DeeganFAT 3e Chapter 04

104 FINANCIAL ACCOUNTING THEORY

LEARNING OBJECTIVES On completing this chapter readers should:

understand the background to recent actions by the International Accounting Standards Board and other standard-setting bodies to implement the adoption of a uniform set of accounting standards for worldwide use (this set of accounting standards being known as International Financial Reporting Standards or, in abbreviated form, IFRS); understand some of the perceived advantages and disadvantages for countries that adopt IFRS; appreciate that prior to many countries adopting IFRS there were a number of important differences between the accounting policies and practices adopted within various countries; such differences are decreasing as countries elect to adopt accounting standards released by the International Accounting Standards Board; understand various theoretical explanations about why countries might adopt particular accounting practices in preference to others, and be able to evaluate whether, in light of the various theories, it is appropriate to have one globally standardised set of accounting standards; be able to explain what is meant by the terms harmonisation and standardisation of accounting; be able to identify and explain some of the perceived benefits of, and obstacles to, harmonising or standardising accounting practices on an international scale; understand the key factors that are leading to greater international harmonisation of accounting.

INTERNATIONAL ACCOUNTING

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DeeganFAT_3e_Chapter 04.indd 104DeeganFAT_3e_Chapter 04.indd 104 3/9/09 3:55:31 PM3/9/09 3:55:31 PMThis material is published for marketing purposes only. No unauthorised printing or reproduction. (c) 2009 McGraw-Hill

CHAPTER 4: INTERNATIONAL ACCOUNTING 105

Since the start of 2005, accounting standards issued by the International Accounting Standards Board (IASB) have become the accounting standards that are to be followed within Australia and a number of other countries (including member states of the European Union). Do you believe that diftferent countries should adopt the same accounting standardsthat is, that a one size fits all approach to financial accounting is appropriate despite differences in cultures, legal systems and financial systems? What are some of the advantages and disadvantages that arise as a result of a country adopting the accounting standards issued by the IASB?

OPENING ISSUES



INTRODUCTION

The previous chapters looked at how regulation can shape the practice of financial reporting. We saw that various factors can influence the actions of regulators (for example, the regulators perceptions about what is in the public interest or about what the economic implications of a newly proposed accounting standard might be), and that various theoretical perspectives can be applied when making a judgement about the factors that will be likely to impact on a regulators ultimate decision to support or oppose particular financial accounting requirements. We saw how differences in, or changes to, accounting regulations can result in different accounting numbers being reported for a given underlying transaction or event, and how these differences in reported accounting results can lead to both positive and negative social and economic consequences. Clearly, therefore, any differences in accounting regulations between different countries are likely to result in the accounting outcomes reported from a specific set of transactions and/or events varying from country to country.

This chapter discusses theoretical explanations as to why, in the absence of efforts to globally harmonise or standardise accounting practices, accounting regulations and practices could be expected to vary between different countries. It explains why there was a large degree of variation in accounting practices internationally prior to recent decisions by many countries to adopt the accounting standards issued by the International Accounting Standards Board (IASB). In light of previous research that indicates that people in different countries or from different cultures will have different information demands and expectations, the chapter explores the logic of recent global efforts to establish one set of accounting standards for worldwide use. It addresses the question of whether it makes sense that organisations in diverse countries all adopt the same accounting standards in an apparent acceptance of a one size fits all approach to financial reporting.

The chapter provides a discussion of recent initiatives undertaken, principally driven by the IASB, to establish a uniform set of accounting standards for global use. More than 100 countries have adopted the accounting standards issued by the IASB, even though these standards often represented a significant change to the accounting standards that had been developed domestically within the respective countries. A significant exception to this general trend has been the United States, which has decided against adopting the accounting standards released by the IASB. To date, the United States continues to use its own domestic standards, those issued by the Financial Accounting Standards Board (FASB), although in 2008 the US Securities and Exchange Commission (SEC) did pass a ruling allowing foreign listed entities that are also listed on the US stock exchange to lodge their reports in accordance with International Financial Reporting Standards (IFRS) without the necessity to provide a reconciliation to US generally accepted accounting procedures. The FASB and the IASB have entered into an arrangement whereby they are trying to eliminate major differences between their respective standards (converge their standards) and once this is achieved then the SEC has indicated a possibility that domestic companies will thereafter be required to also follow IFRS, as is the case in most other countries. However, the timing of any move by the United States to adopt IFRS is far from certain.

The chapter begins with a brief discussion of the international differences that existed between various countries accounting practices prior to the countries recent adoption of IFRS.



EVIDENCE OF INTERNATIONAL DIFFERENCES IN ACCOUNTING PRIOR TO RECENT STANDARDISATION INITIATIVES

In recent years many countries (including Australia and countries in the European Union) have elected to adopt the accounting standards issued by the IASB, with such implementation typically being effective from 2005. However, to understand how different nations accounting rules had led to vastly different accounting results prior to the recent standardisation efforts (and hence to put into context some of the arguments for standardisation), it is useful to consider some actual examples of how a particular companys results varied dramatically depending on which nations accounting standards were being used to account for its various transactions.

In research undertaken prior to the recent widespread adoption of IFRS, Nobes and Parker (2004, p. 4) compared the results of a small number of European-based multinationals which reported their results in accordance with both their home nations accounting rules and US accounting rules. Their comparative analysis shows, for example, that the underlying economic transactions and events of the Anglo-Swedish drug company AstraZeneca in the year 2000 produced a profit of 9521 million when reported in conformity with UK accounting rules but a profit of 29 707 million when reported pursuant to US accounting rulesa difference of 212 per cent in reported profits from an identical set of underlying transactions and events! Extending this analysis to a more recent period, the 2003 annual report of AstraZeneca shows that a profit of $3036 million derived from applying UK accounting rules became a profit of $2268 million when calculated in accordance with US accounting rulesthis time a difference of 25 per cent. In its balance sheet (or, as it is also known, its statement of financial position), AstraZenecas shareholders equity at 31 December 2003 was $13 178 million when reported in accordance with UK accounting rules, but this became $33 654 million when determined in accordance with US accounting rules, a difference of 155 per cent. Although percentage differences of this size might be unusual, an examination of the financial reports of almost any company that reported its results in accordance with more than one nations set of accounting regulations will have shown differences between the profits reported under each set of regulations and between the financial position reported under each set of regulations. In this regard, consider the following statement from an article in the Australian Financial Review (25 November 1998):

From time to time, the fundamental differences in accounting and reporting standards

among the various countries of the western world hit the headlines. This was never more

dramatically demonstrated than when Daimler-Benz achieved a listing on the New York

Stock Exchange (the first German company to do so) in October 1993.

When the group accounts were converted from German accounting rules to US GAAP

(generally accepted accounting practice), a DM168 million profit for the first half year

became a staggering DM949 million loss.

More recently, German conglomerate Hoechst, which had adopted international

accounting standards (IAS) in 1994, also listed in New York. In the process of reconciling

its accounts with US GAAP an IAS profit of DM1.7 billion became a loss of DM57

million.



US accounting principles have turned The News Corporation Ltds $1.92 billion net profit in fiscal 2000 into a $329 million loss, according to documents filed with the US Securities and Exchange Commission.

While the US loss does not change the profit reported by News at the end of last financial year, it does demonstrate how different Newss

accounts would look if it moved its headquarters to the US.

The net difference before minority interests to the way in which News reported its income last year was a $2.4 billion loss.

