1. International Accounting Standards and Global Convergence
Chapter 7
International Accounting Standards and Global Convergence

2. Strategic Decision Point
Rules-based or principles-based standards?
Rules-based
Detailed and complex standards
Resulted in transaction manipulation
Enlarged gap between managers and owners
Principles-based
Reflects “true” underlying economic substance
Provides increased protection for companies
Makes comparability across companies difficult
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

3. Comparability of Accounting Information
International pressure exists for comparability, especially with MNEs
Different approaches to comparability
Harmonization is more flexible
Standardization suggests a state of uniformity
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

4. Which groups are interested?
Governments
Trade Unions
Investors (including financial analysts)
Bankers and lenders
Accountants and Auditors
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

5. Pressures for Harmonization
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

6. Governments
Government involvement in accounting determination varies across the world
Do governments really use corporate reports?
Information needed by governments is often too extensive to include in the report
Governments can demand whatever information they need
Information needs are extensive and confidential
These things suggest governments may not be important users of corporate reports
Is this a paradox?
Explained by situations where governments might be users
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

7. Government use of annual reports
Use reports, along with segmental information, to check performance of local subsidiaries of MNEs
Governments wish to monitor MNE operations as a whole
Governmental needs in differing departments can be accommodated by an annual report
Developing countries would have more information without bargaining for it with increased corporate disclosure
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

8. Governmental use of annual reports
Interest in extranational operations of MNEs
Intergovernmental organizations use this information for policy formulation (UN, EU).
Many governments desire increased bargaining power for information as members of intergovernmental organizations
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

9. Intergovernmental Organizations
United Nations
1976 study revealed lack of information
1979 – Working Group of Experts established
Emphasis on developing countries
Have different interests from those of OECD and IFRS
Major aim is international disclosure standards
Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) established in 1983
Current issues deal with corporate governance
Monitoring role in endorsing desirable standards
UNCTAD – represented in
Standards Advisory Council of the IASB
Advisory Panel of Small and Medium-sized Entities of the IASB
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

10. Intergovernmental Organizations
Organization for Economic Cooperation and Development (OECD)
Represents industrialized nations
Issued Guidelines for Multinational Enterprises
Aimed at strengthening confidence between MNEs and governments
Not required by law
Guidelines are becoming more of a benchmark
Aim is to promote improvements in comparability and harmonization of standards
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

11. Intergovernmental Organizations – European Union
Involved in international harmonization of standards as part of company law harmonization
Goal is to promote European economic integration and development
No company should be at a disadvantage because of legal differences between countries
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

12. International Organizations – European Union
Interests of shareholders, lenders, suppliers, and other parties are protected
Directives in the EU have the force of law and must be ratified by member nations
Regulations become law without national ratification
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

13. Intergovernmental Organizations – European Union
Fourth Directive – approved in 1978
Requirements relate to
Disclosure
Classification and presentation of information
Methods of valuation
Compromise between European and Anglo-American systems
Contains detailed requirements for historical cost accounting with some flexibility
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

14. Intergovernmental Organizations – European Union
Fourth Directive
Level of disclosure and transparency increased
“true and fair view” concept adopted
Does not adequately address
Foreign currency translation
Leases and funds
Cash flow statement
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

15. Intergovernmental Organizations – European Union
Seventh Directive – adopted in 1983
Control criteria other than ownership is applied on an optional basis
Requirements
Worldwide consolidations
“Fair value” approach for assets purchased through acquisitions
Equity treatment of associated corporations
Segmental disclosures of turnover by line of business and geographical area
Disclosure has been substantially improved
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

16. Intergovernmental Organizations – European Union
Additional Directives
Eighth Directive – adopted in 1984
Deals with qualification and work of auditors
Includes minimum educational requirements
Encourages mobility of professional auditors
Proposed directive for employee disclosure was put aside due to MNE and government opposition
Issues readdressed in Charter of Fundamental Social Rights
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

17. Intergovernmental Organizations – European Union
Harmonization of stock exchange regulations and securities laws is also a prerogative
Ensure investor access to sufficient information
Promote capital market and stock exchanges
No plans for new directives
“Mutual Recognition” approach was once considered more effective
IFRS adopted in 2005
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

18. Trade Unions and Employees
International Trade Union Confederations
European Trade Unions Confederation
International Confederation of Free Trade Unions
World Confederation of Labor
Industry-specific trade unions
Deal with individual MNEs
National Trade Unions
Influence MNEs on a variety of levels
Information needs depend on contact with MNEs and purpose of information
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

19. Trade Unions and Employees
Power exists in the nation where they operate
Unions have not grown beyond national boundaries as MNEs have
Trade union pronouncements are aimed at establishing policies concerning MNEs
Main concern centers on subsidiaries
Transfer pricing policies are a major concern
MNE subsidiary transactions have received little attention to date by regulatory bodies
Information about the terms, conditions, scale, security, and location of employment are of concern
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

20. Investors
Owners or potential owners of shares in the MNE parent corp. or a subsidiary
Interests are represented by international financial analyst organizations and IOSCO
Concerned with current lack of comparability
Some want information approach rather than a market approach to disclosure
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

21. Investors International organizations Want comparable information
ICCFAA and IOSCO
IOSCO - works for multilisting and international trading
IOSCO is closely associated with the IASB
Want comparable information
Interested in segmental information of MNEs
Interested in consolidated results
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

