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Financial Reporting
 Standards (IFRS)

Prepared by L. Murphy Smith
Professor of Accounting
Texas A&M University

For permission to use or adapt
this presentation, please contact
Dr. Smith,
Questions and Comments are Welcome Any Time
  International Financial Reporting Standards (IFRSs)
   are shooting down the competition (other GAAPs)

IFRSs are now accepted or required in more than 100
U.S. Leaders Call for Acceptance of IFRSs

             Among those calling for acceptance of
              IFRSs are John Thain, CEO of the
              New York Stock Exchange, and former
              Federal Reserve Chairman Paul

             FASB Chairman Robert Herz has
              expressed his expectation that US
              companies would eventually be
              required to follow a single accounting
              standard, which would be the IFRSs.
Why do we need IFRSs and financial
     reporting comparability?

   Expanding world trade
   Proliferation of multinational
   Increasing role of global capital
   Increased foreign direct
   Growth of multinational political
   A way to minimize costs
Why Does GAAP Differ Among Countries?

                      Political/Legal System
                      Sources of Capital
                      Inflation
                      Taxation
                      Culture
                      Accidents of History
                      Business Complexity

                      Stop & Reflect: Is there one GAAP
                      that works best everywhere?
Key Problems that Cause Resistance to IFRSs

              Agreeing on who will
               create the rules
              How different the rules
               will be from current
               national GAAP
              Costs of changing
              National sovereignty
 International Financial Reporting Standards (IFRSs)
 IFRSs are the accounting standards
  published by the International Accounting
  Standards Board (IASB).
 The IASB was established in 2001 by its
  forerunner, the International Accounting
  Standards Committee, which itself was
  established in 1973.
 In the past decade, the IFRSs went from
  being little used to what is now the
  world’s dominant set of accounting
 Leading accounting experts anticipate
  that IFRSs will be accepted for financial
  reporting, in place of US GAAP, for all
  companies listed in US stock market, as
  early as 2016.
Pivotal Events Propelling the IFRSs Juggernaut

                Financial scandals occurring in the US in the
                 early 2000s, notably Enron, which
                 highlighted shortcomings in US GAAP.
                IOSCO recommended use of IFRSs in 2000.
                Adoption of IFRSs for financial reporting by
                 listed companies in the EU in 2005.
                U.S. Securities and Exchange Commission’s
                 announcement in 2007 to accept IFRSs for
                 financial reporting by non-US companies
                 listed in the US stock market (no Form 20-F
                 reconciliation to U.S. GAAP).
                SEC Commissioners propose timeline for
                 IFRS adoption by 2016.
 SEC Proposed Timeline for Moving Companies to
 End of 2009: Limited group of large companies given the option
  to use IFRS. SEC estimates 110 U.S. companies will be able to
  take advantage of the offer.
 2011: SEC evaluates the progress of achieving proposed
  milestones, and makes a decision about whether to mandate
  adoption of IFRS. If IFRS is mandated, the commission will
  develop a staged roll out, starting with the largest public
  companies first.
 2014: Year the first wave of companies will be mandated to
  report financial results using international accounting standards,
  if IFRS requirements are adopted in 2011.
 2016: Year that all public companies, big and small, will be
  mandated to report financial results using international
  accounting standards, if IFRS requirements are adopted in
          Stop & Reflect: Is the timeline moving too fast?
Overview of the International Accounting Standards
                   Board (IASB)

             The London-based IASB is an independent,
              privately funded accounting standard-setting
             Board members are from nine countries and
              include a variety of functional backgrounds.
             The over-arching commitment of the IASB is to
              develop, in the public interest, one set of high-
              quality, understandable, and enforceable global
              accounting standards that require transparent
              and comparable information in general purpose
              financial statements.
             National accounting standard-setters have
              worked with the IASB to converge accounting
              standards around the globe.
Overview of the International Accounting Standards
             Board (IASB) -- continued

             The International Accounting Standards
              Committee Foundation is the parent body of the
             The IASB’s structure and organization resulted
              from a strategy review undertaken by its
              predecessor body, the Board of the International
              Accounting Standards Committee.
             The body of standards issued by the Board of
              the International Accounting Standards
              Committee was subsequently adopted by the
             These older standards were issued between
              1973 and 2000, and continue to be designated
              International Accounting Standards (IASs).
Structure of the International Accounting Standards
                    Board (IASB)