Under US Generally Accepted Accounting Principles (US GAAP), companies are not allowed to capitalise start-ups, book abnormal losses or gains, or revalue mastheads

or television licences. Depreciation is also treated differently.

US GAAP would have had News making a loss rather than its near $2 billion profit and shaved its operating income back to $1.5 billion from the reported $2.74 billion the company made under Australian accounting rules.

News learns wealthy lesson: dont move to US FINOLA BURKE

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Accounting Headline 4.1 Illustration of the impact on profits of international differences in accounting rules

Accounting Headline 4.1 also illustrates how a large accounting profit according to Australian accounting standards became a significant loss for the Australian company News Corporation Ltd when US accounting standards were applied.

A further dramatic example of the existence of differences between the accounting rules of different countries is provided by the US corporation Enron. As Unerman and ODwyer (2004) explain, in the aftermath of the collapse of Enron many accounting regulators, practitioners and politicians in European countries claimed that the accounting practices that enabled Enron to hide vast liabilities by keeping them off their US balance sheet would not have been effective in Europe. In the United Kingdom this explanation highlighted the differences between the UK approach and the US approach to accounting regulation. It was argued that under UK accounting regulations these liabilities would not have been treated as off balance sheet, thus potentially producing significant differences between Enrons balance sheet under UK and US accounting practices.

We can now consider whether the fact that different countries accounting rules can generate significantly different profits or losses is a justification for the decision by many countries to adopt accounting standards issued by the IASB. Obviously, if various countries adopted the same accounting rules the differences between the results that would be reported in different countries would disappear. What do you think? Is removing international differences in accounting results sufficient justification for standardising international accounting? Certainly, this justification has been used by the IASB and regulators within the European Union and in other countries (such as Australia) to justify the use of IFRS.

The following section looks at some of the factors that have been used to justify efforts to standardise accounting internationally. However, it should be appreciated that there are many accounting researchers who argue that there are very good reasons for accounting rules to be different in different countries (underlying national differences in culture, legal systems, finance systems and so forth). The theoretical reasons given to explain why international differences are



expected to exist, and perhaps should still exist, can in turn be used as possible arguments against the international standardisation of accountingsomething that nevertheless has been actively pursued by the IASB. Towards the end of the chapter the various theoretical arguments that have been proposed in opposition to standardising international accounting are considered.

DOES IT REALLY MATTER IF DIFFERENT COUNTRIES USE DIFFERENT ACCOUNTING METHODS?

Before considering some of the perceived advantages associated with having a standardised system of accounting it is useful to first clarify some important terminology. Nobes and Parker (2004, p. 77) distinguish between harmonisation and standardisation of accounting. They define harmonisation as a process of increasing the compatibility of accounting practices by setting bounds to their degree of variation.

Standardisation of accounting is explained as a term that appears to imply the imposition of a more rigid and narrow set of rules [than harmonisation] (p. 77). Therefore, harmonisation seems to allow more flexibility than standardisation, but, as Nobes and Parker (2004) point out, the two terms have been used almost synonymously in international accounting. Nevertheless, what appears to be happening through the efforts of the IASB is a process of standardisation.

Nobes and Parker (2004) explain that the reasons for the recent efforts to increase international standardisation of financial accounting are similar to the reasons previously used to justify standardising financial accounting within an individual country. If investors are increasingly investing in companies from diverse countries, and these investors use financial reports as an important source of information on which to base their investment decisions, there is a view held by many people (but not all people) that standardisation is important to enable them to understand the financial reports, and to have a reasonable basis for comparing the financial accounting numbers of companies from different countries. Just as is the case domestically (see the arguments in Chapters 2 and 3 ), the understandability and interpretation of financial accounting information should be more effective if all accounts are compiled using the same set of underlying assumptions and accounting rules. If an international investor has to understand numerous different sets of accounting assumptions, rules and regulations, the task of making efficient and effective international investment decisions becomes considerably more complicated.

Further, if the long-term finance needs of a multinational company are too great for the providers of finance in a single country, the country may need to raise finance by listing its securities on the stock exchanges of more than one country. For reasons of domestic investor protection, the stock exchange regulators in a particular country might be reluctant to permit a companys shares to be traded on its exchange if that company does not produce financial reports that are readily comparable with the financial reports of all other companies whose shares are traded on that exchangethat is, reports that have been prepared using comparable assumptions (or rules). Also, where a company has to produce financial accounting reports in accordance with the accounting rules of each of the stock exchanges where its shares are traded, its accounting procedures would be considerably simplified if there was a single set of internationally recognised



accounting rules that were acceptable to all the stock exchanges where its shares are traded. It makes sense to use a single set of international accounting rules and regulations for all companies listed on any stock exchange.

A further reason for the international standardisation of accounting provided by Nobes and Parker (2004) is that it will facilitate greater flexibility and efficiency in the use of experienced staff by multinational firms of accountants and auditors. Without standardisation, the different accounting regulations in different countries act as a barrier to the transfer of staff between countries. However, whether such a factor provides real benefits to parties other than accounting firms and multinational companies is not clear.

Reflective of the perceived advantages of international standardisation, the Australian government was concerned for a number of years about the differences between Australian accounting standards and their international counterparts. In response to this concern, from 1995 Australia was involved in a process that would harmonise (but not initially standardise) Australian accounting standards with accounting standards being released by the International Accounting Standards Committee (the forerunner to the IASB). The harmonisation process required Australian accounting standards to be as compatible as possible with International Accounting Standards (IAS), but still allowed some divergence where the Australian treatment was considered to be more appropriate than the international counterpart. A document released in 1997 as part of the Australian governments Corporate Law Economic Reform Program (entitled Accounting Standards: Building International Opportunities for Australian Business ) discussed the rationale for the harmonisation efforts. It stated (p. 15):

There is no benefit in Australia having unique domestic accounting standards which,

because of their unfamiliarity, would not be understood by the rest of the world. Even

if those standards were considered to represent best practice, Australia would not

necessarily be able to attract capital because foreign corporations and investors would

not be able to make sensible assessments, especially on a comparative basis, of the value

of the Australian enterprises.1 The need for common accounting language to facilitate

investor evaluation of domestic and foreign corporations and to avoid potentially costly

accounting conventions by foreign listed companies are powerful arguments against the

retention of purely domestic financial reporting regimes.

This view was also consistent with the view provided in Policy Statement 6: International Harmonisation Policy (issued in April 1996 by the Australian Accounting Standards Board), which emphasised the need for international comparability of financial statements. As Policy Statement 6 noted in paragraph 1.2:

The globalisation of capital markets has resulted in an increased demand for high

quality, internationally comparable financial information. The Boards believe that they

should facilitate the provision of this information by pursuing a policy of international

harmonisation of Australian accounting standards. In this context the international

harmonisation of Australian accounting standards refers to a process which leads to those

1 The view that harmonisation might lead to Australia abandoning particular standards that might represent best practice

is very interesting. It implies that harmonisation might lead to systems of accounting that are less than ideal. Also, moving

away from best practice obviously has implications for qualitative characteristics such as representational faithfulness and

neutrality.



standards being made compatible, in all significant respects, with the standards of other

national and international standard-setters.

