Financial

Accounting
Theory and Analysis:
Text and Cases
12th 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 company’s first exposure to
international accounting is frequently
the result of a purchase or sale
 Problems:
1. Exchange gains or losses
2. Obtaining credit information
3. 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
to the appropriate securities market
 Level of Political
Education System

Economic
Legal
Development
System

Factors Influencing Development of Accounting Systems

 Agricultural
Type of Resource Based
economy Tourist Based
Manufacturing

Legal Codified
System Common Law

Political Democratic
System Totalitarian

Nature of Private Enterprise

Ownership Socialist
Communist

Influences on the Development of Financial Reporting

 Growth Growing
Pattern of Stable
Economy Declining

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

Influences on the Development of Financial Reporting

Approaches to Preparing Financial
Statements for Use in Other Countries:

1. Same to all
2. Translate language
3. Translate language and currency
4. Two sets
5. 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
Prior to 2012, similar to FASB
1. Steering Committee
2. Identify issues and prepare point outline
3. Board prepares comments
4. Steering Committee prepares final Statement of Principles
5. Exposure Draft
6. Steering Committee reviews comments & prepares final standard
Standard Setting by the IASC
▪ Two treatments
1. Benchmark - point of reference
2. Alternative

▪ Improvements Project (2003)

▪ Removed some of the existing alternative accounting treatments
▪ Where an IAS retained alternative treatments
▪ IASB removed references to 'benchmark treatment'
retermed 'alternative treatment'
▪ Using descriptive references
▪ ‘Cost model’
▪ ‘Revaluation model’
Standard Setting by the IASC
▪ 2012: new standard‐setting procedure established
▪ 2013 to 2015: the IASB initiated a research and
development program
▪ Results in discussion papers being developed

▪ Staff provides
▪ information to help understand the problem;
▪ an assessment of potential solutions; and
▪ a preliminary assessment of relative costs / benefits of each approach

▪ Standards-level projects initiated only when solutions are high

quality and implementable
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:
1. Develop international accounting standards that
require high-quality, transparent, and
comparable information that will help
participants in capital markets, and others, to
make economic decisions; and
2. Promote the use of international accounting
standards by working with national standard
setters
 Restructuring the IASB

▪ Structural changes needed

▪ IASB must anticipate new challenges and meet those challenges
effectively

▪ Issues needing to be addressed:

1. Partnership with national standard setters.
▪ IASB should enter into a partnership with national standard setters
▪ Work together to accelerate
 Convergence between national standards
 Resulting international accounting standards include solutions
requiring high-quality, transparent, and comparable information
 Will help participants in capital markets and others to make
economic decisions.
 Restructuring the IASB

2. Wider participation in the IASB Board

▪ Wider group of countries and organizations should take part in the
IASB Board
 Being careful to not dilute the quality of the Board's work

3. Appointment
▪ 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 standards-setting
transferred to
the International Accounting Standards Board
(IASB)
Restructuring the IASB
▪ New structure:
▪ The IASC Foundation
▪ The International Accounting Standards Board
▪ The International Accounting Standards Advisory Council
▪ International Financial Reporting Interpretations Committee
 KEY: Appoints
IASB Structure Reports To
Advises
Monitoring Board
Approve and Oversee Trustees

IFRS Foundation (22 Trustees)

Appoint, Oversee, Raise Funds

IASB (Maximum 16 Members) IFRS Interpretations Committee

Set Technical Agenda; Approve 14 members; Issue interpretations on
Standards, Exposure Drafts & the application of IFRS and
Interpretations develop other minor amendments

Accounting Standards Advisory

IFRS Advisory Council Forum (ASAF)
~ 40 members; Advise on Provide standard setter input into
agenda and priorities technical projects

Working Groups
For Major Agenda Projects
Revising the IASB’s Constitution
▪ Key issues to be reviewed:
1. Whether objectives of the IASC Foundation should expressly refer
to the challenges facing small and medium-sized entities (SMEs)
2. Number of Trustees and their geographical and professional
distribution
3. Oversight role of the Trustees
4. Funding of the IASC Foundation
5. Composition of the IASB
6. 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. Composition, role, and effectiveness of the SAC
Uses of International Accounting
Standards
▪ IASC noted that its standards are used in a variety of ways:

1. National requirements

2. Basis for national requirements

3. Benchmark to develop standards

4. By regulatory agencies

5. By companies
 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 2003:
▪ IASB published 13 revised International Accounting Standards
▪ Reissued two others
▪ Gave notice of withdrawal of its standard on price level accounting

▪ Revised and reissued standards mark the near-completion of

the IASB’s Improvements project

▪ 2005: reaffirmed support and development of IFRS

IASB Annual Improvements Project

▪ July 2006
▪ Non-urgent issues
▪ Amendments
Use of IASC Standards
▪ Adopted by
▪ Over 12,000 companies
▪ 116 countries
▪ EU

▪ IFRS No. 1 (Discussed later)

IASB-FASB Convergence
The FASB’s Short-term International
Convergence Project
 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

▪ 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
 IASB-FASB Convergence
The Norwalk Agreement
▪ December 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 best efforts to make existing financial

reporting standards compatible as soon as practicable and
to coordinate future work programs to help ensure that
once compatibility is achieved, it will be maintained
 IASB-FASB Convergence
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 differences remaining on January 1, 2005,
between IFRSs and U. S. GAAP by undertaking projects that
both Boards would address concurrently
3. Continue progress on the joint projects currently underway
4. Encourage respective interpretative bodies to coordinate
activities
Effects of International Versus
U.S. GAAP Accounting Standards
▪ 2000: the SEC voted to ask U.S. companies to comment
on whether it should allow foreign companies to list their
securities on U.S. stock exchanges under international
accounting rules
▪ Previously needed Form 20-F reconciliation
▪ 2007: “Acceptance from Foreign Private Issuers of
Financial Statements Prepared in Accordance with
International Financial Reporting Standards without
Reconciliation to GAAP.”
 Effects of International Versus
U.S. GAAP Accounting Standards
▪ SEC staff report
▪ Focused on how recognition and measurement requirements of IFRS were
applied in practice
▪ Found that company financial statements generally appeared to comply with
IFRS requirements

▪ 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

▪ Is convergence a dead issue?