22. Bankers and Lenders
Information needs are focused on financial positions, performance, and future prospects
Concerned with security of loans advanced
Significant impact in France, Germany, Japan
Have more direct access to required info
International banks are involved in harmonization and often require special financial reports (IFC, World Bank, etc.)
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

23. Accountants and Auditors
International Accounting Standards Board
Formerly the IASC
Governed by 14 board members
Objectives
Propose international standards and promote their acceptance
Work toward improvement and harmonization of standards
Works for comparability of accounting standards
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

24. Accountants and Auditors
IASB
Adopted 41 IAS standards, completed 5 new standards, and revised 15 existing standards
Achievements
Completed a core set of standards in 2000 as agreed with IOSCO for cross-board and national listings
Recent efforts are focused on EU compliance with IFRS in 2005
Endorsement by IOSCO was limited
Members of IOSCO are permitted to require reconciliation of certain items, supplementary information, and eliminate some options existing in IAS
Members will individually determine whether or not to endorse IFRS for cross-boarder listings
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

25. Figure 7.2: The IASB’s Governance Structure
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

26. Accountants and Auditors
IFRS and U.S. GAAP
IASB and FASB are working toward similar accounting standards
FASB is researching international convergence
Objectives include
Identify every substantive difference between U.S. GAAP and IFRS
Catalog those differences according to the strategy for resolving them
Recommend further agenda decisions to the Board to further the objective of convergence with IFRS
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

27. Accountants and Auditors
IFRS and U.S. GAAP
Benefits of convergence according to the FASB
Increased efficiency in capital markets by increased comparability and transparency from nation to nation
Reducing the administrative burden for MNEs by allowing only one set of financials to be prepared
Enable U.S. companies access to capital markets throughout the world without reconciling U.S. GAAP to IFRS
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

28. Accountants and Auditors
IFRS and U.S. GAAP
Street, Nichols, and Gray (2000) suggest the gap is narrowing
Major differences are in the areas of
Property, plant and equipment revaluations
Deferred taxes
Goodwill
Capitalized borrowing costs
SEC desires enforcement of international standards if they are in place
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

29. Accountants and Auditors
Rules versus Principles
Recent scandals and aftermath perhaps show a need for principle-based standards
Sarbanes-Oxley requires the SEC to examine the feasibility of principles-based standards
Problems with principles-based standards
Guidance for application
Comparability
No guidance for complex transactions
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

30. Accountants and Auditors
Rules versus Principles
Survey by Mike Ng (2004)
93% of companies surveyed reported that is was possible to apply rules-based standards but not reflect the economic substance of the transaction
Only 7% of companies surveyed believed principles-based standards would lead to a better reflection of economic reality
Results show that neither approach will ensure that companies report the economic reality of transactions
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

31. Accountants and Auditors
Noncompliance with IFRS is problematic
IASI states that compliance means following IFRS and each interpretation of IFRS
Improper accounting treatment is not condoned by explaining accounting treatments applied or by footnotes (paraphrase IASI).
Street and Gray (2000) found that only 775 of the companies in their sample stated they were fully compliant with IAS.
International accounting firms are not supporting the enforcement of IAS
New structure of the IASB should help with compliance
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

32. Accountants and Auditors
International Federation of Accountants
Sets international auditing guidelines
Promotes international convergence of standards
International Auditing and Assurance Standards Board
Independent body under the IFAC that creates International Auditing Standards (ISA)
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

33. Accounting and Auditors
Reforms by the IFAC in cooperation with accounting firms, member bodies, regulators, and accounting organizations include:
Establishment of the Public Interest Oversight Board to oversee IFAC’s standard setting process
Increased transparency with regard to IFAC governance and international standard setting
Public participation in the standard-setting process
A more formal process of communicating with international regulators
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

34. Accountants and Auditors
International Forum on Accountancy Development (IFAD)
Created after the Asian financial crisis to aid developing nations
Encourages conformity with IFRS
Developed the International Financial Framework to aid in improving standards within national financial frameworks
Conducted a GAAP Convergence Survey (2002)
90% of countries surveyed plan to convert to IFRS
Majority of countries surveyed plan to converge with IFRS by establishing a government regulation or a standard-setting body
Half of the countries surveyed see a barrier to convergence in the complication of standards
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

35. Accountants and Auditors
International Association for Accounting Education and Research
Promotes excellence in accounting education
Contributes to development of international standards
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

36. The International Harmonization and Disclosure Debate
Some see harmonization and disclosure as a means to create a balance of power between MNEs and domestic corporations
More industrialized nations will not be totally supportive of increased regulation
Regional integration
Long-term goal to remove market imperfections and eliminate regulatory barriers (EU)
Many countries are more concerned with protecting their own business community at the expense of others
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

37. The International Harmonization and Disclosure Debate
Differences in reporting are due to differences in domestic needs
With domestic corporations, there is little concern for international standards
Natural accounting coordination will be a lengthy process according to research
Regional economic groupings (EU) and intergovernmental organizations (UN) will help
Is the third bullet Okay, or do we need a citation?
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

38. The International Harmonization and Disclosure Debate
Future developments will be centered on MNEs
May be less disclosure now in practice because of the complex nature of MNEs
National reporting requirements may limit disclosure
International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black