CHAPTER 11
WORLDWIDE ACCOUNTING DIVERSITY
AND INTERNATIONAL STANDARDS
Chapter Outline
I. Accounting and financial reporting rules differ across countries. There are a variety of
factors influencing a country’s accounting system.
A. Legal system—primarily relates to how accounting principles are established; code law
countries generally having legislated accounting principles and common law countries
having principles established by non-legislative means.
B. Taxation—financial statements serve as the basis for taxation in many countries. In
those countries with a close linkage between accounting and taxation, accounting
practice tends to be more conservative so as to reduce the amount of income subject
to taxation.
C. Financing system—where shareholders are a major provider of financing, the demand
for information made available outside the company becomes greater. In those
countries in which family members, banks, and the government are the major
providers of business finance, there is less demand for public accountability and
information disclosure.
D. Inflation—historically, caused some countries, especially in Latin America, to develop
accounting principles in which traditional historical cost accounting is abandoned in
favor of inflation adjusted figures. As inflation has been brought under control in most
countries, this factor is no longer of significant influence.
E. Political and economic ties—can explain the usage of a British style of accounting
throughout most of the former British Empire. They also help to explain similarities
between the U.S. and Canada, and increasingly, the U.S. and Mexico.
F. Culture—affects a country’s accounting system in two ways: (1) through its influence
on a country’s institutions, such as its legal system and system of financing, and (2)
through its influence on the accounting values shared by members of the accounting
sub-culture.
II. Nobes developed a general model of the reasons for international differences in financial
reporting that has only two explanatory factors: (1) national culture, including institutional
structures, and (2) the nature of a country’s financing system.
A. A self-sufficient Type I culture will have a strong equity-outsider financing system which
results in a Class A accounting system oriented toward providing information for
outside shareholders.
B. A self-sufficient Type II culture will have a weak equity-outsider financing system which
results in a Class B accounting system oriented toward protecting creditors and
providing a basis for taxation.
C. Countries dominated by a country with a Type I culture will use a Class A accounting
system even though they do not have strong equity-outsider financing systems.
D. Companies with strong equity-outsider financing located in countries with a Class B
accounting system will voluntarily attempt to use a Class A accounting system to
compete in international capital markets.
III. Differences in accounting across countries cause several problems.
A. Consolidating foreign subsidiaries requires that the financial statements prepared in
accordance with foreign GAAP must be converted into the parent company’s GAAP.
B. Companies interested in obtaining capital in foreign countries often are required to
provide financial statements prepared in accordance with accounting rules in that
country, which are likely to differ from rules in the home country.
C. Investors interested in investing in foreign companies may have a difficult time in
making comparisons across potential investments because of differences in
accounting rules across countries.
IV. The International Accounting Standards Committee (IASC) was formed in 1973 in hopes of
improving and promoting the worldwide harmonization of accounting principles. It was
superseded by the International Accounting Standards Board (IASB) in 2001.
A. The IASC issued 41 International Accounting Standards (IAS) covering a broad range
of accounting issues. Ten IASs have been superseded or withdrawn, leaving 31 in
effect.
B. The membership of the IASC was composed of over 140 accountancy bodies from
more than 100 nations.
C. The IASC was not in a position to enforce its standards. Instead, member
accountancy bodies pledged to work toward acceptance of IASs in the respective
countries.
D. Because of criticism that too many options were allowed in its standards and therefore
true comparability was not being achieved, the IASC undertook a Comparability
Project in the 1990s, revising 10 of its standards to eliminate alternatives.
E. The IASC derived much of its legitimacy as an international standard setter through
endorsement of its activities by the International Organization of Securities
Commissions. IOSCO and the IASC agreed that, if the IASC could develop a set of
core standards, IOSCO would recommend that stock exchanges allow foreign
companies to use IASs in preparing financial statements. The IASC completed the set
of core standards in 1998, IOSCO endorsed their usage by foreign companies in 2000,
and many members of IOSCO adopted this recommendation.
