International Financial Accounting (IFA) Part I Accounting Regulation; International Accounting DEPARTMENT OF BUSINESS AND LAW ROBERTO DI PIETRA SIENA, NOVEMBER 4, 2013 1 INTERNATIONAL FINANCIAL ACCOUNTING Part I Accounting Regulation International Accounting Normative Theories of Accounting 2
Accounting standards issues by the IASB as the standards followed in many countries One-size-fits-all approach Is this the best solution to follow? Advantages and Disadvantages 3 Various factors can influence the actions of regulators Accounting Regulation and Practices can vary between different countries Large degree of variations can depends by differences in national cultures and institutional practices Recent initiatives IASB standards as a uniform set of global standards Over 100 countries have adopted these standards Significant exception: USA and its standards (FASB) In 2008 the US SEC has accepted that foreign listed entities could adopt IFRSs FASB and IASB have started a convergence project eliminating the existing major differences 4
Nobes and Parker (2004) Anglo-Swedish drug company (AstraZeneca) Multi-listed company Before 2005 UK accounting rules: 9,521 million of profit US accounting rules: 29,707 million of profit (212%) After 2005 IFRS accounting rules: $ 6,043 million of net income US accounting rules: $ 4,392 million of net income (-27%) 5 SEC: Form 20F Foreign securities issuers and the problems of financial statements prepared under different sets of rules Need for reconciliation of accounting information (multi-listed companies) At the same time we are faced with crossborder securities markets and investments through the internet 6
Terminology Distinction between harmonization and standardization of accounting Harmonization is a process of increasing the comparability of accounting practices by setting bounds to their degree of variation Standardization is explained as a term which Wrongly! appears to imply the imposition of a more rigid and narrow set of rules than harmonization In international accounting the 2 terms recently have been used as synonyms 7 Advantages from the IFRS adoption An international investor has to understand numerous different sets of accounting assumptions, rules and regulations Need to raise finance by listing securities on the stock exchange of more than one country Facilitate flexibility and efficiency in the use of experienced staff by multinational firms of accounting and auditing 8
Benefits of global accounting standards Easier access to foreign markets Increased credibility of domestic capital markets to foreign capital providers and potential foreign merger partners (Foreign Direct Investment - FDI) Increased credibility of FSs from companies in lessdeveloped countries from the point of view of potential lenders Lower cost of capital to companies Comparability of financial data across borders 9 Benefits of global accounting standards Greater transparency Greater understandability (a common financial language) The need for companies to keep only one set of books Reduced national standard-setting costs Ease of regulation of securities markets Lower susceptibility to political pressures than national standards Portability of knowledge and education across national boundaries 10
Calls for the harmonization of accounting standards Investors and lenders Countries with developed capital markets International bodies (World Bank, International Monetary Fund, IOSCO, OECD, the Basel Committee) Associations of accountants (IFAC) 11 International Accounting Standards Committee (IASC) establishment 10 th World Congress of Accountants in Sydney: IASC proposal (1972) Representatives of national accounting associations (Canada, UK, USA, Australia, France, Germany, Japan, the Netherlands, Mexico) In 1973 the IASC was established with its headquarters in London 12
Core standards and the IOSCO agreement IOSCO is the representative body of the world s securities markets regulators (100 organizations) The agreement identified 40 topics that IOSCO felt had to be addressed in the core standards before IOSCO could recommend the IASC to its member agencies In Dec. 1998 the IASC completed the core set of standards and IOSCO immediately began a review of these standards In May 2000 IOSCO publicly recommended that its members allow the use of the IAS 13 Structure of the IASC By 2000 the IASC had expanded from the accounting bodies of the 9 founding countries to encompass 152 professional accounting bodies in more than a hundred countries 14
IASC was not a highly productive institution This was due to several causes Weak relationships with national standard setters Lack of convergence of IASs and major national GAAP A full-time workload had to be shouldered by a parttime board Need for broader sponsorship than provided by the accounting profession Lack of widespread recognition of its standards by regulators Shortage of resources 15 IASB Reform In 1999 the IASC board approved the constitutional changes necessary for its restructuring A new IASC Foundation was incorporated and its trustees were appointed (2010: IFRS Foundation) By 2001, the members of the IASB and the Standards Advisory Council (SAC) were appointed and the new structure became operational In 2002 the IASB moved into the new headquarters in London The technical staff of the IASB includes over 20 accounting professionals The IASB s budget of around USD 21 million per year is five times that of the previous IASC 16
Objective of the IASB The Main objective is to develop a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles To achieve this IASB has reorganized its internal structure 17 18
The IFRS Foundation Trustees In 2010 the IASC Foundation was renamed in IFRS Foundation The aim of the trustees is to promote the work of the IASB and the rigorous application of IFRSs Trustees are not involved in any technical matters relating to the standards The Trustees are accountable to an the Monitoring board Their responsibilities are Appointing members of the IASB, the IFRS interpretations committee and the IFRS Advisory Council Establishing and amending the operating procedure, consultative arrangements and due process fro the IASB, the Interpretations Committee and the Advisory Council Reviewing annually the strategy of the IASB and assessing its effectiveness Ensuring the financing of the IFRS Foundation and approving annually its budget 19 SME Implementation group Established in 2010 with the aim to support the international adoption of the IFRS for SMEs and to monitor its implementation The Monitoring Board of Public and Capital Market Authorities Created in 2009 by the Trustees This Board serves as a link and a forum for interaction between representatives of the main capital market authorities worldwide and the IFRS Foundation 20
IFRS Foundation support operations The creation of XBRL, taxonomy for IFRS and the IFRS SMEs (XBRL is a standardized format and label which should enable the electronic use, exchange and comparability of financial data across countries) The production of high-quality, understandable and up-to-date material for the IFRS for SMEs Promotion of the IFRS brand and the support of global convergence 21 Re-Naming the standards Before 2001 International Accounting Standards (IAS) After 2001 International Financial Reporting Standards (IFRS) IAS continue to have full force and effect unless and until the IASB amends or replaces them 22
The IASB s responsibilities The IASB has 16 full time members Principal responsibilities Developing and issuing IFRSs and EDs Approving interpretations developed by IFRIC On the IASB s Objectives see the IFRS Foundation (2005) 23 1. Hans Hoogervorst (Chairman) The Netherland 2. Ian Mackintosh (Vice-Chairman) UK 3. Stephen Cooper UK 4. Philippe Danjou France 5. Martin Edelman Germany 6. Jan Engstrom Sweden 7. Patrick Finnegan USA 8. Amaro Luiz de Oliveira Gomes Brazil 9. Gary Kabureck USA 10. Prabhakar Kalavacherla ( PK ) USA 11. Patricia McConnell USA 12. Takatsugu Ochi Japan 13. Darrel Scott South Africa 14. Mary Tokar USA 15. Chung Woo Suh South Corea 16. Zhang Wei-Guo China 24
IFRS Advisory Council (SAC) Has approximately 40 members from around 25 countries and 7 international organisations Convenes three times each year at meetings open to the public, in order to: Advise the IASB on priorities in the board s work Inform the board of the views regarding major standard-setting projects held by the organisations and individuals on the IFRS Advisory Council Give other advice to the board or trustees 25 IFRS Interpretations Committee (IFRIC) Has 14 members + 1 Chair appointed by the IASC Foundation trustees for 3-year terms IFRS Interpretations Committee meetings are open to public observation Approval of drafts or final interpretations requires that not more than 3 voting members vote against IFRS Interpretations Committee is chaired by a non-voting chair 26