                                 IASB projects generally take
                                  three years or more, from
                                  formation to standard
                                 Release of an IFRS,
                                  Exposure Draft, or final SIC
                                  Interpretation requires
                                  approval by 8 of the board’s
                                  14 members.
Major Contributions of the IASB

   Harmonizing accounting standards and
    disclosures to meet the needs of the world’s
    capital markets.
   Providing an accounting foundation for
    underdeveloped or newly industrialized countries
    to use as the accounting profession emerges in
    those countries.
   Advancing compatibility of domestic and
    international accounting requirements.
Principles-Based Versus Rules-Based

      IFRSs are often referred to as being principles-
      US GAAP is said to be more rules-based.
      This has led to about 25,000 pages of US GAAP
       versus about 2,000 pages of IFRSs.
      With fewer pages and less detail, IFRSs still
       address all major accounting issues, from
       financial statement presentation to business

       Stop & Reflect: Which is better, rules-
       based or principles-based?
         Required Use of IFRSs by World Region 2003-2006

                                                            Required for all
                                         Required for all   domestic listed
                              Total       domestic listed    companies in
Region                      countries   companies in 2003       2006

Europe                             47                  7                  33
North America                       3                  0                   0
Central and South America          19                  7                   8
Africa                             54                  3                   5
Asia                               49                  6                  11
Australia Oceania                   6                  1                   2
Total                             178                 24                  59
Impact of Cultural and Economic Factors on
     International Financial Reporting
          Accounting standards vary among countries due
           to the culture, economics, politics, and the legal
           environment that are unique to each country.
          For example, in economies where inflation is
           high set up rules to improve period to period
           comparability by use of inflation indices.
          In countries like the U.S., stockholders provide
           the majority of capital to businesses. Individual
           stockholders generally own relatively small
           ownership stakes and are not involved with
           company operations.
          Consequently, U.S. GAAP is geared towards
           full- disclosure and relative transparency. In
           countries where capital-providers have access to
           corporate financial information from sources
           other than financial reports, transparency and
           disclosure is not as critical.
Benefits to Countries with Weak Financial Reporting
                In nations with weak financial disclosure
                 requirements, investors often demand
                 additional financial information when
                 companies issue stock.
                Consequently, governments in these nations
                 may be compelled to revise or create securities
                 laws that require improved financial reporting
                A simpler and better solution is to adopt IFRSs,
                 which have a higher level of financial reporting
                 disclosure than most countries’ GAAP.

                 Stop & Reflect: Will better GAAP (i.e.,
                 IFRS) lead to economic development in
                 developing countries?
Benefits to Countries with Strong Financial Reporting
                 While there is lower motivation to adopt IFRSs,
                  due to a smaller incremental benefit of investor
                  protection, a nation with strong financial
                  disclosure requirements in its existing GAAP
                  can still benefit from adopting IFRSs.
                 Such a nation benefits by participating in
                  uniform, multinational financial reporting
                 Investors are aided by this cross-national
                 Uniform reporting standards reduce costs of
                  financial statement reconciliation associated
                  with multinational stock listings.

                  Stop & Reflect: Do you believe that one
                  set of GAAP (i.e., IFRS) is really the best
                  thing for the US? For the world?
                                         IFRSs Reduce Complexity

              Subsidiary 1
                                                                Complexity is associated with global
                                                                 operations resulting from subsidiary
                                            Subsidiary 2

                                            (c,l,p,x,r,g,i)      operations in cultural settings that differ
                                                                 substantially from the parent.
                                                                This leads to complex operating,
                                             Subsidiary 3        reporting, and information
                                                                Multinational companies do business in
                  Joint Venture

                                                                 a more complex environment than
                                                                 strictly domestic firms and financial
                                                                 reporting differences contribute to this
                                                                Use of one set of accounting standards,
                                                                 such as the IFRSs, will help reduce this
Examining Differences Between U.S. GAAP and IFRS

