International Harmonization of Financial Reporting

International

Harmonization of

Financial Reporting

PROGRAM STUDI AKUNTANSI FAKULTAS EKONOMI DAN BISNIS

UNIVERSITAS ESA UNGGUL

EBA 604

AKUNTANSI INTERNASIONAL

International Harmonization of Financial Reporting

Chapter Topics

• Harmonization: Defnition, pros and cons, eforts toward.

• International Accounting Standards Board (IASB).

• _{Other organizations involved in}

Harmonization.

• _{Principles-based vs. Rules-based accounting.} • IASB Framework and IFRSs.

• Use of and support for IFRSs.

3-3

International Harmonization of Financial Reporting

Learning Objectives

1. Explain the meaning of harmonization.

2. Identify the arguments for and against international

harmonization of accounting standards.

3. Discuss major harmonization eforts.

4. Explain the principles-based approach used by the International Accounting

International Harmonization of Financial Reporting

Learning Objectives

5. Discuss the IASB’s Framework and Standards related to the adoption of

International Financial Reporting Standards (IFRSs) and presentation of fnancial

statements.

6. Examine the support for, and the use of, IFRSs across countries.

3-5

Harmonization

What is harmonization?

Harmonization -- the process of increasing the

level of agreement in accounting standards and

practices between countries.

Harmonization

The two “levels” of Harmonization

• _{Harmonization in accounting}

standards, which is increased agreement in accounting rules.

• _{Harmonization in practice, which is}

increased agreement in actual accounting practices.

• _{Harmonization in standards may or}

3-7

Harmonization

Harmonization

• _{Is diferent from Standardization.} • _{Harmonization allows for diferent}

standards in diferent countries as

long as there are not logical conficts.

• _{Standardization involves using the}

same standards in diferent countries.

Harmonization: The Pros and Cons

Pros:

• _{Expedite the integration of global capital}

markets and make easier the cross-listing of securities.

• _{Facilitate international mergers and}

acquisitions.

• _{Reduce investor uncertainty and the cost of}

capital.

• _{Reduce fnancial reporting costs.}

• _{Allow for easy adoption of high-quality}

3-9

Harmonization: The Pros and Cons

Cons:

• _{Signifcant diferences in standards currently}

exist.

• _{The political cost of eliminating diferences.} • _{Overcoming “Nationalism” and traditions.}

• _{Perhaps it will not provide signifcant benefts.} • _{Will cause “Standards Overload” for some}

frms.

• _{Diverse standards for diverse places is}

acceptable.

Harmonization Eforts

Organizations involved

• _{Association of South East Asian Nations}

(ASEAN).

• _{United Nations (UN) / European Union}

(EU).

• _{International Organization of Securities}

Commissions (IOSCO).

• _{International Federation of Accountants}

(IFAC).

3-11

Harmonization Eforts

Organizations involved

• _{IOSCO – is essentially the}

international equivalent of the U.S.

Securities and Exchange Commission (SEC).

• _{IFAC – is similar, at the international}

level, to the American Institute of

Certifed Public Accountants (AICPA).

• _{IASB – is essentially the international}

equivalent of FASB.

Harmonization Eforts

IOSCO

• _{Works to achieve improved market}

regulation internationally.

• _{Works to facilitate cross-border}

listings.

• _{Advocates for the development and}

3-13

Harmonization Eforts

IFAC

• _{Works to develop international}

standards of auditing, ethics, and education.

• _{Began International Forum on}

Accountancy Development (IFAD) to enhance the accounting profession in emerging countries.

• _{Started the Forum of Firms to raise}

global standards of accounting and auditing.

Harmonization Eforts

EU

• _{Has worked to harmonize accounting}

standards within the EU, primarily by way of two directives.

• _{Fourth Directive – a set of comprehensive}

accounting rules built on the principle of a “true and fair view.”

• _{Seventh Directive – requires consolidated}

3-15

Harmonization Eforts

IASB

• _{Preceded by the IASC (International}

Accounting Standards Committee).

• _{Works toward harmonization of}

international accounting standards.

• _{IASC was established in 1973.}

Harmonization Eforts

IASB

• _{Comprised of 14 members (12 full, 2}

part-time).

• _{7 members are liaison with a national}

board.

• _{Standard development process is open.} • _{Standards are principles-based.}

• _{Since establishment of IASB, focus is on}

3-17

Harmonization Eforts

IASB – Major Initiatives

Comparability Project

• _{Comprehensive review of existing IAS}

(International Accounting Standards).

• _{Begun in 1989.}

• _{In order to increase rigor of IAS.}

Harmonization Eforts

IASB – Major Initiatives

IOSCO Agreement

• _{Establishment of a core set of 30}

accounting standards.

• _{Standards agreed upon by IOSCO}

3-19

Harmonization Eforts

IASB – Revised Structure

The restructured IASB is overseen by the IASC

Foundation which also oversees:

• _{The International Financial Reporting}

Interpretations Committee (IFRIC).

• _{The Standards Advisory Council (SAC).} • _{Also, IFRSs are subject to due process}

and the IASC Foundation now periodically reviews its constitution.

