International Accounting
International Accounting
International Accounting
Chapter 2. Financial reporting of large (listed) entities: economic context, implications for
accounting, accounting models
2.4. IFRS context, evolution, perspectives
- IFRSs comprise 13 IFRSs, 29 IASs, 16 IFRICs and 8 SICs, along with the conceptual
framework;
- the framework applicable nowadays dates from 1989; however, there is a common project with
FASB to revise the framework (first phase completed and published) (Tutorial 4);
- IASCs strategy in terms of international acceptance is well described by Chairman Kirkpatrick
in 1986: I would say that harmonization means compatibility today. Tomorrow it means
comparability. The day after tomorrow, conformity1;
- harmonization is a process through which different national rules, sometimes divergent, are
improved and made comparable. Recently, the term has been replaced with convergence, used
especially to describe IASBs process to eliminate the differences between national standards and
IFRS and to avoid future differences;
- IASBs legitimacy increased, since more and more countries realized or intend to realize total or
partial convergence with IFRS.
- IFRS are in a continuous modernization process, especially after 2001, process in which the
IASB FASB convergence plan played a key role.
The convergence process
- examples of standards issued by IASB influenced by FASB: IFRS 5 (2004), IFRS 8 (2006), IAS
23 revised (2007), IFRS 13 (2011);
- examples of standards issued by FASB influenced by IASB: SFAS 154 (2005) accounting
policies, SFAS 159 (2007) (Fair value option).
- common projects (some delayed) (framework, presentation of financial statements, leases,
revenues recognition)
- benefits of the convergence process:
Convergence offers substantial benefits to large companies and their shareholders, financial
professionals, regulators, and investors, locally and internationally. Large companies would
benefit greatly. Currently, over half of Fortune 500 companies are dealing with subsidiaries
using IFRS. A large portion of companies with foreign subsidiaries encounter IFRS. Many
competitors of U.S. companies already are reporting under IFRS. A large segment of U.S.
companies are already familiar with international standards (SEC 2007b). Convergence would
produce efficiencies, simplification, and cost savings in those companies. It would eliminate dual
reporting. United Technologies, a $50 billion global company, say they need to address IFRS to
aggressively address their competition (SEC 2007b). It would eliminate costly reconciliations
(KPMG 2008a) and will enhance U.S. global competition (SEC 2007b). Firms who convert
should have easier access to foreign markets (Nicolaisen 2005). Financial professionals and
regulators are the second group to suggest benefits. Professionals and regulators would deal
with a single set of standards (SEC 2007a). There would be a bilateral reduction of differences in
accounting standards between countries, and more transparent financial statements (Nicolaisen
2005). Global financial statements would be comparable and convergence would enable the
international regulatory community to bilaterally reduce differences, work together, and create
stronger standards (SEC 2007b). Investors would also benefit from convergence. Convergence
would enable companies to expand capital markets across borders. It will encourage strong,
stable, and liquid capital markets. It will increase investor confidence and produce greater global
acceptance of company financial statements (SEC 2007b). There are also a number of costs
associated with convergence, since the standards are different. United Technologies estimates
1
Firms
Austria
Belgium
5
9
IAS 40
Cost Fair
value
1
4
1
8
Denmark
Finland
France
4
4
16
0
0
9
4
4
7
Germany
Greece
Italy
13
1
5
8
0
3
5
1
2
Cost
x
x
x
x
x
x
x
x
x
Thomas, J. (2009) Convergence: Businesses and business schools prepare for IFRS, Issues in accounting
education, vol. 24, no. 3: 369-376.
3
Kvaal, E., Nobes, C. (2009) International differences in IFRS policy choice, working paper, Electronic
copy available at: http://ssrn.com/abstract=1466693
4
Chen, H., Tang, Q., Jiang, Y., Lin, Z. (2010) The role of IFRS in accounting quality: Evidence from the
EU, Journal of International Financial Management and Accounting, vol. 21, no. 3: 220- 278.
5
Sellhorn & Riedl (2008) Choosing cost versus fair value international evidence from the European
real estate industry upon adoption of IFRS, EAA Congress
6
3
2
1
11
5
40
125
1
0
0
0
0
0
0
23
5
3
2
1
11
5
40
102
x
x
x
x
x
x
prohibited
Disclosure of fair value
x
x
x
x
x
x
x
x
Q2. Which do you think are the factors leading to different IFRS practice? What do you think the
implications of such a different practice are?
Q3. Which are the sources (related to IFRS) for these differences?
Issues related to the IFRS application
- benefits and effects
Previous studies suggest that benefits are related to increased trust of users, increased
comparability, increased transparency (on past performance and risk), another perception on the
value of entities (IFRS are closer to internal reporting) (PWC 2006, 187 investors in 7 countries).
Also, studies indicate that IFRS are related to a decreased degree of prudence, increased volatility
of results, an integration of financial reporting and managerial accounting (with impacts upon the
organization of the accounting system of the company).
- compliance and enforcement
There are differences between countries in terms of the compliance and enforcement levels.
Scandinavian and Anglo-Saxon companies display above-average compliance, whereas
companies from Middle-Eastern Europe display below-average compliance. In-depth
investigations indicate that the strength of countries enforcement systems, the importance of the
national stock market as well as cultural factors are associated with compliance6.
Enforcement of financial reporting rules can be seen as a three-part process: (i) effective
company control systems and management dedicated to good reporting, (ii) independent auditors
who are expert in the rules, and (iii) an oversight mechanism with sufficient expertise and power
to achieve effective enforcement.7
Even if it is possible to craft a single set of high-quality standards, can they be consistently
enforced? [] A common accounting system needs a common enforcement system. Having the
most intelligently crafted rules means nothing if companies feel they can simply ignore them
without fear of any meaningful consequence. Yet there is no global enforcement mechanism.8
There are considerable challenges to be faced in the effective enforcement of IFRS in Europe.
The structure and organisation of entities responsible for the oversight of financial reporting
requirements differ between EU countries, with both public and private sector bodies being used.
Furthermore, some countries have no institutional oversight of financial reporting (FEE, 2001a,
p. 10). The EU Regulation mandating the use of IFRS stipulates that member states are required
to take appropriate measures to ensure compliance with IFRS (European Commission [EC],
2002, n.16). Consequently EU countries are presently evaluating existing enforcement strategies
6
Glaum et al. (2012) Compliance with IFRS 3 and IAS 36 required disclosures across 17 European
countries: company and country level determinants, Accounting and Business Research, in press.
7
Brown, P., Tarca, A. (2005) A commentary on issues relating to the enforcement of IFRS in the EU,
European Accounting Review, vol. 14, no. 1: 181-212
8
Reilly, D. (2011) Commentary: Convergence Flaws, Accounting Horizons, vol. 23, no.4: 873-877
10