                There are many areas of
                 difference between U.S. GAAP
                 and IFRSs, but similarities far
                 outweigh differences.
                Accounting rules vary across
                 countries and differences can be
                 cosmetic or substantive.
           Cosmetic Differences:
Financial Statement Presentation Per IAS 1
    IAS 1 does not prescribe a particular format for
     presentation of financial statements (B/S, I/S,
     SCF, SCE); multiple formats have evolved in
     practice. In the U.S., a common format has
   Re: Balance Sheet
    An illustration of a cosmetic difference is the
     presentation of the balance sheet in many
     countries that are, or were, members of the
     British Commonwealth.
    The balance sheet of a UK company is often
     presented (1) in the form of A – L = OE rather
     than A = L + OE and (2) in reverse order of
Comparing U.S. GAAP and IFRSs: Cosmetic Differences

              Another example of a cosmetic difference is use
              of different word to refer to the same item. A few
              examples are as follows, international term
              followed by U.S. counterpart:

              Turnover – Sales
              Stocks – Inventory
              Share Capital – Common Stock or Paid-in
              Share Issue Premium – Additional Paid-in
              Debtors – Accounts Receivable
              Creditors – Accounts Payable
              Revenue Reserves – Retained Earnings
Comparing U.S. GAAP and IFRSs: Cosmetic Differences
                                           Consolidated Balance Sheet
                                                                               2001      2000
                                                                     Notes       £m        £m
  Goodwill                                                         15           174       170
  Intangible Assets                                                16         1,673       966
  Tangible Assets                                                  17         6,845     6,642
  Investments                                                      18         3,228     2,544
  Fixed Assets                                                               11,920    10,322
  Equity investments                                               19           185       171
  Stocks                                                           20         2,090     2,277
  Debtors                                                          21         5,591     5,399
  Liquid investments                                               25         1,415     2,138
  Cash at bank                                                     25           716     1,283
  Current assets                                                              9,997    11,268
  Loans and overdrafts                                             25        (2,124)   (2,281)
  Other creditors                                                  22        (7,306)   (6,803)
  Creditors: amounts due within one year                                     (9,430)   (9,084)
  Net current assets                                                           567      2,184
  Total assets less current liabilities                                      12,487    12,506
  Loans                                                            25        (2,108)   (1,751)
  Other creditors                                                  22          (190)     (143)
 Comparing U.S. GAAP and IFRSs: Cosmetic Differences
                                Consolidated Balance Sheet - Continued

Creditors: amounts due after one year                                    (2,298)   (1,894)
Provisions for liabilities and charges                         23        (1,810)   (1,657)
Net assets                                                               8,379     8,955
Called up share capital                                        27        1,543     1,556
Share premium account                                          27          170        30
Other reserves                                                 29        1,866     1,849
Profit and loss account                                        29        3,938     4,276
Equity shareholders’ funds                                               7,517     7,711
Non-equity minority interest                                   28          621     1,039
Equity minority interests                                                  241       205
Capital employed                                                         8,379     8,955
Approved by the Board
Sir Richard Sykes, Chairman
12 March 2002

Note: Differences from U.S. GAAP include order of reverse liquidity and model of
A - L (Net assets) = SE (Capital Employed) instead of A + L = SE.
Financial Statement Presentation Per IAS 1

           Re: Income Statement
            No distinction between
             Revenues/Gains or

           Re: Statement of Changes in Equity
            Two different approaches can be
               Benchmark treatment similar to US
               Alternative treatment – include portions
                e.g. capital transactions in notes
Financial Statement Presentation Per IAS 1
           Re: Statement of Cash Flows
            Per IAS 7, the cash flow statement is a
             required statement. Requirements of IAS 7
             are much the same as SFAS 95 in the U.S.
             with a few differences.
            In the U.S., interest paid, interest received,
             and dividends received are shown in the
             operating section, while dividends paid is
             shown in the financing section.
            Under IFRS, interest paid, interest received,
             and dividends received are normally
             accounted for as operating cash flows as well.
             However, interest paid may be accounted for
             as a financing cash flow, while interest
             received and dividends received may be
             accounted for as investing cash flows,
             because they are costs of obtaining financial
             resources or returns on investments.
Financial Statement Presentation Per IAS 1

