FINANCIAL

ACCOUNTING
THEORY AND
ANALYSIS:
TEXT AND CASES
11TH EDITION
RICHARD G. SCHROEDER
MYRTLE W. CLARK
JACK M. CATHEY

CHAPTER
3
INTERNATIONAL ACCOUNTING

International Accounting
Standards
Financial accounting is influenced
by the environment in which it operates
Companies develop financial reports directed at their
primary users
Previously most were residents of the same country as the
corporation
Transnational financial reporting has become more commonplace
because of the European Union, GATT and NAFTA

U. S. companies must be able to compete in global

markets with transnational financial reporting

International Business
Accounting Issues
A companys first exposure to
international accounting is
frequently the result of a purchase
or sale
Problems:
1
2
2

Exchange gains or losses

Obtaining credit information
Evaluation of financial statements

Next step may be to open an international division

Another issue is raising capital in foreign markets
Must prepare financial statements in a format acceptable
by appropriate securities market

Factors Influencing the

Development of Accounting
Systems:
Level of
Education

Legal
System

Political
System

Economic
Development

Influences on the Development

of Financial Reporting
Type of
economy

Agricultural
Resource Based
Tourist Based
Manufacturing

Legal
System

Codified
Common Law

Political
System

Democratic
Totalitarian

Nature of
Ownership

Private Enterprise
Socialist
Communist

Influences on the Development

of Financial Reporting
Growth
Pattern of
economy

Growing
Stable
Declining

Social Climate
Stability of currency
Sophistication of management
Sophistication of financial community
Existence of accounting legislation
Education System

Approaches to Preparing
Financial Statements for Use
in Other Countries:
2
2
2
2
2

Same to all
Translate language
Translate language and currency
Two sets
World-wide standards

The International Accounting

Standards Committee
The preparation of financial statements for foreign users
under option #5 is being increasingly advocated
IASC
Formed in 1973 to
aid in this process

International
Accounting
Standards Board
Replaced IASC in
2001

Standard Setting by the

IASC

Original intent:

Avoid complex details

Concentrate on basic standards

Steps in the process

Similar to FASB
2

Steering Committee

Identify issues and prepare point outline

Board prepares comments

Steering Committee prepares final Statement of Principles

Exposure Draft

Steering Committee reviews comments and prepares final standard

Standard Setting by the

IASC
Two treatments
2 Benchmark - point of reference
2 Alternative

Improvements Project
2003
Removed some of the existing alternative accounting
treatments
Where an IAS retains alternative treatments
IASB removed references to 'benchmark treatment'
Now termed 'alternative treatment'
Using descriptive references
Cost model'
Revaluation model'

Restructuring the IASC

In its early years, IASC acted mainly as a harmonizer
Recently, it has begun to combine that role with the role of a
catalyst

Harmonizer

Catalyst

Coordinator of national initiatives

Initiator of new work
at national level

Restructuring the IASB

Future IASB role as catalyst and initiator should become
more prominent
Important for the IASB to focus objectives more precisely,
as follows:
1. To develop international accounting standards that require highquality, transparent, and comparable information that will help
participants in capital markets and others to make economic
decisions; and
2. To promote the use of international accounting standards by
working with national standard setters.

Restructuring the IASB

Structural changes needed

So that IASB can anticipate the new challenges facing it and meet those
challenges effectively.

Issues that need to be addressed:

1. Partnership with national standard setters.
IASB should enter into a partnership with national standard setters
So that IASB can work together with them to accelerate

Convergence between national standards

And international accounting standards around solutions requiring highquality, transparent, and comparable information

That will help participants in capital markets and others to make

economic decisions.

Restructuring the IASB

2.

Wider participation in the IASB Board.

A wider group of countries and organizations should take part in the
IASB Board

3.

Without diluting the quality of the Board's work

Appointment.

The process for appointments to the IASB Board and key IASB
committees should be the responsibility of a variety of
constituencies
Those appointed must be competent , independent, and objective.

Restructuring the IASB

2001:
Responsibility for international standardssetting was transferred to the to the
International Accounting Standards
Board (IASB)

Restructuring the IASB

The new structure:
The IASC Foundation
The International Accounting
Standards Board
The International Accounting
Standards Advisory Council
International Financial Reporting
Interpretations Committee

IASB

Appoints

KEY:
Structure

Reports To
Advises

Monitoring Board
Approve and Oversee Trustees
IASC Foundation
22 Trustees Appoint, Oversee, Raise Funds

Board: 16 (Maximum 3 part-time)

Set Technical Agenda. Approve Standards,
Exposure Drafts, & Interpretations

IFRS Advisory
Council
Approx. 40 members

Working Groups
For Major Agenda Projects

IFRS Interpretations
Committee
(14 members)