Ball (2006, p. 11) identifies a number of other advantages that are often advanced to support the case for the global standardisation of financial reporting. First, the adoption of IFRS might be done on the premise that the decision will lead to more accurate, comprehensive and timely financial statement information, relative to the information that would have been generated from the national accounting standards they replaced. To the extent that the resulting financial information would not be available from other sources, this should lead to more-informed valuations in the equity markets, and hence lower the risks faced by investors. Another perceived benefit of adopting IFRS relates to the increased financial information that would be available to small and large investors alike. Small investors might be less likely than larger investment professionals to be able to access or anticipate particular financial statement information from other sources. Improving financial reporting quality will allow smaller investors to compete more fully with professional (larger) investors, and hence will reduce the risk that smaller investors are trading with better-informed professional investors (such a risk is known as adverse selection).2

While there are many perceived advantages as well as those given above that could be listed in relation to standardising international accounting, it is obviously very difficult to quantify such benefits or advantages. For example, Australia has now adopted IFRS because of the perceptions that various economic benefits would follow, but there is no real evidence that the country is any better off economically than it would have been had the use of domestically developed accounting standards been maintained. As Ball (2006, p. 9) states, There is very little empirical research or theory that actually provides evidence of the advantages or disadvantages of uniform accounting rules nationally, or internationally.

Hence, it is not at all clear from an empirical perspective whether the decision made by the Financial Reporting Council (FRC) back in 2002 (that Australia would adopt IFRS in 2005) was the right one. Also, it is a matter of conjecture whether the benefits of adopting IFRS are shared by a majority of corporations within a country or whether the benefits are confined to large multinational corporations. If it is only the larger organisations that benefit, then perhaps we may need to question the equity associated with a process that requires all companies within a country to switch from domestic standards to IFRS. In this regard, Chand and White (2007) question the relevance of IFRS to a small, less-developed country such as Fiji, which has a relatively small capital market. They ask (p. 607):

Why would a developing country such as Fiji that does not have a well-established

capital market adopt the IFRSs? Questions concerning the effects of harmonized

accounting standards on domestic users and local communities have largely been left

unanswered.

Having identified some of the perceived advantages relating to standardisation (some perceived disadvantages will be discussed later in the chapter), it is useful now to consider the main organisation involved in standardising accounting on an international basisthe IASB.

2 Adverse selection is an economics term that represents a situation in a market where buyers cannot accurately gauge the

quality of the product they are buying, but where sellers have knowledge about the quality of the product they are selling.



A BRIEF OVERVIEW OF THE IASB AND ITS GLOBALISATION ACTIVITIES

The following pages describe recent initiatives that have been implemented to standardise financial accounting on a global basis. A brief description and history of the IASBthe organisation at the centre of the global standardisation of accountingis provided, along with a brief description of the standardisation efforts in the European Union and Australia.

In describing the history of the IASB, we perhaps need to go back over fifty years and make reference to a former president of the Institute of Chartered Accountants of England and Wales (ICAEW), Henry Benson. Benson was elected president of the ICAEW in 1966. He was the grandson of one of the four brothers who, in 1854, founded the accounting firm Coopers (which through various mergers and so forth has become part of PricewaterhouseCoopers). Veron (2007, p. 10) outlines Bensons influence on international accounting:

When elected (in 1966), Benson gave a short address to the Institutes Council, in which

he mentioned invitations he had received to visit his counterparts at the Canadian Institute

of Chartered Accountants and the American Institute of Certified Public Accountants. He

then added: I have had the feeling for a long time that our relations with those Institutes

were very friendly but somewhat remote and, with the Councils approval, I shall see

whether I can perhaps get them on to a more intimate basis.

These characteristically understated words marked the beginning of international

accounting standard-setting. Benson recalls the moment in his autobiography, published

in 1989 under the title Accounting for Life :

My private but unstated ambition at that stage was to make it, as I think it turned to

be, a turning point in the history of the accountancy profession. The United Kingdom,

America and Canada were the three most important countries at that time in the world

of accountancy, but there was very little dialogue between them. No attempt had been

made to make them closer together to advance the interests of the profession as a

whole or to get a common approach to accountancy and audit problems. The Canadian

institute was closer to the American institute than we were because of their geographi-

cal position but each of the three pursued its own policies without reference or collabo-

ration with the other two. I hoped to change this.

Following Bensons visits, the three bodies jointly established an Accountants

International Study Group in February 1967, which soon published papers on accounting

topics and gradually developed its own doctrinal framework. This then formed the

basis for the creation in 1973 of the International Accounting Standards Committee

(IASC) by an extended array of accounting bodies from Australia, France, Germany,

Japan, Mexico and the Netherlands, in addition to Canada, the United Kingdom (plus

Ireland associated with it), and the United States. The IASCs stated aim was to issue

international standards of reference which would guide the convergence of national

standards over time. Benson was duly elected the IASCs first chairman, and opened its

offices in London.



When the IASC was established in 1973 it had the stated objectives of:

formulating and publishing in the public interest accounting standards to be observed in

the presentation of financial statements and promoting their worldwide acceptance and

observance; and working generally for the improvement and harmonisation of regulations,

accounting standards and procedures relating to the presentation of financial statements

(IASC, 1998, p. 6).

Veron (2007) provides a description of the work performed by the IASC in the years following its formation in 1973 (p. 11):

In the ensuing years, the IASC prepared and published a growing number of documents

constituting an increasingly comprehensive body of rules, eventually completed in 1998

as a set of 39 so-called core International Accounting Standards (IAS). Simultaneously,

its governance evolved constantly to accommodate a growing and increasingly diverse

stakeholder base. Belgium, India, Israel, New Zealand, Pakistan and Zimbabwe joined

as associate members as early as 1974, and many other countries later followed suit. In

1981, the IASCs Consultative Group was formed with representatives of the World Bank,

United Nations, OECD, and various market participants. This group was joined in 1987 by

the International Organisation of Securities Commissions (IOSCO, which brings together

the SEC and its national counterparts around the world), and in 1990 by the European

Commission and FASB, the US standard-setting body, as these two organisations joined

IASC meetings as observers. In 2000, IOSCO recommended the use of IAS for cross-

border offerings or listings. By the same time, a number of developing countries had

taken the habit of using them as the reference for drafting their own national standards.

Some, like Lebanon and Zimbabwe, had even made their use a requirement for banks

or publicly listed companies. Several developed countries, such as Belgium, France,

Italy and Germany, had also adopted laws allowing large listed companies to publish

consolidated accounts using IAS or standards very similar to them, without having to

reconcile them with national standards. Following the Asian crisis of the late 1990s,

international accounting standards were also endorsed by the G7 Group of industrialised

countries and by the Financial Stability Forum, a group of financial regulators hosted by

the Bank for International Settlements in Basel.

In the late 1990s there were significant changes made to how the IASC conducted its operations. The IASC Foundation was created and this body, through a group of trustees, was established to supervise the operations of the newly created International Accounting Standards Board which began operations in 2001.3 The trustees of the IASC Foundation are responsible for the IASBs governance and oversight, including funding. However, the trustees are not to be involved in any technical matters relating to the standards. The responsibility for technical matters associated with accounting standards rests solely with the IASB.

The trustees of the IASC Foundation also appoint the members of the IASB, the International Financial Reporting Interpretations Committee (IFRIC) (which was established at the same time

3 The IASC Foundation has twenty-two trustees, of which six are appointed from North America, six from Europe, six from the

Asia/Oceania region, and four from any area, subject to establishing overall geographical balance.



as the IASB) and the Standards Advisory Council. Briefly, and according to the IASBs website, the IFRIC is the interpretative body of the IASC Foundation and its mandate is to review on a timely basis widespread accounting issues that have arisen within the context of current International Financial Reporting Standards (IFRS). The work of the IFRIC is aimed at reaching consensus on the appropriate accounting treatment for particular transactions and events (IFRIC interpretations) and providing authoritative guidance on those issues. The IFRIC comprises fourteen members who are drawn from a variety of countries and professional backgrounds. IFRIC interpretations are subject to IASB approval and have the same authority as a standard issued by the IASB. IFRIC interpretations may be released when reporting entities appear to be applying a particular reporting requirement in a variety of ways.

