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Harmonization of Accounting

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					International Harmonization of
      Financial Reporting
    Summary of Diversity Research
    Findings as of 1995

       Micro/macro, code-law and common law, were found
        to consistently be highly correlated with patterns of
        financial reporting around the world.
       Culture appeared to play an important role
        everywhere, but what characteristics dominated
        remained unclear.
       Inflation and trading relationships, in some countries,
        seem to matter a great deal.
       Economic variables were implicated but the
        importance of their role was unclear.

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    These findings left many questions
    unanswered, including the following:

       Could diversity be reduced throughout the
        world? If so, how?
       Would it be wise to reduce diversity?
       If so, how much? What are the costs vs
        benefits of imposing upon the business world
        a reporting system with far less diversity?
       Would it happen by itself naturally?
       How could mandated changes be enforced?

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    Beginning in the 1970s:

       Efforts began to reduce financial reporting diversity.
       These early fledgling efforts were met with great
        resistance.
       Most of the early effort began in Europe, as an
        extension of the dream of many for economic and
        political unity on the European continent.
       The International Accounting Standards Committee
        (IASC) was also formed by professional accounting
        groups in 1973.

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    In the 1980s:

       Progress, though incomplete and imperfect,
        was made in Europe.
        –   The EU began to endorse changes in reporting
            practices.
        –   The 4th and 7th directives were implemented.
        –   EU directives were given the force of law.
        –   For the first time, some reporting diversity,
            especially in the extremes, was reduced.



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    On the other hand:

       The IASC floundered with a small staff and little
        support.
       It mostly issued low level, “anything goes” standards
        copied from others.
       Many countries, regardless of how economically
        significant, around the world were equally
        represented on the IASC.
       Most major economic players ignored the IASC.


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    In the 1990s:

       Berlin wall falls, and not long after, the USSR
        collapses with it.
       US capital markets take off, continuing an
        unprecedented bull run that drives share prices up,
        on average, over 1500% from 1982-1999.
       Many economies around the world go into steep
        decline (e.g., Japan and Russia).
       Bank capital becomes scarce.
       The Asian crisis occurs in 1998, sparked by the
        collapse of Indonesia’s currency, markets and
        economy.

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    In the wake of these events:

       American (corporate?) influence expanded
        dramatically.
       The importance of equity financing grew and shaped
        business interests around the world.
       Currency manipulations and shifts reached
        unprecedented levels as attempts were made to
        stabilize the world economy.
       The concept of harmonized financial reporting was
        given new credibility and support.

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    What is harmonization?
    Harmonization -- the process of increasing the
    level of agreement in accounting standards and
    practices between countries.




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     Harmonization

     The two “levels” of Harmonization
        Harmonization in accounting standards,
         which is increased agreement in accounting
         rules.
        Harmonization in practice, which is increased
         agreement in actual accounting practices.
        Harmonization in standards may or may not
         result in harmonization in practice.

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     Harmonization

     Harmonization
        Is different from Standardization.
        Harmonization allows for different standards
         in different countries as long as there are not
         logical conflicts.
         Standardization involves using the same
         standards in different countries.


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     Some of the Significant Harmonization
     Efforts of the 1990s and 2000s:

     IOSCO
        Worked to achieve improved market
         regulation internationally.
        Worked to facilitate cross-border listings.
        Advocated for the development and adoption
         of a single-set of high quality accounting
         standards.


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     The EU

        The EU achieved in monetary union in a
         phased-in fashion between 1999-2002.
        The EU also added many new members
         from Eastern Europe.
        The EU stopped making separate standards.
         As of 2005, it requires members to use
         IFRSs.


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     Harmonization Efforts

     IASB
        Preceded by the IASC (International
         Accounting Standards Committee).
        Works toward harmonization of international
         accounting standards.
        IASB was created in 2001.



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     The Question of Credibility

        The crucial problem was how to be effective.
        SEC indicated an international standard-
         setter would have to be FASB-like, i.e.,
         driven by expertise, not geography.
        EU wanted geographical representation to be
         emphasized.
        IASB decided to be expert-driven.

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     History of IASB – Why now (2001)?

        1987&89- Beginning of effective attempts at IASC to
         reduce flexibility. IOSCO lobbies for common
         standards. E32 issued.
        1995- IOSCO demands acceptable set of standards.
        Agreement between IASB and IOSCO that IASs can
         be used in cross-border listings as an alternative to
         national standards IF core standards were created.
        Core standards are completed in 1998.


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     Major Players Jump on Board

        1998-Germany allows “internationally
         recognized” rules for consolidated
         statements.
        2000-IOSCO recommends acceptance of
         30 IAS core standards for cross-border
         listings.
        2005- EU makes IASs compulsory for all
         firms preparing consolidated statements.

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     IASB- Structure and Process

        Comprised of 14 members (12 full, 2 part-
         time).
        7 members are liaison with a national board.
        Standard development process is open.
        Standards are principles-based.
        Since establishment of IASB, focus is on
         global standard-setting rather than
         harmonization per se.

