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					        Chapter 7
International Accounting
   Standards and Global
           Convergence
Comparability of Accounting
Information
   International pressure exists for
    comparability, especially with MNEs
   Different approaches to comparability
       Harmonization is more flexible
       Standardization suggests a state of uniformity




         International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Which groups are interested?
   Governments
   Trade Unions
   Investors (including financial analysts)
   Bankers and lenders
   Accountants and Auditors




       International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Governments
   Government involvement in accounting determination varies
    across the world
   Do governments really use corporate reports?
       Info needed by govt.’s is often extensive to include in the report
            More relevant for Govt. involved countries like Germany/France
       Governments can demand whatever information they need
            Information needs are extensive and confidential
            Influenced by government planning and regulation/tax
            Power of government to obtain info suggest governments may
             not be important users of corporate report




            International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Government use of annual
reports
   Use reports, along with segmental information, to
    check performance of local subsidiaries of MNEs
   Governments wish to monitor MNE operations as a
    whole – their importance to commercial
    development
   Governmental needs in differing departments can
    be accommodated by an annual report
   Developing countries would have more information
    without bargaining for it with increased corporate
    disclosure – but MNE have more power to control
    the process – Host govt. fear of losing MNE

       International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Governmental use of annual
reports
   Interest in extranational operations of MNEs
    – to some extent information sharing
   Intergovernmental organizations use this
    information for policy formulation (UN, EU).
   Many governments desire increased
    bargaining power for information as members
    of intergovernmental organizations



       International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental
Organizations
   United Nations
       1976 study lack of information / int’l compararbility
       1979 – Working Group of Experts established
         Emphasis on developing countries
         Have different interests from those of OECD and IFRS
         Major aim is international disclosure standards
         Intergovernmental Working Group of Experts on
          International Standards of Accounting and Reporting (ISAR)
          established in 1983
         Current issues deal with corporate governance
         Monitoring role in endorsing desirable standards
         UNCTAD – represented in
             Standards Advisory Council of the IASB
             Advisory Panel of Small and Medium-sized Entities of the IASB


         International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental
Organizations
   Organization for Economic Cooperation and
    Development (OECD)
       Represents industrialized nations – US, UK, Australia,
        Germany, France, Canada, Japan – most MNEs exist here
       Issued Guidelines for Multinational Enterprises
         Aimed at strengthening confidence between MNEs
           and governments
         Not required by law – though govt.’s agreed to
          recommend guidelines related to financing, taxation,
          competition, etc. – as more of benchmark
       Aim is to promote improvements in comparability and
        harmonization of standards – though not standard setting
       Let’s go over exhibit 7.1


         International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union – 25 countries
   Involved in international harmonization of
    standards as part of company law
    harmonization
   Goal is to promote European economic
    integration and development
   No company should be at a disadvantage
    because of legal differences between
    countries


       International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
International Organizations –
European Union
   Interests of shareholders, lenders, suppliers,
    and other parties are protected
   Directives in the EU have the force of law and
    must be ratified by member nations
   Regulations become law without national
    ratification




       International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
   Fourth Directive – approved in 1978
       Requirements relate to
            Disclosure
            Classification and presentation of information
            Methods of valuation
       Compromise between continental European and
        Anglo-American systems
       Contains detailed requirements for historical cost
        accounting with some flexibility


            International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
   Fourth Directive
       Level of disclosure and transparency increased
       Historical costing concepts adopted with flexibility in
        valuing inventory, goodwill, depreciation.
       “true and fair view” concept adopted
       Different layouts of financial statements allowed
       Starting point for harmonization process
       Does not adequately address
         Foreign currency translation

         Leases and funds

         Cash flow statement


         International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
   Seventh Directive (1983) – Consolidated Accounts
       Definition of Control Group source of controversy.
         UK definition (Share ownership/legal control) v. German
          definition of effective control and ownership.
         Compromise: control other than ownership could be
          applied on optional basis.
       Requirements
         Worldwide consolidations
         “Fair value” approach for assets purchased through
          acquisitions
         Equity treatment of associated corporations
         Segmental disclosures of turnover by line of business and
          geographical area
       Disclosure has been substantially improved

