Kế toán, kiểm toán - Chapter eleven: Worldwide accounting diversity and international standards

Chapter ElevenWorldwide Accounting Diversity and International StandardsCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.International Accounting DiversityChinese companies use the direct method in preparing the statement of cash flows.Companies in Germany are allowed to report assets on the balance sheet at revalued amounts.Most companies in the United States and Europe use the indirect method.11-2Learning Objective 11-1Explain the major factorsinfluencing the internationaldevelopment of accountingsystems.11-3Reasons for Accounting DiversityLegal SystemTaxationInflationCultureFinancingSystemsPolitical andEconomicTiesAll these interact!!!11-4Reasons for Accounting Diversity- Legal SystemCommon LawFound primarily in English-speaking countries, where courts establish precedent.Accounting profession plays a large role in standard setting and tends to be independent.Standards tend to be detailed. 11-5Reasons for Accounting Diversity-Legal SystemRoman (Codified) LawBased on statute rather than precedent. Laws govern business enterprises. Accounting profession tends to have little influence on standard setting, is frequently an adjunct of the legal system. Accounting law tends to be lacking in detail.11-6Reasons for Accounting Diversity- Financing SystemsMajor providers of financing:Family membersBanksFocus on solvency and liquidity (balance sheet emphasis)GovernmentsShareholdersFocus on profitability (income statement emphasis) Other creditors11-7Reasons for Accounting Diversity- Other IssuesTaxationFinancial statements are the basis for taxation in some countries. Others adjust financial statements for tax purposes, and submit separate reports to stockholders’.InflationHigh inflation tends to render historical cost useless.High inflation rates force adoption of accounting rules that adjust historical costs to current or market value.Creditors tend to suffer under highly inflationary economies.11-8Reasons for Accounting Diversity- Political and Economic TiesAccounting methods are readily conveyed from one country to another, either by trade or conquest:Britain’s former colonies, such as Australia and Canada, tend toward “common law” systemsFormer French colonies, such as Senegal and Congo, base accounting standards on “codified law”Economic ties with the US have impacted accounting in Canada, Mexico and Israel11-9Reasons for Accounting Diversity- CultureSocietal values found within cultures:Individualism Uncertainty Avoidance Power Distance MasculinityThese values are thought to shape legal systems and capital markets.They influence accounting values shared by members of the accounting subculture, which influences the nature of the accounting system.11-10Gray’s Framework for the Development of Accounting Systems InternationallyCultural DimensionsIndividualismUncertainty AvoidancePower DistanceMasculinityInstitutional ConsequencesLegal systemCorporate OwnershipCapital MarketsProfessional AssociationsEducation & ReligionAccounting ValuesProfessionalismUniformityConservatismSecrecyAccounting SystemsAuthorityEnforcementMeasurementDisclosure11-11Nobes’ Model of the Reasons for International Accounting DiversityNobes’ simplified model has two explanatory factors: (1) national culture, including institutional structures, (2) the nature of a country’s financing system divided into two classes.Class A (Strong equity-outsider financing system)Less conservativeGreater disclosureFinancial and tax accounting separateClass B (Weak equity-outsider financing system)More conservativeLess extensive disclosureFinancial reporting follows tax rules11-12Learning Objective 11-2Understand the problemscreated by differences inaccounting standards acrosscountries and the reasons todevelop a set of internationallyaccepted accounting standards.11-13Problems Caused By Diverse Accounting StandardsSubs use local standards for financial statements. The parent must adjust the subs’ statements to GAAP. Statements must be re-stated in common standards.To access foreign capital markets, costly measures must be taken to prepare financial statements that comply with local standards.Financial statements from different countries are simply not comparable. Accounting rules differ from country to country.11-14International HarmonizationHarmonization: Reducing differences in accounting practices across countries.Harmonization efforts have been ongoing for decades, and originally the International Accounting Standards Committee (IASC) led the movement.In 1987, the International Organization of Securities Commissions (IOSCO) joined the effort.Since 2001, the process has been led by the International Accounting Standards Board (IASB) 11-15Learning Objective 11-3List the authoritativepronouncements that constituteInternational FinancialReporting Standards (IFRS).11-16International Accounting Standards Committee- IASCInternational Accounting Standards committee (IASC) established in 1973.IASB superseded IASC in April 2001. 