V. The International Accounting Standards Board (IASB) replaced the IASC in 2001.
A. The IASB originally consisted of 14 members – 12 full-time and 2 part-time. The
number of board members was increased to 16 members in 2012, at least 13 of whom
must be full-time. Full-time IASB members are required to sever their relationships
with former employers to ensure independence. To ensure a broad international
diversity, there normally are four members from Europe; four from North America; four
from the Asia/Oceania region; one from Africa; one from South America; and two from
any area to achieve geographic balance.
B. IASB GAAP is referred to as International Financial Reporting Standards (IFRS) and
consists of (a) IASs issued by the IASC (and adopted by the IASB), (b) individual
International Financial Reporting Standards developed by the IASB, and (c)
Interpretations issued by the Standing Interpretations Committee (SIC) (until 2001) and
International Financial Reporting Interpretations Committee (IFRIC).
C. In addition to 31 IASs and 13 IFRSs (as of January 2013), the IASB also has a
Framework for the Preparation and Presentation of Financial Statements, which
serves as a guide to determine the proper accounting in those areas not covered by
IFRS.
D. As of June 2012, more than 90 countries required the use of IFRS by all domestic
publicly traded companies, and several important countries were to begin using IFRS
in the near future. Other countries allow the use of IFRS by domestic companies.
Many countries also allow foreign companies that are listed on their securities markets
to use IFRS.
E. There are two primary methods used by countries to incorporate IFRS into their
financial reporting requirements for listed companies: (1) full adoption of IFRS as
issued by the IASB, without any intervening review or approval by a local body, and (2)
adoption of IFRS after some form of national or multinational review and approval
process.
VI. The U.S. FASB has adopted a strategy of convergence with IASB standards.
A. In 2002, the IASB and FASB signed the so-called “Norwalk Agreement” to “use their
best efforts to (a) make their existing financial reporting standards fully compatible as
soon as is practicable and (b) coordinate their work program to ensure that once
achieved, compatibility is maintained.”
B. The FASB-IASB convergence process has resulted in changes made to U.S. GAAP,
IFRS, or both in a number of areas including: Business combinations, Non-controlling
interests, Acquired in-process research costs, Share-based payment, Borrowing costs,
Segment reporting, and Presentation of other comprehensive income.
C. At the beginning of 2013, the FASB listed joint convergence projects with either an
Exposure Draft or final standard expected to be issued in 2013 in the following areas:
Leases, Insurance contracts, Financial instruments, Revenue recognition, Investment
companies, and Consolidation: Policy and Procedures
VII. The U.S. SEC’s early interest in IFRS stemmed from IOSCO’s endorsement of IFRS for
cross-listing purposes.
A. After considering this issue for several years, in 2007 the SEC amended its rules to
allow foreign registrants to prepare financial statements in accordance with IFRS
without reconciliation to U.S. GAAP. Since 2007, foreign companies using IFRS have
been able to list securities on U.S. securities markets without providing any U.S. GAAP
information in their annual reports.
B. To level the playing field for U.S. companies, in July 2007, the SEC issued a concept
release to determine public interest in allowing U.S. companies to choose between
IFRS and U.S. GAAP in preparing financial statements. Many comment letter writers
were not in favor of allowing U.S. companies to choose between IFRS and U.S. GAAP
instead recommending that U.S. companies be required to use IFRS.
C. In November 2008, the SEC issued the so-called “IFRS Roadmap.” The SEC
indicated it would monitor several milestones until 2011 at which time it decide whether
to require U.S. companies to follow IFRS over a three-year phase-in period. The
Roadmap indicated 2014 as the first year of IFRS adoption, but a subsequent SEC
Release in February 2010 pushed that date back to “approximately 2015 or 2016.”
