Standard Setting Seminar

Standard Setting Seminar

Peter BerridgeMike Kimeda

Roy ParkManish PathakAlison Sherk

Seminar Outline• Importance and Type of Standards• Historical Context and Challenges• Accounting Organizations & Standard Setting

Process: Canada US International

• Enforcement and Oversight SOX and Bill 198

• Rules vs. Principle based Accounting• Harmonization• Class Discussion

Accounting Standards

• Common set of standards and procedures specifying how transactions & other events should be treated: Generally Accepted Accounting Principles (GAAP) Developed by an authoritative accounting body, or

become accepted over time as appropriate because of its universal application

• Needed: To make informed decision For comparability of financial statements across

companies and time

Types of Accounting Standards

• Explanatory How financial statements were developed

• Measurement How numbers were calculated

eg. asset valuation, income assessment, depreciation method, inventory value etc.

• Disclosure What information should be disclose for reader’s own

judgement

• Presentation How information should be displayed on financial

statements

Stakeholders

• Various with coinciding and conflicting needs:InvestorsCreditorsManagers/CorporationsIndustry AssociationsGovernment

Historical Development

Accounting Theory

Bookkeeping to financial reporting

Maturation of financial reporting

1930’s - Historical cost-matching model

Information value perspective

Standard Setting

1930’s – Rule making bodies emerge

National organizations mature

1970’s – International standards proposed

Drive toward harmonization

Factors Influencing Development

• Why regions differed in speed of development… Political environment Maturity of economy Speed of adapting GAAP or other principles Monitoring & enforcement capabilities

Regulatory strength Corruption

Recent business issues Ownership structure

Development Issues

• Factors effecting standards development…Fragmentation of international effortDifferent approaches

Rules based Standards based Committee approach

Uniformity a global issue

More Development Issues

• Factors affecting standards development…Impact of technologyCapital markets – sophistication, speed,

complexityChanging economies – resource to

knowledgeAccountability improvements

Today’s Challenges

• Globalization of companies and capital markets• Impact of technology

Greater access to information Potential for real-time or continuous reporting

• Changing nature of economy Shift from manufacturing & resource extraction to “knowledge

based economy” Need relevant model for measuring & reporting assets not

currently recognized on BS

• Increased requirement for accountability More sophisticated investors Shift to holistic reporting: strategic vision, non-

financial metrics, etc.

Accounting Organization and Standard Setting Process

Canada

Accounting Organizations in Canada

CICA Canadian Institute of Chartered Accountants

AcSOC Accounting Standards Oversight Council

PSAB Public Sector Accounting Board

AcSB Accounting Standards Board

EIC Emerging Issues Committee

UAC User Advisory Board

Accounting Structure in Canada

CICAServes interests of society

& CA profession

AcSOCServes public interest; provides

strategic direction and priorities

AcSBSets GAAP

PSABEstablishes accounting

standards for public sector

EICClarifies wording & applicability

UACProvides user perspective

on financial statements

AcSB

• Authority to develop and establish standards

• Objectives:Serve public interestEncourage input from all stakeholdersBring objectivity in the consideration of issuesRespond in a timely manner

Agenda

1

Topicsidentified

Proposal

2

Vote ondecision to

proceedwith

proposal

Exposure Draft

34

Released forpublic

comment:CA Magazine

AcSB Website

Standard Setting Process

Re-ExposureDraft

5

Repeat steps3 and 4

Feedback

4

Considers comments& meets

with interested

parties

Final Approval& Issuance

6

Published inCICA

Handbook,updated quarterly

Continued…

Monitoring & Enforcement

• Canada Business Corporations Act & Securities Legislation:Companies required to prepare financial

statements in according with GAAP

Monitoring & Enforcement

Accountants

SecuritiesCommission

OverseenProvincially;

power to de-list

companies

Bill 198(Similar to SOX)

Auditors

Licensed provincially


United States

Accounting Organizations in US

FASB Financial Accounting Standards Board

FAF Financial Accounting Foundation

FASAC Financial Accounting Standards Advisory Council

GASB Government Accounting Standards Board

AICPA American Institute of Certified Public Accountants

EITF Emerging Issues Task Force

SEC Securities Exchange Commission

Organization Organizations

FinancialAccountingFoundation

FASB

FinancialAccounting StandardsAdvisoryCouncil

GASB

GovernmentalAccounting StandardsAdvisoryCouncil

Staff andTask Force

FASB• Develops broad accounting concepts and

financial reporting standards GAAP

• Although SEC has the authority to be the national standard setter, their policy states that FASB will officially develop these standards

• Focus is on relevance, reliability, comparability and consistency

Decisions – How Topics are Added

Factors to be considered

• Pervasiveness of the issue—troublesome issues • Alternative solutions - solutions to improve financial

reporting• Technical feasibility - developing a technically sound

solution• Practical consequences - a generally accepted solution• Convergence possibilities - opportunity to amalgamate

standards• Cooperative opportunities - support for other standard

setters• Resources – adequate resources from FASB or others to

complete the project

Due Process for FASB

• Receives request/recommendations for new projects• Board meetings to discuss requests/recommendations• Take vote to decide whether to accept – majority wins• Deliberate issue at Public Board meeting• Board issues exposure draft• Public roundtable on review of Exposure Draft• Board evaluates public comments, and re-deliberates at

public Board meeting• Statement of Interpretations issued if majority votes to

approve standard


International

International Organization Structure

IASC

IFRICResolves conflicting

interpretations

SACProvides advice to IASB

IASBSets accounting standards

International Accounting Organizations

IASC International Accounting Standards Committee

IFRIC International Financial Reporting Interpretations Committee

IASB International Accounting Standards Board

SAC Standards Advisory Council

IASB

• Members appointed by International Accounting Standards Council (IASC)