16-member board at least 13 full-timeThe IASB has sole responsibility for establishing IFRSs (“IASB GAAP”)IASB has no enforcement authority!!11-17International Accounting Standards Board (IASB)All of the 41 IASs issued by the IASC were adopted by the IASB. 28 are currently in effect.New standards are called “International Financial Reporting Standards” (IFRSs). As of January 2013, 13 IFRSs have been issued.11-18Learning Objective 11-4Describe the ways and theextent to which IFRS are usedaround the world.11-19International Financial Reporting Standards (IFRSs)Countries can elect to use IFRS by:(1) adopting IFRS as its national GAAP(2) requiring domestic listed companies to use IFRS in preparing their consolidated financial statements(3) allowing domestic listed companies to use IFRS(4) requiring or allow foreign companies listed on a domestic stock exchange to use IFRS. 11-20International Financial Reporting Standards (IFRSs)Of the 153 countries using IFRS as of June 2012:(1) 92 require all domestic listed companies to use IFRS in preparing their consolidated financial statements.(2) All publicly traded companies in the EU are required to use IFRS.(3) Two significant exceptions – China and the U.S. 11-21Learning Objective 11-5Describe the FASB–IASBconvergence process and the SEC recognition of IFRS.11-22Norwalk Agreement: FASB-IASB ConvergenceIn Norwalk, Connecticut, FASB and IASB held a joint meeting in September 2002.The “Norwalk Agreement” states that the two bodies will “use their best efforts” to:1. Make existing financial reporting standards compatible “as soon as is practicable” and2. Coordinate efforts to “ensure that once achieved, compatibility is maintained”11-23Norwalk Agreement: FASB-IASB Convergence 2006- Memorandum of Understanding (MoU) FASB and IASB agreed that trying to eliminate differences between standards and create identical standards, even if jointly developed, is not realistic.Instead, they agreed that standards in need of improvement should be replaced with new jointly developed standards. The idea behind convergence is to have similar, but not necessarily identical standards. 11-24FASB-IASB ConvergenceAs of January 2013, the FASB‐IASB convergence process had resulted in changes made to U.S. GAAP, IFRS, or both: Business combinations ∙ Borrowing costsConsolidated financial statements ∙ DerecognitionNon‐controlling interests ∙ Post‐employment benefitsAcquired in‐process research costs ∙ Fair value optionNon‐monetary asset exchanges ∙ Joint ventures Share‐based payment ∙ Fair value measurementAccounting changes ∙ Segment reportingPresentation of (OCI) ∙ Inventory accounting 11-25FASB-IASB ConvergenceAs part of its technical agenda at the beginning of 2013, the FASB listed the following on‐going joint convergence projects with either an Exposure Draft or final standard expected to be issued in 2013:LeasesInsurance contractsFinancial instrumentsRevenue recognition11-26IFRS RoadmapIFRS Roadmap:In November 2008, SEC issued a proposed rule that set milestones toward the use of IFRS by U.S. public companies by 2014.In February 2010, SEC pushed that date back to “approximately 2015 or 2016.”11-27IFRS FrameworkIn May 2011, the SEC published a suggested framework for an “endorsement process” incorporating IFRS into U.S. GAAP. The two components of the framework are:(1) FASB continues to participate in the process of developing new IFRSs and incorporates those standards into U.S. GAAP by means of an endorsement process.