According to the IASBs website, the Standards Advisory Council (SAC) is a forum for the International Accounting Standards Board (IASB) to consult a wide range of representatives from user groups, preparers, financial analysts, academics, auditors, regulators and professional accounting bodies that are affected by and interested in the IASBs work. The SAC meets three times a year to advise the IASB on a range of issues, including the IASBs agenda and work program. It should be noted that in 2008 the IASC released a document entitled Review of the Constitution: Public Accountability and the Composition of the IASBProposals for Change, which, as part of a regular five-year review, proposed a number of changes to how the IASB will be organised and governed in the future. Regular changes to the functioning of the IASB can be expected in the future.

The IASB has fourteen members, twelve of whom are full time and two of whom are part time. According to the IASC Foundation constitution, IASB members must:

comprise a group of people representing, within that group, the best available combination

of technical skills and background experience of relevant international business and

market conditions in order to contribute to the development of high quality, global

accounting standards.

To approve a standard, a two-thirds majority of the fourteen members of the IASB needs to be in favour of the relevant requirements. It should be noted, however, that the IASB does not have the power to enforce the use of the standards in particular jurisdictions. As will be seen later in the chapter, the IASBs inability to enforce accounting standards has meant that there is a potential that different countries will enforce the requirements of various IFRS in a less than uniform manner.

The IASBs approach to accounting regulation essentially followed the Anglo-American model (which is explained later in the chapter), but initially many of the International Accounting Standards (IAS) it published permitted a wide range of accounting options. As such, they were not particularly effective at standardising accounting practices internationally, as different companies (or countries) could use substantially different accounting policies while still being able to state that they complied with the single set of IAS regulations. Therefore, compliance with IASs did not ensure or enhance the comparability or understandability of financial accountsa key purpose of accounting regulationand was not accepted by stock exchanges as a basis for the preparation of financial reports to support a listing on their exchange. 4

In the late 1980s the International Organization of Securities Commissions (IOSCO), a body representing government securities regulators worldwide, recognised that to encourage a

4 The IASBs Framework for the Preparation and Presentation of Financial Statements identifies comparability and understandability

as two primary qualitative characteristics of financial information (the other two being relevance and reliability).



greater number of multinational companies to raise funds from stock exchanges in more than one country it would be useful to have a single set of rigorous international accounting standards, compliance with which would be acceptable to any stock exchange regulated by an IOSCO member. This would reduce the costs for companies that were currently producing a different set of financial accounting results for each of the countries in which their shares were listed. However, to be acceptable for this purpose, the IAS would have to be much more effective at standardising accounting practice, and would therefore need to permit a much narrower set of accounting practices or options.

Accordingly, the IASC (which subsequently became the IASB) embarked on a comparability and improvements project to reduce the range of permitted options in IAS and thereby make them acceptable to IOSCO (Purvis, Gernon & Diamond, 1991). This project culminated in the publication of a revised core set of IAS by 1999, which was then accepted by IOSCO memberswith the important exception of the US Securities and Exchange Commission. After this endorsement by IOSCO, any company that drew up its accounts in accordance with the revised IAS could use this single set of IAS-based accounts to support its listing on any stock exchange regulated by an IOSCO member anywhere in the worldagain, with the exception of the United States.

After completion of the core of the comparability and improvements project, the IASC was replaced in 2001 by the IASB, which adopted all existing IAS and from 2001 has published new regulations in the form of International Financial Reporting Standards (IFRS).5 The IASB has a structure that is considerably more independent and rigorous than the former IASC (although there are still some concerns about the independence of the IASB, as discussed later in the chapter).

Despite the reforms to the IASB, IFRSs/IASs have still not been accepted by the US Securities and Exchange Commission as an adequate basis for the preparation by US companies of financial statements to support a listing on a US stock exchange. 6 However, the IASB and the US standard-setter (the Financial Accounting Standards Board) have been working to reduce the differences between the international standards and US accounting standards, in what is referred to as its convergence project (Nobes & Parker, 2004). We will return to a discussion of the project shortly.

A very significant participant in the process of standardising accounting practices internationally was the European Union (EU). 7 A key reason for the EU becoming involved in accounting regulation at the EU level (rather than leaving this to individual member states) is that a founding principle of the EU is freedom of movement within the EU of people, goods and capital. As discussed earlier, differing accounting principles in different countries have acted

5 When the IASC issued accounting standards they were referred to as International Accounting Standards (IASs). When the

IASB now issues accounting standards they are referred to as International Financial Reporting Standards (IFRSs). Many of the

IASC standards are still in existence, although a lot have been modified or updated by the IASB. These modified standards are

still referred to as IASs and retain the same title and number, rather than becoming an IFRS, such that at the international level

there are many IASs as well as numerous newly released IFRSs. A list of the currently applicable accounting standards can be

found on the IASBs website, www.iasb.org.

6 As noted elsewhere in the chapter, foreign listed companies are allowed to lodge their financial statements within the United

States in accordance with IFRS. This concession, however, is not extended to US companies.

7 The European Union was formerly known as the European Community (and prior to that it was known as the Common

Market). It is an intergovernmental organisation of twenty-seven Western European nations created by the Maastricht Treaty of

December 1993 with its own institutional structures and decisionmaking framework. It comprises Austria, Belgium, Bulgaria,

Cyprus, the Czech Republic, Estonia, Great Britain, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia,

Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Spain, Slovakia, Slovenia and Sweden.



as an impediment to investors seeking to understand and compare the financial statements of companies in different countries, and thereby acted as an impediment to them freely investing their capital in companies from different EU member states (an inhibition to the free movement of capital). The approach towards harmonisation of accounting in the EU has historically differed from the IASC/IASB approach. This should be of little surprise, given that most countries in the EU, by definition, follow a continental European system of accounting (to be discussed shortly) rather than the Anglo-American model of the IASC/IASB, so the EU approach to accounting harmonisation has historically been through legislation. This legislation has primarily been in the form of EU directives on company law, which have to be agreed on by the EU and

The European Commission has welcomed the Councils adoption, in a single reading, of the Regulation requiring listed companies, including banks and insurance companies, to prepare their consolidated accounts in accordance with International Accounting Standards (IAS) from 2005 onwards (see IP/01/200 and MEMO/01/40). The Regulation will help eliminate barriers to cross-border trading in securities by ensuring that company accounts throughout the EU are more reliable and transparent and that they can be more easily compared. This will in turn increase market efficiency and reduce the cost of raising capital for companies, ultimately improving competitiveness and helping boost growth. The IAS Regulation was proposed by the Commission in February 2001. It is a key measure in the Financial Services Action Plan, on which significant progress has been made in the last few weeks (see IP/02/796). Unlike Directives, EU Regulations have the force of law without requiring transposition into national legislation. Member States have the option of extending the requirements of this Regulation to unlisted companies and to the production of individual accounts. Although the Commission put

forward the IAS proposal long before the Enron affair, this is one of a series of measures which will help to protect the EU from such problems. Others include the Commissions recent Recommendation on Auditor Independence (see IP/02/723) and its proposal to amend the Accounting Directives (see IP/02/799).