• Solely responsible for setting international accounting standards

• Meetings with the SAC, IFRIC, and IASB working groups to work on agenda items

• Use a “comply or explain” approach to standard setting

IASB 6 Step Process

1. Set the Agenda2. Project Planning3. Development and Publication of Discussion

Paper4. Development and Publication of Exposure

Draft5. Development and Publication of an

International Financial Reporting Standard (IFRS)

6. Procedures after an IFRS is issued

Enforcement of US and International Standards

• National commissions used to ensure that publicly available financial reporting information is compliant

• National standard setters are involved in the standard setting process

• Countries responsibility to ensure that companies are in compliance

Principle vs. Rule Based

Rules-Based Accounting

• Proliferation of rules

• Many complaints that the rules are too detailed and too complex

• Too difficult to stay current for both preparers and auditors

• ‘Check-box’ mentality

• Too many exceptions

Principle-Based Accounting

• Requires professional judgment

• Exercise in good communication; more than just compliance

• Reduction of form-over-substance accounting

Fewer exceptions

Fewer conflicting rules

• Simpler standards

• IASB and other major standards already using the principles

International Accounting Standards (IAS)

• Advantages Help firms compete on equal terms to raise capital on

the world markets

Financial statements that better represents the state of a company Only in certain cases

Decrease in litigation for the US

Increase in comparability and consistency

Reduces the reporting costs for multi-national firms

International Accounting Standards (IAS)

• Disadvantages Increased litigation

Reduction in comparability and consistency

Different good-faith judgments

Different interpretations

How many disclosures will there be?

Harder to enforce a principles based systems because of the different interpretations

Can take more time (already long)

National differences with the International Community

Challenges of IAS

• National taxation

IAS primarily serves the world markets which may have different priorities than the taxation authorities

• Who is going to police the IAS?

• Principle-based standards leading to rules-based in order to increase consistency and comparability

• US must be a part of this initiative for it to be a true IAS (largest capital market)

• SEC will not endorse IAS if not as rigorous as US GAAP

SEC Staff Study – July 25, 2003• Recommends accounting standards should be principle-

based standards with the following characteristics:

Improved and consistently applied conceptual framework

Clearly stated accounting objective of the standard

Sufficient detailed and structured for it to be operationalized consistently

Minimal use of exceptions to the standard

Avoiding the use of percentage tests

Compliant, but not intent of standard

• FASB has already started applying the ‘objectives-oriented’ approach on a prospective basis

SEC Staff Study – July 25, 2003• Operationalizing will take time requiring the following:

Newly developed standards that articulate the objectives and avoids exceptions, bright-lines, and excessive details

Addressing the deficiencies and inconsistencies of the framework

Ensuring new standards are in-line with the conceptual framework

Addressing current standards that are rules-based

Redefining the GAAP hierarchy

Continuing to converge the US, foreign, and international standards

Harmonization

What is Harmonization?

• Harmonization refers to the convergence between differing accounting standards

• For Canada this means harmonizing Canadian, US and International rules

• For the USA this mean adoption of a more principles based approach

Why is Harmonization Important?

• Daimler-Benz DM 1.1 billion difference: January - June 1993

DM 168 million PROFIT under German GAAP DM 949 million LOSS under US GAAP Difference attributable to variation in accounting standards

• Roche Group estimated it would save US$100 million annually by producing one set of books

• Harmonization is one of the most important, dynamic accounting topics today (really!)

• It is a priority of FASB, IASB and AcCSB

Benefits of Harmonization

• Lowered costs of reporting for international organizations

• Single standard improves understand-ability for users

• Compatibility of reports in different counties• High quality standards for countries that can not

create their own standards

Disadvantages of Harmonization

• Lowering of standards to a compromise position for jurisdiction with highest levels

• High costs of changing from current standards

• Differing legal and tax backgrounds make common rules less relevant

• Does it benefit users?

Australian Experience

• Australia has made an exerted effort to adopt IAS

• Political positioning from ASE to accept IAS for ASE’s financial gain

• NO feedback from users as to advantages from adoption of IAS

Australian vs International Standards

International Standard

OZ Standards

Options for Canada

1. Adopting US GAAP and eliminating CDN-GAAP

2. Adopting IAS and eliminating CDN-GAAP

3. Maintaining CND-GAAP

4. Abandon the field and let the market decide

5. Status Quo: wait until the market is more clear

Position of Loblaws

• Loblaws responded to an AcSB request for comment on the direction Canada should take.

• Pushing for AcSB to actively push international accounting standards with FASB and IASB

• Concerned about US style rules• Concerned about differential rules for

private and public companies

Canadian Direction

• AcSB published its strategic plan Jan 4, 2006• Approaching different strategies for different

users: publicly traded companies, private companies, not-for-profit

Public companies: Reporting rules will converge with IFRS CDN GAAP will cease to exist AcSB will work with IASB and FASB to eliminate

differences between US GAAP and IFRS

Canadian Direction

Not-Publicly Accountable Enterprises: Need to determine who the “users” of financial reports

are Recognizes that needs are very different from public

companies No clear strategy on how to proceed Continuation of Canadian GAAP

Not For Profit Enterprises Will follow same rules as for-profit companies Will research how to create rules Will develop standards specific to NFPE’s

Conclusions

Documents

Standard Setting Seminar