         International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
   Additional Directives
       Eighth Directive – adopted in 1984
            Deals with qualification and work of auditors
                Includes minimum educational requirements
                Encourages mobility of professional auditors
       Proposed directive for employee disclosure was
        put aside due to MNE and government opposition
            Issues readdressed in Charter of Fundamental Social
             Rights



            International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Intergovernmental Organizations –
European Union
   Harmonization of stock exchange regulations
    and securities laws is also a prerogative
       Ensure investor access to sufficient information
       Promote capital market and stock exchanges
   Reaffirmed commitment to harmonization in
    2000 requiring all listed companies to adopt
    IFRS in 2005
       Includes all IAS except IAS 32 and 39 (as these
        under revision by IASB)
       All Standard Industrial Classifications (SIC)

         International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Trade Unions and Employees
   International Trade Union Confederations
       European Trade Unions Confederation
       International Confederation of Free Trade Unions
       World Confederation of Labor
   Industry-specific trade unions
       Deal with individual MNEs
   National Trade Unions
       Influence MNEs on a variety of levels
   Information needs depend on contact with MNEs
    and purpose of information

         International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Trade Unions and Employees
   Power exists in the nation where they operate –
    Striking very powerful tool esp in EU
   Unions have not grown beyond national boundaries
    as MNEs have
   Trade union pronouncements are aimed at
    establishing policies concerning MNEs
   Main concern centers on subsidiaries
       Transfer pricing policies are a major concern
       MNE subsidiary transactions have received little attention
        to date by regulatory bodies
   Information about the terms, conditions, scale,
    security, and location of employment are of concern

         International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Investors
   Owners or potential owners of shares in the
    MNE parent corp. or a subsidiary
   Interests are represented by international
    financial analyst organizations and IOSCO
   Concerned with current lack of comparability
   Some want information approach rather than
    a market approach to disclosure



       International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Investors
   International organizations
       ICCFAA and IOSCO
            IOSCO - works for multilisting and international trading
            IOSCO is closely associated with the IASB
   Want comparable information
       Interested in segmental information of MNEs
       Interested in consolidated results




            International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Bankers and Lenders
   Information needs are focused on financial
    positions, performance, and future prospects
   Concerned with security of loans advanced
   Significant impact in France, Germany, Japan
   Have more direct access to required info
   International banks are involved in
    harmonization and often require special
    financial reports (IFC, World Bank, etc.)

       International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
   International Accounting Standards Board
       Formerly the IASC
       Governed by 14 board members
       Objectives
            Propose international standards and promote their
             acceptance
            Work toward improvement and harmonization of
             standards
       Goal achieve comparability while minimizing cost
        of MNE to comply with accounting standards

            International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
   IASB
     Adopted 41 IAS standards, completed 5 new standards, and
       revised 15 existing standards
     Achievements
            Completed a core set of standards in 2000 as agreed with IOSCO for
             cross-board and national listings
            Recent efforts are focused on EU compliance with IFRS in 2005
       Endorsement by IOSCO was limited
            Members of IOSCO are permitted to require reconciliation of certain
             items, supplementary information, and eliminate some options
             existing in IAS
            Members will individually determine whether or not to endorse IFRS
             for cross-boarder listings


            International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
   IFRS and U.S. GAAP
       IASB and FASB are working toward similar
        accounting standards
       FASB is researching international convergence
            Objectives include
                Identify every substantive difference between U.S. GAAP
                 and IFRS
                Catalog those differences according to the strategy for
                 resolving them
                Recommend further agenda decisions to the Board to
                 further the objective of convergence with IFRS


