Accounting theory 6


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Accounting theory 6

  1. 1. Financial Accounting Theory Craig Deegan Ch. 4 International Accounting (Part-1) Prepared By: Dewan Mahboob Hossain Assistant Professor; Dept. of Accounting & Information Systems; University of Dhaka; Dhaka; Bangladesh
  2. 2. Recent standardization <ul><li>Recently many countries have elected to follow IFRS with implementation typically being effective from 2005. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  3. 3. Difference is practices: evidences <ul><li>Drug company AstraZeneca produced a profit of GBP 29707 million as per US accounting rules but this was GBP 9521 as per UK accounting rules. A difference of 212%. </li></ul><ul><li>Daimler-Benz achieved NYSE listing on Oct 1993. When the group accounts were converted from German accounting rules to US GAAP, a profit of DM 168 million became as loss of DM 949 million. </li></ul><ul><li>Hoechst adopted IAS in 1994 and got listed in NY. By getting converted to US GAAP, a profit of DM1.7 billion became a loss of DM 57 million. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  4. 4. Need for harmonization <ul><li>If various countries adopted the same accounting rules, the differences between the results that would be reported in different countries would disappear. </li></ul><ul><li>This justification is used to justify IFRS. </li></ul><ul><li>Though many accounting researchers argue that there are very good reasons for accounting rules to be different in different countries. Why? </li></ul><ul><li>-differences in culture </li></ul><ul><li>-different legal and financial systems. </li></ul><ul><li>-some other reasons. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  5. 5. Harmonization and standardization <ul><li>Harmonization: a process of increasing the compatibility of accounting practices by setting bounds to their degree of variation. </li></ul><ul><li>Standardization: to imply the imposition of a more rigid and narrow set of rules. </li></ul><ul><li>These two terms have been used almost synonymously in international accounting. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  6. 6. Different accounting methods in different countries: Does it matter? <ul><li>There are investors investing in companies of different countries. </li></ul><ul><li>To take investment decisions, they need financial statements. </li></ul><ul><li>For this there should be a reasonable basis for comparison of the financial numbers. </li></ul><ul><li>The understandability and interpretation of financial statements should be more effective if the accounting rules and assumptions are same. </li></ul><ul><li>international investment decisions are more complicated. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  7. 7. Different accounting methods in different countries: Does it matter? (contd..) <ul><li>For multinationals: </li></ul><ul><li>If the long-term finance needs of an MNC are too great for the providers of a single country, the company may need to raise finance by listing its securities on the stock exchanges of more than one country. </li></ul><ul><li>For the protection of domestic investors, the regulators of different countries might not allow an MNC to sell its stocks without an incomparable F/S. </li></ul><ul><li>So, harmonization is needed. </li></ul><ul><li>It will also facilitate the MNC to transfer its staffs (specially accoutnants) to different countries. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  8. 8. Ball (2006): Advantages of IFRS <ul><li>The decision will lead to more accurate, comprehensive and timely financial statement information relative to the information generated from the national accounting standards. </li></ul><ul><li>Increased financial information that will allow the small investors to compete with large investors. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  9. 9. IASB and its globalization activities <ul><li>Henry Benson  former President of ICAEW. </li></ul><ul><li>He got an invitation to visit the CICA and AICPA in 1966. </li></ul><ul><li>Just after this visit, these 3 institutes jointly established Accountant’s International Study Group in 1967. </li></ul><ul><li>This formed the basis for creating International Accounting Standards Committee (IASC) in 1973. </li></ul><ul><li>Accounting bodies participated from: Canada, the USA, The UK, Australia, France, Germany, Japan, Mexico and Netherlands. </li></ul><ul><li>Aim: </li></ul><ul><li>formulating and publishing in the public interest, the accounting standards. </li></ul><ul><li>Promoting worldwide acceptance and observance. </li></ul><ul><li>Improvement and harmonization of regulations. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  10. 10. IASB and its globalization activities (contd..) <ul><li>IASC eventually completed a set of 39 so called ‘core’ International Accounting Standards (IAS). </li></ul><ul><li>1981: International Organization of Securities Commissions (IOSCO) </li></ul><ul><li>A consultative group of IASC having representatives from World Bank, United Nations, OECD and others. </li></ul><ul><li>In 2000, IOSCO recommended the use of IAS for cross border offerings or listings. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  11. 11. IASB and its globalization activities (contd..) <ul><li>In 2001  International Accounting Standards Board (IASB) </li></ul><ul><li>At the same time IFRIC was also formed  International Financial Reporting Interpretations Committee. Task: to review on a timely basis widespread accounting issues that have arisen within the context of current IFRSs. </li></ul><ul><li>Despite the reforms to the IASB, IFRS/IASs have still not been accepted by the US SEC as the basis of presentation for US companies. </li></ul><ul><li>A ‘convergence project’ is getting carried out. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  12. 12. IASB and its globalization activities (contd..) <ul><li>IASB has 14 members. </li></ul><ul><li>12 full time </li></ul><ul><li>2 part time. </li></ul><ul><li>These members must have: </li></ul><ul><li>Technical skills </li></ul><ul><li>Background experience of relevant international business and market conditions. </li></ul><ul><li>To approve a standard, a 2/3rds majority of these 14 member is needed. </li></ul><ul><li>IASB does not have the power to enforce these laws. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  13. 13. The US role <ul><li>One notable exception to the global adoption of IFRS is the US. </li></ul><ul><li>Two main bodies in the US: SEC and FASB. </li></ul><ul><li>At first, the SEC was given with the authority to set accounting regulation but SEC decided to rely on accounting profession for this. </li></ul><ul><li>Over the years US accounting profession developed several documents namely US GAAP. </li></ul><ul><li>In 1973  SEC gave the standard formulation power to newly formed FASB (a private independent body established for public interest). </li></ul><ul><li>SEC still relies on the accounting standards set by FASB. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  14. 14. The US Role (contd…) <ul><li>US did not adopt IFRS believing that its ‘rule-based’ approach is better than the ‘principles-based’ approach. </li></ul><ul><li>But Enron’s collapse shattered the perception of high quality of the ‘rule-based’ approach. </li></ul><ul><li>Shortly thereafter, the Sarbanes Oxley Act specifically mandated the SEC to study how a more principles based system could be introduced in the US. </li></ul><ul><li>In 2002  FASB and IASB  joint program to converge and improve the standards of both bodies. </li></ul><ul><li>Both FASB and IASB should move some way towards each other. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  15. 15. The future of this convergence program <ul><li>The adoption of IFRS will be contingent ultimately on whether the SEC and the FASB are satisfied with the results generated by the IASB/FASB Convergence Project. </li></ul><ul><li>In the US, now, foreign companies can lodge their reports within the US in accordance with IFRS, whereas domestic US companies must lodge their reports in accordance with the US GAAP. </li></ul><ul><li>There is a resistance in the US in relation to the adoption of IFRS by the US based organizations. </li></ul><ul><li>So, though there is a view that IFRS will eventually be adopted, the adoption may be some years away. </li></ul>Prepared By: Dewan Mahboob Hossain  Page
  16. 16. Comments of the US Financial Accounting Foundation (FAF) <ul><li>FAF: Independent private sector organization with responsibility for the oversight, administration and finances of the FASB. It also selects the members of FASB. </li></ul><ul><li>They suggested an ‘improve and adopt’ process: </li></ul><ul><li>The first part of the process involves working with the IASB to improve areas where neither US GAAP nor IFRS is considered to be of sufficiently high quality. </li></ul><ul><li>The second part of the process involves the FASB adopting applicable IFRS in all other areas that are not subject to the improvement program. </li></ul><ul><li>Both US GAAP and IFRS require improvement in several major areas. This adoption process avoids or minimizes the capacity constraints that might develop in an abrupt mandated switch to IFRS. </li></ul>Prepared By: Dewan Mahboob Hossain  Page