▪ No final decision by the SEC

Standards Overload
Also a concern for IASB
2009: IASB published IFRS for
small to medium-sized businesses
 95% of all companies
 Provide simplified standards
 Review found it needed little change
 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
1. Assisting the IASC in developing future standards
2. Promoting harmonization of accounting standards
3. Assisting national standard setters
4. Assisting preparers in applying international standards
5. Assisting auditors in forming an opinion as to
whether financial statements conform to
international standards
6. Assisting users in interpreting financial
statements prepared in conformity with
international standards
7. Providing interested parties with information
about the IASC’s approach to the formation
of international accounting standards
Framework for the Preparation and
Presentation of Financial Statements
The Framework specifies:
▪ Chapter 1: The Objective of General-Purpose Financial Reporting
▪ This topic is discussed in Chapter 2 of this text.

▪ Chapter 2: The Reporting Entity

▪ This topic is currently under study

▪ 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

▪ The original framework approved in 1989
Underlying Assumption

Going concern
▪ If this presumption is invalid, appropriate disclosure
and a different basis of reporting are required
Elements of Financial Statements

▪ Asset
▪ Liability
▪ Equity
▪ Income
▪ Expense
▪ The concept of recognition
– Probable
– Measurable
Concepts of Capital Maintenance

▪ Concepts:
1. Financial capital maintenance
2. Physical capital maintenance

▪ Selection of “measurement basis” and the

“concept of capital maintenance” chosen will
determine the accounting model
▪ IASC does not intend to prescribe a model
Revised Conceptual Framework
▪ 2012: Conceptual framework added to IASB agenda
▪ 2013: Exposure Draft released (Nine Chapters)
▪ Introduction
▪ Chap 1—Objective of general purpose financial reporting
▪ Chap 2—Qualitative characteristics of useful financial information
▪ Chap 3—Financial Statements and the reporting entity
▪ Chap 4—Elements of financial statements
▪ Chap 5—Recognition and derecognition
▪ Chap 6—Measurement
▪ Chap 7—Presentation and disclosure
▪ Chap 8—Concepts of capital and capital maintenance
IASB–FASB Project
Financial Statement Presentation
▪ A joint project to develop a new joint standard for
presenting financial statements
▪ Ultimately, new standard will replace IAS No. 1 & IAS No. 7

▪ Main objective is to address fundamental issues relating

to presentation and display of information in the
financial statements, including the:
▪ Relationship between items across financial statements
▪ Disaggregation of information so that it is useful in predicting
an entity’s future cash flows
▪ Provision of information to help users assess an entity’s
liquidity and financial flexibility
Agenda Consultation Initiative
▪ July 2011: the IASB initiated an agenda
consultation initiative
▪ Plan – Obtain input every three years on the
direction and the overall balance of its work
▪ December 2012: First consultation culminated in
the release of a Feedback Statement 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 improve the standard-setting process
Agenda Consultation Initiative
▪ Resulted in the following initiatives:
▪ Improved implementation
▪ Resume work on the Conceptual Framework
▪ Developed a list of research projects to explore (each to
result in a report or discussion paper):
1. Emissions trading schemes
2. Business combinations under common control
3. Discount rates
4. Equity method of accounting
5. Intangible assets, extractive activities, and research and development
activities
6. Financial instruments with the characteristics of equity
7. Foreign currency translation
8. Nonfinancial liabilities (amendments to IAS no. 37)
9. Financial reporting in high inflationary economies
IAS No. 1:
“Presentation of Financial Statements”
▪ Written due to constituents expressing concerns about the
complexity of the implementation task and existing
guidance on first‐time adoption
▪ Considerations:
1. Fair presentation and compliance with IASC standards
2. Accounting policies
3. Going concern
4. Accrual basis of accounting
5. Consistency of presentation
6. Materiality and aggregation
7. Offsetting
8. Comparative information
IAS No. 1:
“Presentation of Financial Statements”
▪ 2003 Amendment
▪ Encourages companies to apply professional
judgment in determining what information to
disclose and how to structure it in their financial
statements
▪ Key provisions
▪ Materiality
▪ Financial statements
▪ Notes
IFRS No. 1:
“First Time Adoption of a
International Reporting Standards”
▪ Amendments made IAS No. 1 complex and
difficult to apply
IFRS No. 1 was issued
▪ Principles
▪ Recognize all assets and liabilities whose recognition is
required under existing IFRSs
▪ Do not recognize items as assets or liabilities when
existing IFRSs do not allow such recognition
▪ Reclassify assets, liabilities, and equity as necessary to
comply with existing IFRSs
▪ Apply existing IFRSs in measuring all recognized assets
and liabilities
 End of Chapter 3
Prepared by Suzanne Sevin, CPA, and Kathryn Yarbrough, MBA

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