Revising the IASBs

Constitution
Key issues to be reviewed:
1. Whether the objectives of the IASC Foundation should
expressly refer to the challenges facing small and mediumsized entities (SMEs)
2. Number of Trustees and their geographical and professional
distribution
3. The oversight role of the Trustees
4. Funding of the IASC Foundation
5. The composition of the IASB
6. The appropriateness of the IASB's existing formal liaison
relationships
7. Consultative arrangements of the IASB
8. Voting procedures of the IASB
9. Resources and effectiveness of the International Financial
Reporting Interpretations Committee (UMC):
10. The composition, role, and effectiveness of the SAC

The Uses of International

Accounting Standards
IASC noted that its standards are used in a variety of
ways:
2 National requirements
2 Basis for national requirements
2 Benchmark to develop standards
2 By regulatory agencies
2 By companies

Also International Organization of Securities Commissions

(IOSCO) looks to the IASC to provide standards that can
be used in multinational securities offerings

Other Issues
Partnership with the IOSCO
Generate standards acceptable to IOSCO

December 17, 2003

IASB published 13 revised International Accounting Standards
Reissued two others
Gave notice of the withdrawal of its standard on price level
accounting.

Revised and reissued standards mark near-completion of

the IASBs Improvements project
2005: reaffirmed support and development of IFRS

IASB Annual Improvements

Project
July 2006
Non-urgent issues
Amendments

The Use of IASC Standards

Adopted by approx. 120 countries
EU
Australia
New Zealand

Planned option by others

Israel
Canada
Japan
China

US (?)

FASB Short-term
International
Convergence Project
The goal of this project is to remove a variety of
individual differences between U.S. GAAP and
International Financial Reporting Standards that are not
within the scope of other major projects.

The project scope is limited to those differences in which convergence

around a high-quality solution would appear to be achievable in the
short-term, usually by selecting between existing IFRS and U.S. GAAP.

The Norwalk Agreement

12/18/2002:
FASB and IASB held joint meeting in Norwalk, Connecticut
Both standard setting bodies acknowledged

Their commitment to the development of high-quality compatible

accounting standards that can be used for both domestic and
cross-border financial reporting.

Also committed to use their best efforts to make their existing

financial reporting standards compatible as soon as
practicable and to coordinate their future work programs to
help ensure that once compatibility is achieved, it will be
maintained.

The Norwalk Agreement

Both Boards agreed to:

1. Undertake a short-term project aimed at removing a variety of
differences between U. S. GAAP and IFRSs.
2. Remove any other differences between IFRSs and U. S.
GAAP that may remain on January 1, 2005 by undertaking
projects that both Boards would address concurrently.
3. Continue the progress on the joint projects currently underway.
4. Encourage their respective interpretative bodies to coordinate
their activities.

The Roadmap to
2005
agreement between FASB & IASB:
Convergence

Convergence best achieved with high-quality, common

standards
Develop a new common standard rather than try to eliminate
differences
Replace weaker standards with stronger standards

The Roadmap to
7Convergence
Original Milestones
1.
2.
3.
4.
5.
6.
7.

Improvements to accounting standards

Funding of IASCF
Improved ability to use interactive data for IFRS reporting
Improved education and training in the US
Limited use in narrow group of companies
SEC to determine in 2011 if mandatory adoption is feasible
Mandatory use

2014
2015
2016

SEC staff report

July 2012 final report
How can IFRS be incorporated into financial
reporting system for US issuers?
Retain US GAAP while considering aspects of
convergence and endorsement?
Options for US issuers

No final decision or recommendation

SEC staff report

Key findings
1. US standards perceived as high quality
2. IFRIC should do more to address practice issues on
timely basis
3. IASB should consider placing greater reliance on
national standard setters
4. Global application of IFRS and cooperation among
regulators could be improved
5. Overall design of governance structure reasonable
6. IFRS Foundation has made progress in developing a
broad-based funding mechanism
7. US investors current understanding of IFRS varies
significantly

SEC staff report

Identified 6 areas of consideration
1. Sufficient development and application of IFRS for
US domestic reporting system
2. Independent standard setting for benefit of investors
3. Investor understanding and education regarding
IFRS
4. Regulatory environment
5. Impact on issuers
6. Human capital readiness

International vs. GAAP

Accounting Standards
VS
Question: Should foreign companies be
allowed to list their securities in United
States markets
Form 20-F reconciliations
Pressure on the SEC to accept
international accounting rules

SEC Staff Report

In 2011, the SEC staff issued a report analyzing the use
of IFRS in practice.
Focused on how the recognition and measurement requirements
of IFRS were applied in practice.
Compared their observations for all companies to identify trends
on an overall basis as well as by country and industry.

Report is informational only and does not include

conclusions or recommendations.
Found that company financial statements generally
appeared to comply with IFRS requirements.

