Board (IASB) Successor in 2001 to International Accounting Standards Committee (IASC). Canada was a founding member. Current objectives: –To develop a single set of high-quality, global accounting standards that require transparent and comparable information in general purpose financial statements –To cooperate with various national accounting standard- setters in order to achieve convergence in world standards 41 IASB standards in force as of July 2007. IASB will introduce new IFRSs in the future.

12. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 12 Towards Accounting Harmonization and Convergence As of June 2007, 79 countries required use of IFRSs for all publicly traded domestic companies. Australia adopted IFRS in 2005, New Zealand in 2007 European Union adoption of IFRS for all publicly traded companies in member countries resulted in over 8,000 companies switching to IFRS in 2005. IFRS do not require uniform presentation of financial statement elements and descriptions.

13. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 13 The United States Standards set by Financial Accounting Standards Board (FASB), a private organization. FASB pronouncements are detailed and rule-based, compared to more general and principle-based standards of IASB and CICA. Canadian standards are closer to U.S. than to any other country, but there are significant differences.

14. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 14 The United States FASB has a convergence project underway with IASB. First stage of convergence project is to eliminate differences capable of quick resolution. Second stage will examine more contentious differences with the goal that any standards released by either FASB or IASB will have similar outcomes. Overall goal is that non-U.S. companies listed on U.S. exchanges will be able to use IFRS.

15. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 15 Japan Government has full control over accounting standards Tax laws require tax deductions to appear as deductions on income statement as well. Lower accounting income results from companies taking advantage of liberal provisions in tax law to minimize taxable income. Cash flow statements are not required. Subsidiary financial results are consolidated without first converting from foreign to Japanese GAAP.

16. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 16 Where is Canada going? CICA announced in 2006 a strategic plan to harmonize CICA Handbook with IFRSs. CICA will issue Exposure Drafts before adopting new Handbook sections in accordance with IFRSs. All Canadian publicly accountable enterprises will have to use new standards effective January 1, 2011. From 2006-2011, any converged standards issued by FASB and IASB under their convergence project will be adopted by CICA.

17. Chapter 1 © 2008 McGraw-Hill Ryerson Limited 17 Where is Canada going? In 2008 and 2009 management will be required to disclose estimates of the effect of the change to IFRSs on future financial statements. In 2010 public companies will have to keep dual records in Canadian GAAP and IFRSs, in order to provide IFRS comparatives in 2011 financial statements. Options are being considered for private companies and not-for-profits, including harmonization with IFRS, provision for differential reporting, and separate made-in-Canada GAAP for these entities.