Principles-Based Approach to Accounting Standard Setting

IASB Perspective

• _{IASB attempts to follow a}

Principles-Based approach to standard setting.

• _{As such accounting standards are}

3-21

Principles-Based Approach to Accounting Standard Setting

A Principles-Based approach

• _{Represents a contrast to a}

Rules-Based Approach.

• _{Attempts to limit additional}

accounting guidance (e.g., FASB EITFs, FASB Interpretations).

• _{Is designed to encourage}

professional judgment and

discourage over-reliance on detailed rules.

Principles-Based Approach to Accounting Standard Setting

Support for a Principles-Based Approach from outside the IASB

• _{FASB – has published a supportive proposal}

entitled, “Principles-Based Approach to U.S. Standard Setting”

(www.fasb.org/proposals/principles-based_approach.pdf).

• _{SEC – has recommended adoption of this}

approach

3-23

IASB Framework and

IFRSs

IASB Framework

• _{Provides the basis for fnancial}

statements presented in accordance with IFRS.

• _{Similar to the relationship between}

U.S. GAAP fnancial statements and the FASB Conceptual Framework.

IASB Framework and

IFRSs

IASB Framework

• _{The objective and underlying}

assumptions of fnancial statements.

• _{Qualitative characteristics of}

information.

• _{Defnition, recognition, and}

measurement of elements in fnancial statements.

3-25

IASB Framework and

IFRSs

IASB Framework

• _{Possesses objective and underlying}

assumptions of fnancial statements.

• _{Primary objective is to provide}

information useful to decision making.

• _{Underlying assumptions include}

accrual-basis and going concern.

IASB Framework and

IFRSs

Qualitative characteristics of information

• _{Understandability – should be}

understandable to people with reasonable fnancial knowledge.

• _{Comparability – allows for}

3-27

IASB Framework and

IFRSs

Qualitative characteristics of information

• _{Relevance – useful for making}

predictions and confrming existing expectations.

• _{Reliability – free from bias (neutral)}

and represents that which it claims to represent (representational

faithfulness).

IASB Framework and

IFRSs

Elements of Financial Statements

• _{Defnition – assets, liabilities, and}

other fnancial statement elements are defned.

• _{Recognition – guidelines as to when}

to recognize revenues and expenses.

• _{Measurement – various bases are}

3-29

IASB Framework and

IFRSs

Concepts of Capital maintenance

Financial capital maintenance

• _{One approach to income}

measurement.

• _{Net income represents the increase}

in net fnancial assets, excluding owner transactions.

• _{The approach in U.S. GAAP.}

IASB Framework and

IFRSs

Concepts of Capital maintenance

Physical capital maintenance

• _{Another approach to income}

measurement.

• _{Net income represents increase in}

physical productive capacity.

• _{Excluding owner transactions.} • _{Requires current costs for}

3-31

Presentation of Financial Statements (IAS 1)

This standard provides guidance in the

following areas

• _{Purpose of fnancial statements –}

to provide decision-useful information.

• _{Components of fnancial}

statements – balance sheet,

statements of income, cash fows, changes in equity, and notes to the fnancial statements.

Presentation of Financial Statements (IAS 1)

• _{Fair presentation – the overriding principle of}

fnancial statement presentation.

• _{Accounting policies}

– _{Should be consistent with all IASB}

standards.

– _{When specifc guidance is lacking, use}

standards on similar issues, and

3-33

Presentation of Financial Statements (IAS 1)

Basic principles and assumptions

• _{Reiteration of underlying assumptions.}

– Accrual basis/going concern/comparability. Structure and Content of Financial

Statements

• _{Provides information on presentation format:} – _{Current/noncurrent.}

– Items to be included on face of fnancial statements.

– Content of notes.

First Time Adoptions of IFRSs (IFRS 1)

• _{Provides guidance for frst time}

adoption.

• _{Much used in 2005, particularly in}

EU.

• _{Requires compliance with all}

efective IFRSs.

• _{Allows exemptions when costs}

3-35

Use of IFRSs

Evidence of support for IFRSs

• _{Adoption by the EU – public companies in the} EU were required to begin using IFRSs in 2005. • _{IOSCO has endorsed IFRSs for cross-listings.}

• _{Many developing nations have adopted IFRSs.}

• _{Some countries disallow IFRSs for domestic}

frms but allow foreign companies to use them. • _{U.S. is a major exception, does not allow use of}

IFRSs.

IASB/FASB Convergence

The Norwalk Agreement

• _{Reached in 2002.}

• _{Between the IASB and FASB.}

• _{To work toward accounting standards}

3-37

IASB/FASB Convergence

FASB’s key initiatives in the Norwalk Agreement

• _{Joint projects – boards will work}

together to address some issues (e.g., revenue recognition).

• _{Short-term convergence – to remove}

diferences between IFRSs and U.S. GAAP for issues where convergence is deemed most likely.

• _{IASB liaison – IASB member in}

residence at FASB.

IASB/FASB Convergence

• _{Monitoring IASB projects – FASB}

monitors IASB projects of most interest.

• _{Convergence research project –}

identifcation of all major diferences between IFRSs and U.S. GAAP.

• _{Convergence potential – FASB}

SEKIAN

DAN

TERIMA KASIH