Internal Market Commissioner Frits Bolkestein said: I am delighted that the IAS Regulation has been adopted in a single reading and am grateful for the positive attitude of both the Parliament and the Council. I believe IAS are the best standards that exist. Applying them throughout the EU will put an end to the current Tower of Babel in financial reporting. It will help protect us against malpractice. It will mean investors and other stakeholders will be able to compare like with like. It will help European firms to compete on equal terms when raising capital on world markets. What is more, during my recent visit to the US, I saw hopeful signs that the US will now work with us towards full convergence of our accounting standards.

To ensure appropriate political oversight, the Regulation establishes a new EU mechanism to assess IAS adopted by the

International Accounting Standards Board (IASB), the international accounting standard-setting organisation based in London, to give them legal endorsement for use within the EU. The Accounting Regulatory Committee chaired by the Commission and composed of representatives of the Member States, will decide whether to endorse IAS on the basis of Commission proposals.

In its task, the Commission will be helped by EFRAG, the European Financial Reporting Advisory Group; a group composed of accounting experts from the private sector in several Member States.

EFRAG provides technical expertise concerning the use of IAS within the European legal environment and participates actively in the international accounting standard setting process. The Commission invites all parties interested in financial reporting to contribute actively to the work of EFRAG. The Commission recently proposed amendments to the Accounting Directives which would complement the IAS Regulation by allowing Member States which do not apply IAS to all companies to move towards similar, high quality financial reporting (see IP/02/799).

Agreement on International Accounting Standards will help investors and boost business in EU

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then implemented in the domestic legislation of each EU member state. This is a very lengthy process, and during the 1990s the EU recognised that it was far too inflexible to respond to the requirements of a dynamic business environment where financial accounting practices need to adapt quickly to rapidly changing business practicesespecially for companies that rely on outsider forms of finance, as an increasing number of the largest companies in many continental European nations do. (Outsider forms of finance refers to finance received from parties, such as shareholders, that do not get involved in the management of the organisation.)

Following proposals made in 2000, the EU agreed in 2002 that from 1 January 2005 all companies whose shares were traded on any stock exchange in the EU would have to compile their consolidated accounts in accordance with IASs/IFRSs. 8 This was seen as ensuring that accounting rules were flexible enough to suit the needs of a dynamic business environment and that the financial accounts of EU-listed companies maintained international credibility. Further details regarding the EU adoption of IASs/IFRSs are shown in Accounting Headline 4.2, which is a press release issued by the European Commission when this route for accounting regulation was formally adopted in 2002.

Accounting Headline 4.2 demonstrates that the views being embraced in favour of the adoption of IAS/IFRS are based on beliefs about the information people need in making various decisions (which can be tied back to decision usefulness theoriessome of which are considered in Chapters 5 and 6 ), beliefs about how individuals and capital markets react to accounting information (which can be tied back to behavioural and capital markets researchthe topics of Chapters 10 and 11 ), and a view that the adoption of IAS/IFRS is in the public interest, rather than being driven by the private interests of particular constituents (public interest theories and private interest theories are discussed in Chapter 3 ). There also appears to be a view that new accounting methods will be embraced in a similar manner across different countries (which perhaps differs from some of the assertions in this chapterfor example, that religion, culture or taxation systems influence the usefulness of various alternative accounting approaches).

Despite the European Commissions enthusiasm for the adoption of IAS/IFRS, there were concerns that, for both legal and political reasons, the EU could not be seen to endorse in advance regulations that could be developed at any time in the future by an international body not under control of the EU (Nobes & Parker, 2004). That is, the EU was unwilling to give a blanket approval covering all future IFRSs (that would apply to many EU companies) without considering the details of those IFRSs. Therefore, as can be seen in Accounting Headline 4.2, the EU established a mechanism whereby each IAS/IFRS would have to be endorsed separately by the EU before becoming mandatory for listed companies in the EU. This endorsement process involves an eleven-member committee entitled the European Financial Reporting Advisory Group (EFRAG), whose members are drawn from the preparers and users of financial statements, and who comment on each IAS/IFRS to a new EU Accounting Regulatory Committee (ARC). 9 The ARC has a member from each EU state, and the members vote on whether to recommend approval of the IAS/IFRS to the EU Commission, a two-thirds majority of the twenty-seven members being required to recommend approval. This mechanism was used in 2004 to block recommendation of full EU endorsement of IAS 39 (on financial instruments) by governments

8 For a small number of companies, the deadline was 2007 instead of 2005.

9 For details of EFRAG and the SAC, see the following websites respectively: www.efrag.org and http://ec.europa.eu/internal_

market/accounting/committees_en.htm.



who argued that aspects of IAS 39 were unrealistic and would have potentially significant negative economic consequences on banks in their nations. It is interesting to speculate whether this action by the EU to modify an accounting standard issued by the IASB (and thereby move away from full standardisation) will undermine the efforts being undertaken by the IASB to encourage other countries, most notably the United States, to adopt IFRS. The benefits of international standardisation are potentially reduced when some countriessuch as the member countries of the EUdecide to make alterations to the standards issued by the IASB.

The efforts undertaken within Australia to harmonise or standardise Australian accounting practice with international practice are now considered. As indicated earlier, from the mid-1990s Australia adopted a policy of harmonisation. This process led to revised Australian accounting standards which, although not the same, were very comparable with those issued by the IASC. Once these revisions were almost complete and many revised accounting standards had been issued, a decision was made in 2002 by the Financial Reporting Council (FRC) that Australia would adopt accounting standards being issued by the IASB and no divergence was to be acceptable (that is, there was a shift from harmonisation to standardisation). 10 This led to yet another set of accounting standards being released, for application in 2005. This was a very frustrating time for Australian accountants. Just as they were getting used to a new set of accounting standards that had been released to harmonise Australian accounting standards with IASs, the revised (harmonised) standards were dumped in favour of a standardisation process that involved the adoption of IASs. The Bulletin released by the FRC outlining its direction on the adoption of international accounting standards is reproduced in Accounting Headline 4.3. As can be seen, there is much similarity between the arguments in favour of standardisation provided in Accounting Headline 4.3 and the supporting arguments expressed in Accounting Headline 4.2. However, as has already been mentioned, there have been no known attempts to quantify the costs and benefits of these standardising activities.

THE UNITED STATES ROLE IN THE INTERNATIONAL STANDARDISATION OF FINANCIAL ACCOUNTING

The major event that triggered the adoption of IFRS by more than 100 countries was the decision taken by the European Union to adopt IFRS as the accounting standards to be used for preparing the consolidated financial statements of publicly listed companies from 2005. 11 In Australia, the Financial Reporting Council (FRC) followed the lead of the European Union and in 2002 decided that Australia would adopt IFRS from 2005. Prior to the adoption of IFRS, these countries used accounting standards that were typically developed on a domestic basis.

10 The FRC has an oversight function in regards to the Australian Accounting Standards Board (and the Australian Auditing

Standards Board) and appoints members of the AASB (other than the chairperson). There are nineteen members on the FRC

inclusive of the chairperson. See www.frc.gov.au for more details about the FRC.

11 The proposal to adopt IFRS was confirmed in a regulation of the European Parliament and European Council released on

19 July 2002. IFRS and IFRIC interpretations, once adopted by the IASB, need to be specifically acknowledged (and translated

into various languages) by the European Commission to become part of EU law. National standards are still commonly used in

European countries for individual (non-consolidated) financial statements.



The Chairman of the Financial Reporting Council (FRC), Mr Jeffrey Lucy, AM, today announced that the FRC has formalised its support for the adoption by Australia of international accounting standards by 1 January 2005.