                Re: Statement of Cash Flows
                 Non-cash transactions (e.g.,
                  issue bonds for LT assets) do
                  not need to be disclosed on the
                  face of the cash flow statement
                 CF from extraordinary &
                  discontinued items must be
                  disclosed separately in each

            Stop & Reflect: Do you see any
            problems with the IFRS approach to the
Financial Statement Presentation Per IAS 1

             Re: Notes
              IFRS requires disclosure of currency
               used in the FS
              Does not need to be the primary
               currency of the enterprise
              For example, Jardine Matheson, a
               diversified Bermuda-based company
               with operations primarily in Asia and
               Australia uses the U.S. dollar.

      Stop & Reflect: Why is it necessary to
      disclose currency used under IFRS, but
      not US GAAP?
Comparing U.S. GAAP and IFRSs:
    Under IFRS, the benchmark treatment under IAS
     16 is to report PP&E at cost net of depreciation
     and potential impairments.
    IAS 16 provides for an alternative treatment, to
     revalue PP&E to fair value. Companies may use
     “highest and best use” to determine fair value.
    After a company begins to revalue PP&E, it must
     continue to doing so “. . .with sufficient regularity to
     ensure that the carrying amount does not differ
     materially from that which would be determined
     using fair value at the balance sheet date.”
    Example: Journal entry to revalue land that cost
     200,000 to FV of 240,000:

           Land     40,000
                    Revaluation Surplus         40,000
Comparing U.S. GAAP and IFRSs:
   Re. revaluation, downward revaluations are
       Determined on an asset-by-asset basis, not by
        the class as a whole
       If downward revaluation, it is offset against the
        revaluation equity, to the extent it exists. Any
        excess goes to expense
       If subsequent upward revaluation, goes to
        income to extent of any prior revaluation
        expense taken
   Construction period interest may be
    expensed or capitalized (US GAAP
    requires capitalization only)
   Depreciation determined similarly under
Comparing U.S. GAAP and IFRSs:

      • Under US GAAP, leases are classified
        as capital if one or more of the 4
        criteria are met (title transfer, bargain
        purchase option, 75% of economic
        life, MLP >= 90% of asset FMV)
      • Under IFRS, criteria are less rigid.
Comparing U.S. GAAP and IFRSs:
  Under IAS 17, a leases is classified as either an
    operating lease or a finance lease (U.S. GAAP
    refers to finance leases as capital leases).
  Per IAS 17 a finance lease “…transfers
    substantially all the risks and rewards incidental to
    ownership of an asset. Title may or may not
    eventually be transferred.”
  Example situations:
 1. The lease transfers ownership to the lessee,
 2. The lessee has a bargain purchase option,
 3. The lease term is for the “major part” of the
    economic life of the asset,
 4. The present value of the minimum lease payments
    “amounts to at least substantially all of the fair
    value of the leased asset,”
       Comparing U.S. GAAP and IFRSs: Leases
                Example situations – continued:
               5. The leased assets are of a specialized nature such
                   that only the lessee can use them,
               6. If the lease is cancelable by the lessee, the lessor’s
                   costs associated with the cancellation are borne by
                   the lessee,
               7. Gains or losses associated with fluctuations in the
                   leased asset FMV are borne by the lessee, and
               8. The lessee can continue to lease the asset for a
                   secondary period for a substantially lower rent than
                   market rent.
                The first four criteria are similar to criteria under
                   U.S. GAAP but are not identical; criteria 5 through
                   8 are not included in U.S. GAAP.