(2) The FASB would incorporate existing IFRSs into U.S. GAAP over a defined period of time, e.g., five to seven years, with a focus on minimizing transition costs for U.S. companies.11-28IFRS FrameworkThis approach would: maintain U.S. GAAP, which could continue to be used by both public and nonpublic companies.achieve the objective of having a single set of high-quality, globally accepted accounting standards.retain the FASB’s authority for establishing financial reporting standards in the United States, and provide the flexibility to modify the requirements of IFRS.11-29IFRS FrameworkModifications could include:Requiring additional disclosures beyond what is required by an IFRS.Prescribing which of two or more alternative accounting treatments allowed by IFRS should be followed by U.S. issuers.Promulgating standards on issues not specifically addressed in IFRS.11-30First-time Adoption of IFRSWhat does this mean?Large US publicly-traded companies may be required to adopt IFRS someday.The company would prepare an opening balance sheet at the “transition date” and present re-stated comparative statements also prepared under IFRS.11-31Steps To prepare opening IFRS balance sheet:Determine the applicable IFRS.Recognize assets and liabilities not recognized under GAAP and derecognize those not allowed under IFRS.Measure the balance sheet accounts under IFRS at the balance sheet date.Reclassify certain assets and liabilities in accordance with IFRS.Comply with disclosure and presentation requirements. First-time Adoption of IFRS11-32IFRS Accounting Policy HierarchyIAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, establishes the hierarchy that firms must follow when dealing with an accounting issue:1. Apply specifically relevant standards (IASs, IFRSs, or Interpretations).2. Refer to other IASB standards. 3. Refer to the IASB Framework for guidance.4. Consider the most recent pronouncements of other standard-setting bodies11-33IFRS Accounting Policy HierarchyIn establishing accounting policies to be followed under IFRS, the two extreme approaches that companies can follow are:1. Minimize change. Under this approach a company would adopt accounting policies consistent with IFRS that are most consistent with current accounting policies.2. Fresh start. Under this approach a company would ignore current accounting policies and adopt accounting policies consistent with the IFRS that best reflect economic reality.11-34Learning Objective 11-6Recognize acceptable accountingtreatments under IFRS andidentify key differences betweenIFRS and U.S. GAAP.11-35Current Differences Between IFRSs and US GAAPMeasurement: How is cost determined?Disclosure:If allowed, How?InventoryFixed AssetsExtraordinary ItemsRecognition: If recognized, how? When?Discontinued OperationsPresentation:Principles? Financial Statement Components?11-36Current Differences Between IFRSs and US GAAPThere are differences in nearly every area of financial accounting including:Inventory -- cost flow and write-offsPP&E-- measurement and subsequent costsAsset Impairment – measurement and subsequent reversalsConstruction contracts – recognition methodR&D – capitalization vs expenseOperating Leases – gain recognitionPensions – vested benefits 11-37Income taxes – deferred tax assetsClassification of deferred taxesConsolidated financial statements –Parent vs. SubsidiaryInterim reporting – Discrete vs. integralPresentation of “extraordinary” items Definition of a “discontinued operation” Statement of Cash Flows – Interest classificationCurrent Differences Between IFRSs and US GAAP Continued11-38IAS 1: Presentation of Financial StatementsIFRSs contain this single standard governing the presentation of financial statements. There is no US GAAP equivalent.Key guidance elements:PurposeOverriding principle of fair presentationBasic principles and assumptionsComponents of financial statementsStructure and content of financial statements11-39Presentation of Financial StatementsIFRS COMPANY Income Statement11-40Learning Objective 11-7Determine the impact thatspecific differences betweenIFRS and U.S. GAAP have onthe measurement of incomeand stockholders’ equity.11-41U.S. GAAP ReconciliationsInterest CapitalizationBusiness Combinations Purchase vs. Pooling MethodsGoodwill Amortization vs. ImpairmentLeases Revaluation of Fixed AssetsFixed Asset Impairment Losses11-42U.S. GAAP ReconciliationsIASB: Principles-BasedProvide general principles with limited guidance.Requires greater professional judgment.FASB: Rules-BasedProvide detailed guidance.May encourage mindset of looking for loop-holes.11-43U.S. GAAP ReconciliationsTranslation of IFRS into other languages IFRS are drafted in English, then translated into other languages. Time has already proven that some terms (“probable” or “remote”) are not translating with the same meaning. The impact of Culture Using professional judgment under IFRS, an accountant in one country may reach a different conclusion than an accountant in another part of the world.11-44