Subject to the Governments support at the appropriate time for any necessary amendments of the Corporations Act, this will mean that, from 1 January 2005, the accounting standards applicable to reporting entities under the Act will be the standards issued by the International Accounting Standards Board (IASB). After that date, audit reports will refer to companies compliance with IASB standards.

The FRC considered the issue at its meeting on 28 June and formally endorsed the 2005 objective, in line with statements made recently by the Parliamentary Secretary to the Treasurer, Senator the Hon. Ian Campbell. Mr Lucy paid tribute to the Governments strong leadership over the last five years in pressing for the international convergence of accounting standards. This objective is reflected in the Governments 1997 Corporate Law Economic Reform Program initiative (CLERP 1) and amendments made in 1999 to the Australian Securities and Investments Commission Act 2001.

The FRC fully supports the Governments view that a single set of high-quality accounting standards which are accepted in major international capital markets will greatly facilitate cross-border comparisons by investors, reduce the cost of capital, and assist Australian companies wishing to raise capital or list overseas.

Mr Lucy said he understood that the 1 January 2005 timing is somewhat later than the

Government would have liked. However, it is determined by the decision of the European Union to require EU listed companies to prepare their consolidated accounts in accordance with IASB standards from that date, in support of the EU single market objective. Australia certainly cannot afford to lag [behind] Europe in this regard, Mr Lucy said. He also expressed his support for efforts to encourage the United States to further converge its standards with IASB standards with a view to eventual adoption.

Mr Lucy was pleased to note that the Chairman of the IASB, Sir David Tweedie, had issued a statement in London welcoming the FRCs decision. Sir David said that the FRCs announcement demonstrates growing support for the development and implementation of a single set of high-quality global accounting standards by 2005.

This vote of confidence is a reflection of the leadership role that Australia continues to play in standard-setting, and will increase momentum for convergence towards high-quality international standards. The input and active participation of interested parties in Australia and the Australian Accounting Standards Board (AASB), under the leadership of Keith Alfredson, are and will remain a vital element in ensuring the IASBs success. It is through national standard-setters, such as the AASB, and the members of our various committees that we are able jointly to develop high-quality solutions to accounting issues, leverage resources to research topics not yet on the international agenda so as to expedite conclusions, reach interested parties throughout the world and better understand differences in operating

environments, thus fulfilling our role as a global standard-setter.

The full statement is available on the IASBs website www.iasb.org.uk.

While there will be a need for business and the accounting profession to adapt to significant changes in some standards, and to some complex new standards, the AASB has been harmonising its standards with those of the IASB for some years, resulting in substantial synergies between the two.

Nevertheless, Mr Lucy urged the accounting bodies to prepare for the changeover through their programs of professional development and their influence on accounting education. He also urged the business community to participate fully in commenting on exposure drafts of IASB standards issued in Australia in the period ahead.

Mr Lucy noted that implementation issues would also need to be considered by the FRC (to the extent they did not involve the content of particular standards) and the AASB between now and 2005. These could relate, for example, to the timing of introduction of particular IASB standards in Australia before 1 January 2005 (which would be AASB standards until that date), as well as to issues of interpretation.

The FRC and AASB will be doing everything they can to keep constituents informed about these issues and to communicate an overall strategy for adoption, Mr Lucy said.

Mr Lucy also confirmed that Australia would be making a substantial financial contribution, through the FRC, to the International Accounting Standards Committee (IASC) Foundation in 200203. This

Adoption of International Accounting Standards by 2005

Accounting Headline 4.3 Australias adoption of IASs/IFRSs

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One notable exception to the global adoption of IFRS is the United States. But before considering the US position on global standardisation, it is useful to briefly consider the two main bodies responsible for accounting regulation within the United States, the Securities and Exchange Commission and the Financial Accounting Standards Board. In relation to their history, following the US stock-market crash of 1929 the newly established US securities legislation of 1933 and 1934 led to the creation of the Securities and Exchange Commission (SEC). The SEC was given the authority to develop accounting regulation, but it decided to rely on the expertise of the US accounting profession to develop accounting standards. Over the following decades the US accounting profession developed various documents that became known as generally accepted accounting principles (GAAP). In 1973 the SEC entrusted the task of developing accounting standards to the newly formed Financial Accounting Standards Board (FASB). 12 The FASB is a private-sector body that was established to act in the public interest. While the FASB was established as an independent body, the SEC has the power to override the accounting standards issued by the FASB should it see fit to do so. 13

In the United States, reliance is still placed on accounting standards issued by the FASB, rather than on the standards issued by the IASB. That is, unlike many other countries, the United States has not yet adopted IFRS. Given that the United States represents the worlds major capital market, its non-involvement represents a significant limitation in the global acceptance

contribution will be sourced from funds available to the FRC for the standard-setting process contributed by the Commonwealth, State and Territory governments, the three accounting bodies, the Australian Stock Exchange, and from the Financial Industry Development Account (as announced by Senator Campbell on 12 June).

Among the FRCs functions are to further the development of a single set of accounting standards for world-wide use and to promote the adoption of international best practice accounting standards in Australia if doing so would be in the best interests of both the private and public sectors in the Australian economy.

The IASB, which is based in London, is committed to developing, in the public interest, a single set

of high-quality, global accounting standards that require transparent and comparable information in financial statements. In pursuit of this objective, the IASB cooperates with national standard-setters, including the AASB, to achieve convergence in accounting standards around the world.

The AASB has been harmonising its standards with IASB standards for a number of years and is now working in close partnership with the IASB as a liaison standard-setter, aligning its work program with that of the IASB and standing ready to allocate resources to lead or support projects on the IASB agenda. Recently, the AASB issued to its Australian constituents invitations to comment on a number of exposure drafts of IASB standards.

Australians are actively involved in the work of the IASB. Mr Ken Spencer is a member of the oversight body for the IASB, the IASC Foundation Trustees (and Chairman of the Foundations Nominating Committee). Mr Warren McGregor is a member of the IASB, also designated the Liaison Member for Australia and New Zealand. Mr Kevin Stevenson, a former director of the Australian Accounting Research Foundation, is the IASBs Director of Technical Activities. Australians are also on the IASBs Standards Advisory Council (Mr Peter Day and Mr Ian Mackintosh) and its Interpretations Committee (Mr Wayne Lonergan).

Accounting Headline 4.3 (continued)

12 Prior to this time, the Accounting Principles Board (a committee of the American Institute of Certified Practicing Accountants)

was responsible for developing US GAAP.

13 See the following websites for further information about the SEC and FASB respectively: www.sec.gov and www.fasb.org.



of IFRS. The United States was very strong in its resolve not to adopt IFRS, believing that its rules-based standards were superior to the more principles-based standards of the IASB. 14 However, this resolve appeared to diminish around 20012002 with the various accounting scandals involving organisations such as Enron. 15 As Veron (2007, p. 23) states:

The context was profoundly modified by the Enron bankruptcy in December 2001 and

other accounting scandals that erupted in 2002, following the bursting of the late-1990s

stock market bubble. Before this wave of controversy, specific US GAAP standards had

been occasionally criticised but overall it was widely considered, in the US and elsewhere,

that US GAAP as a whole were the best available set of accounting standards But

Enrons collapse shattered the perception of high quality. It exposed the shortcomings

of some detailed US GAAP rules, most notably those on consolidation which gave Enron

enough leeway to hide its now famous special-purpose entities (with their funny names

such as Chewco, Raptor, Jedi, or Big Doe) off its balance sheet, packing them with real

debts backed by flimsy assets In February 2002, a Senate Committee investigating

the Enron debacle heard the testimony of IASB Chairman David Tweedie who explicitly

criticised the rules-based approach which is prevalent in US GAAP, contrasting it with the

more principles-based stance adopted by the IASB. Shortly thereafter, the SarbanesOxley

Act specifically mandated the SEC to study how a more principles-based system (such as

IFRS) could be introduced in the United States.