            International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
   IFRS and U.S. GAAP
       Benefits of convergence according to the FASB
            Increased efficiency in capital markets by increased
             comparability and transparency from nation to nation
            Reducing the administrative burden for MNEs by
             allowing only one set of financials to be prepared
            Enable U.S. companies access to capital markets
             throughout the world without reconciling U.S. GAAP to
             IFRS



            International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
   IFRS and U.S. GAAP
       Street, Nichols, and Gray (2000) suggest the gap
        is narrowing
       Major differences are in the areas of
            Property, plant and equipment revaluations
            Deferred taxes
            Goodwill
            Capitalized borrowing costs
       SEC desires enforcement of international
        standards if they are in place


            International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
   Rules versus Principles
       Recent scandals and aftermath perhaps show a
        need for principle-based standards – Rules often
        lend more opportunity to form over substance
       Sarbanes-Oxley requires the SEC to examine the
        feasibility of principles-based standards
       Problems with principles-based standards
            Guidance for application
            Comparability
            No guidance for complex transactions


            International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
   Rules versus Principles
       Survey by Mike Ng (2004)
            93% of companies surveyed reported that is was
             possible to apply rules-based standards but not reflect
             the economic substance of the transaction
            Only 7% of companies surveyed believed principles-
             based standards would lead to a better reflection of
             economic reality
            Results show that neither approach will ensure that
             companies report the economic reality of transactions


            International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
   Noncompliance with IFRS is problematic
       IASI states that compliance means following IFRS and
        each interpretation of IFRS
         Improper accounting treatment is not condoned by
           explaining accounting treatments applied or by footnotes
           (paraphrase IASI).
       Street and Gray (2000) found that only 77% of the 162
        companies in their sample stated they were fully compliant
        with IAS.
         International accounting firms are not supporting the
           enforcement of IAS
       New structure of the IASB should help with compliance –
        raising standards of accounting and auditing worldwide

         International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
   International Federation of Accountants
       Sets international auditing guidelines
       Promotes international convergence of standards
   International Auditing and Assurance
    Standards Board
       Independent body under the IFAC that creates
        International Auditing Standards (ISA)




         International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accounting and Auditors
   Reforms by the IFAC in cooperation with accounting
    firms, member bodies, regulators, and accounting
    organizations include:
       Establishment of the Public Interest Oversight Board to
        oversee IFAC’s standard setting process
       Increased transparency with regard to IFAC governance
        and international standard setting
       Public participation in the standard-setting process
       A more formal process of communicating with international
        regulators



         International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
   International Forum on Accountancy Development (IFAD)
     Created after the Asian financial crisis to aid developing nations

     Encourages conformity with IFRS

     Developed the International Financial Framework to aid in
       improving standards within national financial frameworks
     Conducted a GAAP Convergence Survey (2002)
           90% of countries surveyed plan to convert to IFRS
           Majority of countries surveyed plan to converge with IFRS by
            establishing a government regulation or a standard-setting body
           Half of the countries surveyed see a barrier to convergence in the
            complication of standards




           International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
Accountants and Auditors
   International Association for Accounting Education and
    Research
     Promotes excellence in accounting education

     Contributes to development of international standards




       International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
The International Harmonization
and Disclosure Debate
   Some see harmonization and disclosure as a means
    to create a balance of power between MNEs and
    domestic corporations
   More industrialized nations will not be totally
    supportive of increased regulation
   Regional integration
       Long-term goal to remove market imperfections and
        eliminate regulatory barriers (EU)
   Many countries are more concerned with protecting
    their own business community at the expense of
    others

         International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
The International Harmonization
and Disclosure Debate
   Differences in reporting are due to
    differences in domestic needs
   With domestic corporations, there is little
    concern for international standards
   Natural accounting coordination will be a
    lengthy process according to research
   Regional economic groupings (EU) and
    intergovernmental organizations (UN) will
    help

       International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black
The International Harmonization
and Disclosure Debate
   Future developments will be centered on
    MNEs
   May be less disclosure now in practice
    because of the complex nature of MNEs
   National reporting requirements may limit
    disclosure




       International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

				
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