Chapter Eleven

Worldwide
Accounting
Diversity and
International
Accounting
Standards

McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
LO 1
Reasons for Accounting Diversity

Legal
System
Tax Regimes

Political
and AllCulture
these
Economic
Ties
interact!!!
Financial
Providers
Inflation

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Grays Framework for the Development
of Accounting Systems Internationally

Cultural Dimensions Institutional Conseq.

Individualism Legal system
Uncertainty Avoidance Corporate Ownership
Power Distance Capital Markets
Masculinity Professional Associations
Education & Religion

Accounting Values Accounting Systems

Professionalism Authority
Uniformity Enforcement
Conservatism Measurement
Secrecy Disclosure
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 Nobes Model of the Reasons for
International Accounting Diversity
Nobes simplified model has two explanatory factors:
(1) national culture, including institutional structures,
(2) the nature of a countrys financing system
divided into two classes.
Class A (Strong equity-outsider financing system)
Less conservative
Greater disclosure
Financial and tax accounting separate
Class B (Weak equity-outsider financing system)
More conservative
Less extensive disclosure
Financial reporting follows tax rules

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LO 2 Problems Caused By Diverse
Accounting Standards
Problems
1. Subs use local standards for financial statements.
The parent must adjust the subs statements to
GAAP. Statements must be re-stated in common
standards.
2. To access foreign capital markets, costly measures
must be taken to prepare financial statements that
comply with local standards.
3. Financial statements from different countries are
simply not comparable. Accounting rules differ from
country to country.

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LO 3 International Accounting Standards
Board (IASB)

International Accounting Standards

committee (IASC) established in 1973.
IASB superseded IASC in April 2001.
14-member board
(12 full-time, 2 part-time)
The IASB has sole responsibility for
establishing IFRSs (IASB GAAP)
IASB has no enforcement authority!!

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LO 4 International 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.

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LO 5 Norwalk Agreement:
FASB-IASB Convergence

In 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 and
2. Coordinate efforts to ensure that once
achieved, compatibility is maintained

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 FASB-IASB Convergence

FASB initiatives include:

Short-term convergence project
Joint projects
Convergence research project
Liaison IASB member at FASB offices
Monitoring of IASB projects
Explicit consideration of convergence
potential in FASB agenda decisions

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 SEC Acceptance Of IFRS

IFRS 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.
Large companies with market capitalization
greater than $700 million (so-called large
accelerated filers) would be the first required
to use IFRS.

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 SEC Acceptance Of IFRS

IFRS Roadmap Milestones:

Improvements in IFRS
Accountability and funding for the IASB
Improvement in the ability to use interactive
data for IFRS reporting
Education and training
However, in May 2011, the SEC published a
suggested framework for an endorsement
process incorporating IFRS into U.S. GAAP.

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 First-time Adoption of IFRS

Steps To prepare opening IFRS balance sheet:

1. Determine the applicable IFRS.
2. Recognize assets and liabilities not recognized
under GAAP and derecognize those not
allowed under IFRS.
3. Measure the balance sheet accounts under
IFRS at the balance sheet date.
4. Reclassify certain assets and liabilities in
accordance with IFRS.
5. Comply with disclosure and presentation
requirements.
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 IFRS Accounting Policy Hierarchy

IAS 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 bodies

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LO 6 Current Differences Between IFRSs and
US GAAP

Recognition: Presentation:
Principles? Financial
If recognized, how? When? Statement Components?

Disclosure: Measurement:
If allowed, How? How is cost determined?

Discontinued Extraordinary Fixed

Inventory
Operations Items Assets

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LO 7 Significant Differences
Between IFRSs and US
GAAP
U.S. GAAP Reconciliations:
Interest Capitalization
Business Combinations
Purchase vs. Pooling Methods
Goodwill
Amortization vs. Impairment
Leases
Revaluation of Fixed Assets
Fixed Asset Impairment Losses

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