With the perceived limitations of some US accounting requirements in mind, the FASB and the IASB entered a joint agreement in 2002 to converge and improve the standards of both the IASB and the FASB. The ultimate consequence of the Convergence Project would be that the United States adopted IFRS. As Veron (2007, p. 24) states:

Since the early 2000s the FASB has been working with the IASB to narrow the differences

between US GAAP and IFRSa process they call convergence, but which in fact is very

different from the unilateral convergence of, say, Australian or South Korean accounting

standards towards IFRS. The premise, enshrined in the so-called Norwalk Agreement

of September 2002 16 and renewed by a FASBIASB Memorandum of Understanding

in February 2006, is that both the FASB and the IASB would need to move some way

14 In basic terms, rules-based accounting standards tend to be relatively lengthy and provide explicit guidelines on how to

account for specific attributes of different transactions and events. By contrast, principles-based accounting standards tend to

be less detailed and more concise. Rather than providing detailed rules for particular transactions and events, in principles-

based standards reference is made to general principles that should be followed. These principles might be incorporated within a

conceptual framework of accounting. Principles-based accounting standards require the exercise of greater levels of professional

judgement relative to rules-based accounting standards. As an example of the difference, a rules-based accounting standard

might say that a particular type of intangible asset should be amortised over twenty years, whereas a principles-based standard

might require that the intangible assets be amortised to the extent that the economic value of the asset has declined since the

beginning of the accounting period. Accounting standards released by the FASB are generally considered to be more rules-based

that accounting standards issued by the IASB (which are considered to be principles-based).

15 Enron was an energy company based in Texas. Prior to its bankruptcy in late 2001, it employed approximately 22 000

people and was one of the worlds leading electricity, natural gas, pulp and paper, and communications companies, with reported

revenues of $111 billion in 2000. At the end of 2001, it became apparent that the companys financial position was generated

through extensive accounting fraud. Enron represented one of the biggest and most complex bankruptcy cases in US history.

16 It was signed in FASBs home city of Norwalk, Connecticut, hence becoming known as the Norwalk Agreement.



towards each other. In this process, on some issues FASB adopts standards identical or

near identical to existing IFRS (e.g. for stock option expensing); on other issues the IASB

adopts standards identical or near identical to existing US GAAP rules, as with the IFRS 8

standard on operating segments; and on yet other issues the two bodies jointly develop

entirely new projects.

Although there appears to be a long-term aim that ultimately there will be one set of standards used internationally, including within the United States, the timing of when (and some people still question if) the United States will adopt IFRS is far from certain. Obviously, for the IASB to achieve its aim of developing a single set of high-quality, understandable and international financial reporting standards (IFRSs) for general purpose financial statements (as stated on the IASB website), it will need to encourage the United States to adopt its standards. However, at this point the US adoption of IFRS for use by US companies appears to be a number of years away. The adoption of IFRS will be contingent ultimately on whether the SEC and the FASB are satisfied with the results generated by the IASB/FASB Convergence Project. Nevertheless, from late 2007 the SEC adopted rules that permit foreign private issuers (but not US domestic companies) to lodge, with the SEC, their financial statements prepared in accordance with IFRS without the need to provide a reconciliation to generally accepted accounting principles (GAAP) as used in the United States. That is, foreign companies that are listed across a number of stock exchanges internationally, including within the United States, can now lodge their reports in the United States even though the reports have not been prepared in accordance with US accounting standards and do not provide a reconciliation to US GAAP. The ruling of the SEC requires that foreign private issuers that take advantage of this option must state explicitly and unreservedly in the notes to their financial statements that such financial statements are in compliance with IFRS as issued by the IASB (without modifications) and they must also provide an unqualified auditors report that explicitly provides an opinion that the financial statements have been compiled in accordance with IFRS as issued by the IASB. In explaining the basis for its decision to provide this concession to foreign companies, the SEC stated (2007, p. 16):

As discussed in the Proposing Release, continued progress towards convergence between

U.S. GAAP and IFRS as issued by the IASB is another consideration in our acceptance of

IFRS financial statements without a U.S. GAAP reconciliation. We believe that investors

can understand and work with both IFRS and U.S. GAAP and that these two systems can

co-exist in the U.S. public capital markets in the manner described in this rule making,

even though convergence between IFRS and U.S. GAAP is not complete and there are

differences between reported results under IFRS and U.S. GAAP.

Hence, effectively there are two types of financial statements being lodged within the United States (as is the case in many other countries). Foreign companies can lodge their reports within the United States in accordance with IFRS, whereas domestic US companies must lodge their reports in accordance with US GAAP. It is interesting that the SEC states that these two systems can co-exist. If different systems can co-exist, does that question the need for all countries to adopt IFRS? What do you, the reader, think? Does the US position of supporting dual reporting systems undermine the view of the FRC in Australia, which argued back in 2002 that if Australia retained its own accounting standards (which were fundamentally similar to IFRS) it would be damaging to Australian capital markets?



29 October 2002

FASB and IASB agree to work together toward convergence of global accounting standards.

LONDON, United Kingdom The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have issued a memorandum of understanding marking a significant step toward formalizing their commitment to the convergence of U.S. and international accounting standards. The FASB and IASB presented the agreement to the chairs of leading national standard setters at a two-day meeting being held in London. The agreement between the FASB and IASB represents their latest commitment, following their September joint meeting, to adopt compatible, high-quality solutions to existing and future accounting issues.

The agreement follows the decisions recently reached by both Boards to add a joint short-term

convergence project to their active agendas. The joint short-term convergence project will require both Boards to use their best efforts to propose changes to U.S. and international accounting standards that reflect common solutions to certain specifically identified differences. Working within each Boards due process procedures, the FASB and IASB expect to issue an Exposure Draft to address some, and perhaps all, of those identified differences by the latter part of 2003. The elimination of those differences, together with the commitment by both Boards to eliminate or reduce remaining differences through continued progress on joint projects and coordination of future work programs, will improve comparability of financial statements across national jurisdictions.

Robert H. Herz, Chairman of the FASB, commented, The FASB is committed to working toward the goal of producing high-quality

reporting standards worldwide to support healthy global capital markets. By working with the IASB on the short-term convergence projectas well as on longer-term issuesthe chances of success are greatly improved. Our agreement provides a clear path forward for working together to achieve our common goal.

Hailing the agreement, Sir David Tweedie, Chairman of the IASB, remarked, This underscores another significant step in our partnership with national standard setters to reach a truly global set of accounting standards. While we recognize that there are many challenges ahead, I am extremely confident now that we can eliminate major differences between national and international standards, and by drawing on the best of U.S. GAAP, IFRSs and other national standards, the worlds capital markets will have a set of global accounting standards that investors can trust.

JOINT NEWS RELEASE FROM THE FASB AND IASB

The following two press releases provide additional information about the decision taken in 2002 for the IASB and FASB to work towards converging their respective accounting standards, and the decision taken in late 2007 by the SEC to remove the requirement for foreign companies to provide a reconciliation to US GAAP.