SEC Staff Report

Noted that apparent compliance should be
considered in light of the following two concerns :
Transparency and clarity of the financial statements in
the sample could be enhanced
Diversity in the application of IFRS presented
challenges to the comparability of financial statements
across countries and industries. This diversity can be
attributed to a variety of factors.
Explicit options permitted by IFRS or owing to the absence of
IFRS guidance in certain areas.
Noncompliance with IFRS.

IS Adopting IFRS Feasible?

Miller and Bahnson:
SEC has already determined that adopting IFRS is
legally impossible.
Allowing U.S. companies to choose between GAAP
and IFRS would be unworkable.

Selling:
After Europe discovers that working with an IASB that
doesnt include the United States is of little benefit, the
next step will be for every other country with mature
standard setting mechanisms to revert to their
previous standard-setting procedures

Standards Overload
2009: IASB published
IFRS for small to
medium-sized
businesses
95% of all companies
Provide simplified
standards
Now reviewing impact
Another area of
difference with U. S.
GAAP

Framework for the Preparation

and Presentation of Financial
Statements
Purpose - to set out concepts that underlie the preparation
and presentation of financial statements by:
Assisting the IASC in developing future standards
Promoting harmonization of accounting standards
Assisting national standard setters
Assisting preparers in applying international standards
Assisting auditors in forming an opinion as to
whether financial statements conform to
international standards
2 Assisting users in interpreting financial
statements prepared in conformity with
international standards
2 Providing interested parties with information
about the IASCs approach to the formation
of international accounting standards
2
2
2
2
2

Framework for the Preparation

and Presentation of Financial
Statement
The Framework specifies:
Chapter 1: The Objective of GeneralPurpose Financial Reporting
This topic is discussed in Chapter 2 of this text.
Chapter 2: The Reporting Entity
The chapter on the Reporting Entity will be
inserted once the IASB has completed its
redeliberations following the Exposure draft
issued in March 2010.
Chapter 3: Qualitative Characteristics of
Useful Financial Information
This topic is discussed in Chapter 2 of this text.
Chapter 4: The Framework: The Remaining
Text

Underlying Assumption

Going concern
If that presumption is invalid, appropriate
disclosure and a different basis of
reporting are required.

The Elements of Financial

Statements
Asset
Liability
Equity
Income
Expense
The concept of recognition
2 Probable
2 Measurable

The Concepts of Capital

Maintenance
Concepts:
2 Financial capital maintenance
2 Physical capital maintenance

Selection of the measurement bases and the

concept of capital maintenance chosen will
determine the accounting model
IASC does not intend to prescribe a model

The IASBFASB Financial

Statement Presentation

Project
IASB and the FASB are undertaking a joint project to

develop a new joint standard for presenting financial

statements.
Ultimately, the new standard will replace IAS No. 1 ,
Presentation and IAS No. 7 ,
The main objective of this project is to address
fundamental issues relating to presentation and display
of information in the financial statements, including:
The relationship between items across financial statements
The disaggregation of information so that it is useful in predicting
an entitys future cash flows
The provision of information to help users assess an entitys
liquidity and financial flexibility

Future work program

In July 2011, the IASB requested
consultation on its future work plan.
This consultation sought input on the
direction and the overall balance of its work.
Culminated in the release of a Feedback
Statement issued by the IASB on December
18, 2012 that identified several key themes:
A period of calm.
Prioritize work on the Conceptual Framework
Targeted improvements to certain standards
Updates to assist implementation and
maintenance.
Updates to assist in improving the standard-setting
process.

Future work program

As a result, the following initiatives developed:
Improved implementation
Resume work the Conceptual Framework
Developed a list of nine research projects that it will
explore over the next three years
1.
2.
3.
4.
5.
6.
7.
8.
9.

Emissions trading schemes

Business combinations under common control
Discount rates
Equity method of accounting
Intangible assets, extractive activities, and research and
development activities
Financial instruments with the characteristics of equity
Foreign currency translation
Nonfinancial liabilities (amendments to IAS No. 37 )
Financial reporting in high inflationary economies

Each research project will result in a report or discussion paper

IAS No. 1 Presentation of Financial

Statements
Considerations:
2
2
2
2
2
2
2
2

Fair presentation and compliance with IASC standards

Accounting policies
Going concern
Accrual basis of accounting
Consistency of presentation
Materiality and aggregation
Offsetting
Comparative information

IAS No. 1 Presentation of Financial

Statements
2003 Amendments

Presents fairly definition

Elaboration of misleading results
from complaince
Standards on selection of accounting
policies moved to IAS No. 8
Certain disclosures no longer
required
Specific disclosures required
Statement of Changes in Equity
disclosure requirements

IFRS No. 1 First Time Adoption of

International Reporting Standards
Compliance requirements
Recognition of assets and liabilities
Only when required by IFRSs
Requires reclassifying if necessary
Applies existing IFRSs in measuring

End of Chapter 3
Prepared by Kathryn Yarbrough, MBA
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