Chapter 3 of 'International Financial Reporting and Analysis' discusses the harmonization of accounting practices, focusing on the role of the EU and the IASB. It outlines the endorsement process of international accounting standards and the history of financial reporting regulation in Europe. The chapter highlights current developments, including IFRS for SMEs and the convergence project among key accounting bodies.

1. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Chapter 3
The process of harmonizati
on

2. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Contents
• EU Directives
– Enforcement of IFRS in the EU
– The future of EU accounting regulation
• International Accounting Standards
• The structure of the IASB
• The objectives of the IASB
• The IASB’s due process of standard setting
• IFRS for SMEs
• The future?

3. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Learning objectives
• Outline the role of the EU in the develo
pment of accounting harmonization
• Explain the endorsement process of IAS/IFR
S in the EU
• Outline the history and changing role of the IA
SC/IASB
• Describe the different steps in the due proces
s of standard setting
• Understand current developments and their i
mplications

4. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
How to improve financial comm
unication between
different countries
• Through harmonization: increasing the comp
atibility of accounting practices by setting bou
nds to their degree of variation
• Through standardization: the imposition of a
more rigid and narrow set of rules

5. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
EU-approach in the
20th century
• Harmonization through the EU-Directives of fina
ncial reporting
• 4th Company Law Directive of 25 July 1978 on t
he annual accounts of individual companies
• 7th Company Law Directive of 13 June 1983 on t
he consolidated accounts

6. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
History of financial reporting
in the EU
• 1978: 4th Directive
• 1983: 7th Directive
• 1995: The new “Accounting Strategy”
• 1999: The Financial Services Action Plan
• 2002: Approval of Regulation (EC) N°1606/2002 o
n the application of IAS
• 2003: update of the 4th and 7th Directive

7. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
IAS-Regulation in the EU
• Scope: EU and countries of the European Ec
onomic Area
• Requirement to publish consolidated account
s in compliance with IAS/IFRS for listed group
s for accounting periods on or after the 1 Jan
uary 2005

8. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
The endorsement process
of the IASs in the EU
The EC decides on the applicability of individual IASs
in the EU. It may adopt an IAS only if:
a) it is not contrary to the principles of the 4th and 7t
h Directives;
b) it is conductive to the European public good; and
c) it meets the criteria of understandability, relevanc
e, reliability and comparability

9. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
The endorsement process
of the IASs in the EU
The EC is assisted in the endorsement dec
ision by the Accounting Regulatory Commit
tee (ARC), the European Financial Reporti
ng Advisory Group (EFRAG) and the Stand
ards Advice Review Group

10. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Accounting Regulatory Com
mittee
• Consists of representatives of the member states
• Its function is to provide an opinion to the Commissio
n on proposals to adopt (endorse) IAS

11. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
European Financial Reportin
g Advisory Group (EFRAG)
• A technical group which advises the EC in its endors
ement process
• It provides proactive advice to the IASB
• It provides advice to the EC on resulting changes to b
e made to the Accounting Directives and related topic
s

12. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
The Standards Advice Re
view Group
• Seven independent experts
• To give advice to the Commission that is not influenced
by governments (unlike ARC) or by stakeholders like co
mpanies and audit firms (EFRAG)

13. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Commission of European
Securities Regulators
(CESR)
* Strive for consistent application of IFRS in a
ccounts of listed companies
* Analyse and discuss the decisions taken by
independent EU National Enforcrs in respect
of financial statements published by issuers w
ith instruments (equity and debt) traded on a
EU market

14. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
International Accounting
Standards Committee
• Created in 1973
• Creation related to the set up of Internationa
l Federation of Accountants
• Mission statement:
(a) to formulate and publish in the public interest acc
ounting standards to be observed in the presentatio
n of financial statements and to promote their world
wide acceptance and observance;
(b) to work generally for the improvement and harm
onization of regulations, accounting standards and p
rocedures relating to the presentation of financial st
atements

15. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
History of the IASC
• 1970s and 1980s standards with man
y options
• 1989 “comparability project” – ED 32
• 1995 agreement with IOSCO to complete a c
ore set of IAS by 1999
• 1999 “Recommendations on shaping IASC fo
r the Future”
• 2000 acceptation of “core” standards by IOSC
O

16. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
In 2001 the structure of
the IASC changed
The reform of the IASC

17. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Mission statement of the IAS
B
1. To develop, in the public interest, a single set of high q
uality, understandable and enforceable global standar
ds that require high quality, transparent and comparab
le information
2. To promote the use and rigorous application of those s
tandards
3. To take account of the special needs of SMEs and em
erging countries
4. To bring about convergence of national accounting sta
ndards and IAS and IFRS to high quality solutions

18. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
The structure of the IASB

19. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
The due process of
standard setting
Stage 1: setting the agenda
Stage 2: project planning
Stage 3: development and publication of a d
iscussion paper
Stage 4: development and publication of an e
xposure draft
Stage 5: development and publication of an I
FRS
Stage 6: procedures after an IFRS is issued

20. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
The IASB’s due process of stand
ard setting

21. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
IASB: towards a global
standard setter?
• Mandatory application for listed companies in the EU,
European Economic Area, Australia and New Zealan
d
• Mandatory compliance for listed companies underwa
y in:
- Brazil from 2010 onwards
- Korea from 2011 onwards
- Russia for banks

22. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
IASB: towards a global stand
ard setter? (cont’d)
• Canada : decision on mandatory compliance under way
for 2011 (IASB Insight 2008)
• A number of countries have adopted IASs as their nation
al standards: Hong Kong, Singapore, South Africa
• Voluntary adoptions in other countries

23. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
SEC Decision - 2007
• For financial statements of foreign private issuers coveri
ng years ended after 15 November 2007, the SEC decid
ed that financial statements prepared according to IFRS
as issued by the IASB are accepted on American stock e
xchanges without reconciliation to US GAAP

24. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Most important element
for the near future
The further evolution of the convergence project wit
h the FASB and the position of the SEC with regard
to American listed companies
FASB and IASB reaffirm commitment to complete c
onvergence project by the end of June 2011 (nove
mber 2009)

25. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
IFRS for SMEs
• In 2003 discussions started on the need for such statem
ents, they could also be of help to developing nations
• Discussion paper 2005
• IFRS for SMEs published in 2009
• SME – implementation group set up in January 2010

26. International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
IFRS for SMEs: characteristic
s
• IFRS for SMEs – simplification of full IFRS through
– By the ommission of topics not relevant for S
MEs
– When IFRS have options, the simpler option i
s retained, the more complex ommitted
– Recognition and measurement principles sim
plified
– The number of disclosures reduced