As noted above, there is resistance in the United States in relation to the adoption of IFRS by US-based organisations. Although there is a view that IFRS will eventually be adopted, the adoption may be some years away. This is best summed up by a submission made by the US Financial Accounting Foundation (FAF) 17 in 2007 to the SEC in response to a concept release issued by the SEC which called for opinions about the United States ultimately adopting IFRS:

The Concept Release asks, could comentators foresee a scenario under which it would

be appropriate for the Securities and Exchange Commission to call for all remaining U.S.

17 The Financial Accounting Foundation was established in 1972 and is the independent, private-sector organisation with

responsibility for the oversight, administration and finances of the FASB. It also selects the members of the FASB.



[non governmental] issuers to move their financial reporting to IFRS?. We believe the

answer to that question is yes. In our view, now is the time to develop a plan for moving

all U.S. public companies to an improved version of IFRS. We are not recommending

immediate adoption of existing IFRS because various elements of the U.S. financial

reporting system need to change before moving to IFRS, and those changes will take

several years to complete. In addition, further improvements to IFRS are needed before

U.S. public companies transition to IFRS (FAF, 2007, p. 5).

Hence, while the FAF considers that the ultimate adoption of IFRS within the United States is a sound idea, the adoption should not in its opinion happen for a number of years, to give enough time for IFRS to be further improved and for the US reporting systems to be properly prepared for the transition. The FAF made the following suggestion (2007, p. 7):

We propose transitioning from U.S. GAAP to IFRS via a two-pronged improve-and-adopt

process.

The first part of the process involves working with the IASB to improve areas where

neither U.S. GAAP nor IFRS is considered to be of sufficiently high quality. The 2006

Memorandum of Understanding identifies a number of those areas (e.g. leases, financial

statement presentation, revenue recognition), but other areas such as completing key

15 November 2007

The IASB welcomes SEC vote to remove reconciliation requirement .

The International Accounting Standards Board (IASB) welcomed the decision taken today by the US Securities and Exchange Commission (SEC) to remove the requirement for non-US companies reporting under International Financial Reporting Standards (IFRSs) as issued by the IASB to reconcile their financial statements to US generally accepted accounting principles (GAAP).

The development of a single, high-quality language for financial reporting that is accepted throughout the worlds capital markets has been the primary goal of the IASB since its inception in 2001 and todays decision is an

important step towards achieving that objective.

The adoption of IFRSs by the European Union with effect from 2005, and similar decisions by Australia, Hong Kong and South Africa, led the way in a process that has resulted in over 100 countries now requiring or permitting the use of IFRSs. The SECs decision follows those announced by other leading countries in 2007 to establish time lines for the acceptance of IFRSs in their domestic markets or accelerate convergence of national standards with IFRSs. Among those are Canada, India and Korea, all of which will adopt IFRSs by 2011. In Brazil listed companies will have to comply with IFRSs from 2010, and convergence between Japanese GAAP and IFRSs is expected by 2011. At the beginning of this year

China introduced a completely new set of accounting standards that are intended to produce the same results as IFRSs.

Commenting on the SECs decision Sir David Tweedie, Chairman of the IASB, said:

We are delighted that the US Securities and Exchange Commission has decided to allow non-US issuers to file under IFRSs without the need for reconciliation to US GAAP. The IASB remains strongly committed to its joint work with the US Financial Accounting Standards Board set out in the Memorandum of Understanding in February 2006 in order to achieve our goal of providing the worlds integrating capital markets with a common language for financial reporting.

IASB PRESS RELEASE



aspects of the conceptual framework also should be considered. The blueprint would

establish a timetable for producing a new common high-quality standard in each of the

improvement areas.

The second part of the process involves the FASB adopting applicable IFRS in all

other areas that are not the subject of the improvements program. This will move U.S.

public companies to most of the IASBs standards in an orderly fashion while allowing

the IASB and FASB to focus their resources on providing significant improvements in

financial reporting.

We support the improve-and-adopt approach for several reasons.

Both existing U.S. GAAP and IFRS require improvement in several major areas.

A cooperative effort between the IASB and the FASB to develop improved standards in

those areas will benefit financial statement users both here and abroad.

This approach results in the adoption of IFRS standards over several years, which

avoids or minimizes the capacity constraints that might develop in an abrupt mandated

switch to IFRS.

This approach allows other infrastructure elements to improve and converge while

IFRS are improved or adopted.

The improve-and-adopt approach avoids the added cost and complexity to U.S. capital

market participants of dealing with two accounting systems.

Hence, if the SEC takes note of the concerns of the FAF, a deal of work will need to be undertaken to improve the IFRS before the United States will be prepared to adopt them. It is interesting that many other countries (including Australia) were prepared to adopt the IFRS before many of the current improvement projects were completed.

The FAF also raised concerns about the perceived independence of the IASB, and it wanted certain changes to be made to the governance policies of the IASB before the United States would be willing to adopt IFRS (which emanate from the IASB). Of particular concern was the uncertain nature of the funding being received by the IASB and the fact that a great deal of the funding comes from the Big 4 accounting firms who each donate $1 million to the IASBorganisations that are directly affected by the operations of the IASB. The FAF (2007, p. 8) called for mechanisms to be established to provide the IASB with sufficient and stable funding and staffing levels, thereby ensuring its sustainability as an independent setter of high-quality accounting standards. The FAF further stated (2007, p. 8) that it did not support moving U.S. public companies to IFRS until mechanisms to adequately fund the IASBs activities over the long term are developed.

The FAF was also concerned that in many jurisdictions amendments are being made to IFRS at a local level before the standards are used in that particular country. This has the obvious implications of undermining the consistency of accounting being undertaken across countries that otherwise state they have adopted IFRS. As the FAF (2007, p. 3) states:

Agreements are needed to eliminate the separate review and endorsement processes that

various jurisdictions apply to each IFRS after it is issued by the IASB. These after-the-fact

jurisdictional processes are inconsistent with the objective of a single set of high-quality

international accounting standards, as evidenced by the local variants of IFRS that have

developed in some jurisdictions.



In 2008 the IASC Foundation proposed a number of changes to the IASBs organisational and governance practices. 18 Whether such changes will be sufficient to satisfy the concerns of various stakeholders such as the FAF will become clearer in future years.

DOES THE INTERNATIONAL STANDARDISATION OF ACCOUNTING STANDARDS NECESSARILY LEAD TO THE INTERNATIONAL STANDARDISATION OF ACCOUNTING PRACTICE?

The standardisation of accounting standards by a multitude of different countries, with different enforcement mechanisms, different forms of capital markets, different cultures and so forth, might be considered to lead to the standardisation of accounting practice. Certainly this seems to be a central assumption of the IASB. But is this a realistic belief? Will international standardisation of accounting standards lead to international standardisation of accounting practice? The discussion that follows will show that there are a number of reasons why the standardisation of accounting standards will not necessarily lead to standardisation in practice. Hence, consistent with Nobes (2006), the study of international differences in accounting (and the reasons and motivations for them) will remain an important area of research despite the ongoing standardisation efforts of the IASB. 19 It will be seen that there are various reasons why international differences will survive beyond the introduction of IFRS.

DIFFERENCES IN TAXATION SYSTEMS Nobes (2006, p. 235) uses a comparison of differences in taxation systems between Germany and the United Kingdom to identify why financial accounting practices in the two countries might be systematically different despite both countries adopting IFRS. As he states:

In Germany, companies are required to continue to prepare unconsolidated financial

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DeeganFAT 3e Chapter 04