CHAPTER 3
INTERNATIONAL CONVERGENCE
OF FINANCIAL REPORTING
Chapter Outline
I. Accounting harmonization is a process that reduces alternatives while retaining a high
degree of flexibility in accounting practices.
A. Harmonization is different from standardization (or uniformity) which implies the
elimination of alternatives in accounting practices.
B. The objective of accounting harmonization is to have comparable financial statements
from companies in different countries.
C. Harmonization of regulations (de jure harmonization) does not necessarily produce
harmonization of practices (de facto Harmonization).
II. There are many arguments for international harmonization of accounting standards. The
arguments include that it would:
A. Make financial statements of companies in different countries more comparable, and
hence make it easier for investors to evaluate foreign firms.
B. Simplify for MNCs the evaluation of possible foreign takeover targets.
C. Reduce the cost for MNCs to consolidate foreign listed companies.
D. Make it easier for companies to access foreign capital markets.
E. Make it easier for MNCs and international accounting firms to transfer accounting
personnel to other countries.
F. Raise the quality level of accounting practices internationally.
III. There also are several arguments against international harmonization of accounting
standards.
A. Considering the differences among countries in terms of socio-politico-economic
systems, it would be almost impossible to arrive at a set of accounting standards
that would satisfy all of the parties involved.
B. Nationalism – international standards would be perceived as a set of standards
developed to suit the requirements of other countries, and hence would not be
received favorably.
C. It is unnecessary to force all companies worldwide to follow a common set of rules.
D. Today’s global capital market has evolved without harmonized accounting standards.
E. It would lead to a situation of standards overload.
IV. The International Accounting Standards Committee (IASC) was established in 1973 by
professional accounting bodies in ten countries (Australia, Canada, France, Germany,
Ireland, Japan, Mexico, the Netherlands, the United Kingdom, and the United States) with
the broad objective of formulating “international accounting standards.”
A. In its first 15 years, the IASC’s main activity was the issuance of International
Accounting Standards (IASs), many of which allowed multiple options to accommodate
existing accounting practices in various countries.
B. The IASC undertook a Comparability Project during the period 1989-1993 to eliminate
most of the choices of accounting treatment permitted under IASs.
C. The final phase in the work of the IASC began with the IOSCO agreement in 1993 and
ended with the creation of the IASB in 2001. The main activity during this phase was
the development of a “core set” of international standards that could be endorsed by
IOSCO for cross-listing purposes.
V. The International Accounting Standards Board (IASB) has the primary responsibility for
international harmonization/convergence of accounting standards.
A. The IASB was formed in 2001 to replace the IASC with the objective of developing a
set of high quality accounting standards to be used through out the world.
B. The IASB follows a due process procedure and uses a principles-based approach in
developing international standards.
C. The IASB has 14 members – 12 full-time and 2 part-time. Seven full-time members
serve as liaison with national standard setters. Technical competence is the most
important criterion for selection as a Board member.
D. In addition to the IASB itself, the other main components of international standard
setting include the IASC Foundation and its Trustees, the International Financial
Reporting Interpretations Committee (IFRIC), and the Standards Advisory Council
(SAC).
E. International Financial Reporting Standards (IFRS) consist of IFRSs issued by the
IASB, IASs issued by the IASC (and adopted by the IASB), and Interpretations
developed by IFRIC.
F. As of March 2008, 41 IASs and 8 IFRSs had been issued, but only 30 IASs were still in
effect.
G. The IASB has a conceptual framework (Framework for the Preparation and
Presentation of Financial Statements) that serves as the basis for developing IFRS.
Subsequently, the IASB and FASB attempted to develop a common conceptual
framework for financial reporting. More recently, the IASB has launched an IASB only
conceptual framework project.
H. The IASB also has issued a set of guidelines for first time adopters of IFRS (IFRS 1).
VI. There are a number of ways in which a country might adopt IFRS.
A. Replace national GAAP with IFRS.
B. Require parent companies to use IFRS in preparing consolidated financial statements.
C. Require stock exchange listed companies to use IFRS in preparing consolidated
financial statements.
D. Require foreign companies listed on a domestic stock exchange to use IFRS.
E. Require domestic companies listing on a foreign stock exchange to use IFRS.
VII. There are some concerns about adopting IFRS.
A. They are too complicated for some companies.
B. Using them as the basis for taxation could be a problem.
C. Some IFRS, for example, those related to financial instruments and fair value
accounting, are controversial.
D. Guidance for first-time adopters is inadequate.
E. In countries which do not have well-developed capital markets, and where the users
are satisfied with the local standards, the adoption of IFRS would be of little benefit.
F. There could be language translation issues.
VIII. Despite the difficulties, there is a worldwide trend towards convergence with or adoption of
IFRS, as evidenced by:
A. Support for the IASB structure and its highest common denominator approach.
B. The IASB’s initiatives to facilitate and enhance its role as a global standard-setter, for
example, by issuing guidelines for first-time adopters, holding public round table
forums, and having direct liaison with some national standard setters.
C. The European Union requiring the use of IFRS by publicly traded companies in
preparing consolidated financial statements.
D. The FASB/IASB convergence project (the so-called Norwalk agreement).
E. More recently, the IASB seems to have taken a new direction to its convergence
project.