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     IASB – Structure and Process

        Up until 2000 –Issued IASs
        After 2000- Issues IFRSs (Intl financial
         reporting standards)
        Similar process to FASB- “in the sunshine”
         due process.
        SIC- final step- interprets the standards.



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     IASB- Structure and Process

        Publication of an exposure draft and/or
         standard-requires 8 of the 14 members
         approval.
        Financed mostly by selling publications.
        At end of 1998, IASB found itself in
         competition with FASB, as many firms sought
         to be listed on US Exchanges.


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     Geographical Backgrounds of IASC
     Trustees- 2001-2002

                               US
           5
                               Japan
           4                   Australia
                               Canada
           3                   S Africa
                               France
           2                   Germany
                               Switz
           1                   Brazil
                               China
           0                   Denmark
                  Number       Italy
                               Holland
                               UK
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     IASB Members- 2001

          5
                          US
          4
                          UK
                          Australia
          3
                          Canada
                          S Africa
          2
                          France
                          Germany
          1
                          Japan
                          Switz
          0
                Number



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     Companies referring to the use of IAS
     standards in 2001

                                  Austria
           70
                                  Bahrain
           60                     China
           50                     Cyprus
                                  Czech Rep
           40
                                  Denmark
           30                     Switz
           20                     France
                                  Germany
           10                     Hong Kong
            0                     Hungary
                 # of companies   Kuwait
                                  Latvia
                                  S Africa
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     IASB-Limitations

        No Power to Enforce or require use of
         standards.
        Result-Each country individually decides
         whether to accept IASs.
        Major holdouts that still do not accept IAS
         standards- US, Canada, and Japan.



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     Principles-Based Approach to
     Accounting Standard Setting

     IASB Perspective
        IASB attempts to follow a Principles-Based
         approach to standard setting.
        As such accounting standards are grounded
         in the IASB Framework.




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     Principles-Based Approach to
     Accounting Standard Setting

     A Principles-Based approach
        Represents a contrast to a Rules-Based
         Approach.
        Attempts to limit additional accounting
         guidance (e.g., FASB EITFs, FASB
         Interpretations).
        Is designed to encourage professional
         judgment and discourage over-reliance on
         detailed rules.
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     IASB Framework and IFRSs

     IASB Framework
        Similar to the relationship between U.S.
         GAAP financial statements and the FASB
         Conceptual Framework.




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     IASB Framework and IFRSs

     IASB Framework
        Provides the basis for financial statements presented
         in accordance with IFRS.
     Includes:
      The objective and underlying assumptions of
        financial statements.
      Qualitative characteristics of information.
      Definition, recognition, and measurement of
        elements in financial statements.
      Concepts of capital maintenance.



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     IASB Framework and IFRSs

     IASB Framework
        The “objective and underlying assumptions
         of financial statements”:
         –   Primary objective is to provide information useful
             to decision making.
         –   Underlying assumptions include accrual-basis
             and going concern.



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     IASB Framework and IFRSs

     Qualitative characteristics of
      information
        Understandability – should be
         understandable to people with reasonable
         financial knowledge.
        Comparability – allows for meaningful
         comparisons to financial statements of
         previous periods and other companies.

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     IASB Framework and IFRSs

     Qualitative characteristics of
      information
        Relevance – useful for making predictions
         and confirming existing expectations.
        Reliability – free from bias (neutral) and
         represents that which it claims to represent
         (representational faithfulness).


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     IASB Framework and IFRSs

     Elements of Financial Statements
        Definition – assets, liabilities, and other
         financial statement elements are defined.
        Recognition – guidelines as to when to
         recognize revenues and expenses.
        Measurement – various bases are allowed,
         historical cost, current cost, realizable value,
         and present value.

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     IASB Framework and IFRSs

     Concepts of Capital maintenance
     Financial capital maintenance
      One approach to income measurement.
      Net income represents the increase in net
       financial assets, excluding owner
       transactions.
      The approach in U.S. GAAP.



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     IASB Framework and IFRSs

     Concepts of Capital maintenance
     Physical capital maintenance
      Another approach to income measurement.
      Net income represents increase in physical
       productive capacity.
      Excluding owner transactions.
      Requires current costs for measurement of
       certain physical assets.

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          IASB/FASB Convergence

          The Norwalk Agreement
             Reached in 2002.
             Between the IASB and FASB.
             To work toward accounting standards
              convergence.




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Learning Objective 7
          IASB/FASB Convergence

          FASB’s key initiatives in the Norwalk
          Agreement
           Joint projects – boards will work together to
            address some issues (e.g., revenue recognition).
           Short-term convergence – to remove differences
            between IFRSs and U.S. GAAP for issues where
            convergence is deemed most likely.
           IASB liaison – IASB member in residence at FASB.




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Learning Objective 7
          IASB/FASB Convergence

             Monitoring IASB projects – FASB monitors
              IASB projects of most interest.
             Convergence research project –
              identification of all major differences between
              IFRSs and U.S. GAAP.
             Convergence potential – FASB assesses
              agenda items for possible cooperation with
              IASB.

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Learning Objective 7

				
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