Stop & Reflect: Regarding leases, which do you think gives the better
result, rules-based US GAAP or principles-based IFRS?
Comparing U.S. GAAP and IFRSs:
       Intangible Assets

     Purchased intangibles
        Recorded at cost
        Amortized finite life intangibles over useful
         life. Both IFRS and US GAAP have no
         upper amortization term
     Internally-generated intangibles
        Normally expensed as incurred
        In the case of internal R&D, IFRS splits the
         costs into a research phase and a
         development phase (similar definition to US
        Research phase costs are expensed under
         US GAAP and IFRS
  Comparing U.S. GAAP and IFRSs: Intangible Assets

             Accounting may differ in development phase
                Under US GAAP, costs are expensed
                Under IFRS, costs can be capitalized if ALL
                 the following are met:
                  Completion is technically feasible
                  Intention is to complete asset and use or sell
                  Company has ability to do so
                  Can demonstrate how asset will generate future
                  Company has resources to complete the asset
                  Company can reliably measure development

Stop & Reflect: Do you think it makes sense to allow capitalization of
some R&D, as permitted under IFRS?
Comparing U.S. GAAP and IFRSs:
    Accounting Changes

                IFRS 2, Stock-Based
                 Payment, includes stock
                US GAAP followed with
                 SFAS 123 (R) (fair value)
FASB – IASB Working Together

     In October 2002, the FASB and the IASB issued a
      memorandum of understanding (referred to as the
      Norwalk Agreement or MoU) formally announcing
      their commitment to converging U.S. GAAP and
     In recent years, both the FASB and IASB have issued
      rules that converge (or almost converge) their
      accounting standards with the standards of the other
     For example, the IASB essentially conformed to U.S.
      GAAP for pooling and accounting for goodwill with the
      issuance of IFRS 3, Business Combinations.
     The FASB conformed to IFRS when it issued SFAS
      151 on Inventory, SFAS 153 on Like-Kind Exchanges,
      and SFAS 154 on Accounting Changes.
If Everyone Adopts IFRSs, it’s Still Not a Perfect World

                  Uniformity in accounting standards is a gigantic step
                   toward understanding financial statements prepared
                   in different nations; however, uniformity alone is not a
                   total solution.
                  Environmental factors such as culture, language, legal
                   system, and economic conditions affect how any
                   GAAP, including IFRS, is applied.
                  For example, regarding environmental factors, the
                   litigation environment affects conservatism in financial
                  For a company located in a nation where there is a
                   high risk of investor lawsuits, such as the US, there
                   will be a different perspective on conservatism than in
                   a nation that is less litigious.
                  Thus, IFRS will be applied differently depending on
                   the national culture. Properly evaluating investment
                   opportunities in any country requires that the investor
                   understand the culture of that country.
Impact of Ethics on International Financial Reporting
              No set of accounting standards, whether IFRSs,
               US GAAP, or other set of accounting standards,
               can replace the necessity for accountants to have
               the highest level of ethical character.
              Corporate financial scandals rarely ever result
               from deficiencies in accounting standards alone,
               but are frequently the result from weaknesses in
               the ethical character of the perpetrators, which
               may include top management, corporate
               accountants, and auditors.
              Greed and over-reaching ambition have led to
               disastrous consequences for corporations and
               their stakeholders.
              Considering the problem of greed, Solomon
               wrote: “Whoever loves money never has money
               enough; whoever loves wealth is never satisfied
               with his income” (Ecclesiastes 5:10).
Impact of Ethics on International Financial Reporting

                      Author, Army veteran, U.S Congress
                      Representative from Tennessee, and
                      hero of the Alamo, David Crockett used
                      the following campaign slogan:
                      Be sure you’re right, then go ahead.
Winning isn’t everything, but doing what’s right is.
Impact of Ethics on International Financial Reporting

                   Without ethical character, proper
                    professional judgment is virtually
                   Since IFRSs are regarded as more
                    principles-based as opposed to the more
                    rules-based US GAAP, ethical character
                    and professional judgment will be even
                    more critical (if that is possible) in an
                    IFRS-based financial reporting
    Take-Away Points

    IFRSs are the accounting standards published by the International
     Accounting Standards Board (IASB).
    IFRSs are now accepted or required in more than 100 countries.
    Leading accounting experts anticipate that IFRSs will be accepted for
     financial reporting, in place of US GAAP, for all companies listed in
     US stock market, as early as 2012 or 2013.
    Since IFRSs are regarded as more principles-based as opposed to
     the more rules-based US GAAP, ethical character and professional
     judgment will be even more critical (if that is possible) in an IFRS-
     based financial reporting environment.
    Be sure you’re right, then go ahead.

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