D. In 2011, the SEC Staff published a discussion paper that suggests an alternative
framework for incorporating IFRS into the U.S. financial reporting system. This
framework combines the existing FASB-IASB convergence project with the
endorsement process followed in many countries and the EU. Some refer to this
method as “condorsement.” The framework would retain both U.S. GAAP and the
FASB as the U.S. accounting standard setter. At the end of a transition period, a U.S.
company following U.S. GAAP also would be able to represent that its financial
statements are in compliance with IFRS.
E. The 2011 deadline established by the SEC in its IFRS Roadmap came and went
without the Commission making a decision whether to require the use of IFRS in the
U.S. In July 2012, the SEC staff issued a Final Staff Report that summarized analysis
conducted by the SEC Staff on the possible use of IFRS by U.S. companies, but it did
not include conclusions or recommendation for action by the Commission and did not
provide insight into the nature or timetable for next steps. Thus, at the time this book
went to press, the SEC had not signaled when it might make a decision about whether
and, if so, how IFRS should be incorporated into the U.S. financial reporting system.
VIII. IFRS 1, First-time Adoption of IFRS, established guidelines that a company must use in
transitioning from previously-used GAAP to IFRS.
A. Companies transitioning to IFRS must prepare an opening balance sheet at the “date
of transition.” The transition date is the beginning of the earliest period for which an
entity presents full comparative information under IFRS. For example, for a company
preparing its first set of financial statements for the calendar year 2017, the date of
transition is January 1, 2015.
B. An entity must complete the following steps to prepare the opening IFRS balance
sheet:
1. Determine applicable IFRS accounting policies based on standards in force on the
reporting date.
2. Recognize assets and liabilities required to be recognized under IFRS that were
not recognized under previous GAAP and derecognize assets and liabilities
previously recognized that are not allowed to be recognized under IFRS.
3. Measure assets and liabilities recognized on the opening balance sheet in
accordance with IFRS.
4. Reclassify items previously classified in a different manner from what is acceptable
under IFRS.
IX. IAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors,” establishes
guidelines for determining appropriate IFRS accounting polices.
A. Companies must use the following hierarchy to determine accounting polices that will
be used in preparing IFRS financial statements.
1. Apply specifically relevant standards (IASs, IFRSs, or Interpretations) dealing with
an accounting issue.
2. Refer to other IASB standards dealing with similar or related issues.
3. Refer to the definitions, recognition criteria, and measurement concepts in the
IASB Framework.
4. Consider the most recent pronouncements of other standard-setting bodies that
use a similar conceptual framework, other accounting literature, and accepted
industry practice to the extent that these do not conflict with sources in 2. and 3.
above.
B. Because the FASB and IASB conceptual frameworks are similar, step 4 provides an
opportunity for entities to adopt FASB standards in dealing with accounting issues
where steps 1 through 3 are not helpful.
X. Numerous differences exist between IFRS and U.S. GAAP.
A. Differences exist with respect to recognition, measurement, presentation, and
disclosure. Exhibit 11.8 lists several key differences.
B. IAS 1, “Presentation of Financial Statements,” provides guidance with respect to the
purpose of financial statements, components of financial statements, basic principles
and assumptions, and the overriding principle of fair presentation. There is no
equivalent to IAS 1 in U.S. GAAP.
C. The IASB follows a principles-based approach to standard setting, rather than the so-
called rules-based approach used by the FASB. The IASB tends to avoid the use of
bright line tests and provides a limited amount of implementation guidance in its
standards.
XI. Even if all countries adopt a similar set of accounting standards, two obstacles remain in
achieving the goal of worldwide comparability of financial statements.
A. IFRS must be translated into languages other than English to be usable by non-
English speaking preparers of financial statements. It is difficult to translate some
words and phrases into other languages without a distortion of meaning.
B. Culture can affect the manner in which an accountant interprets and applies an
accounting standard. Differences in culture can lead to differences in application of the
same standard across countries.
Answer to Discussion Question: Which Accounting Method Really is Appropriate?
Students in the United States often assume that U.S. GAAP is superior and that all reporting
issues can (or should) be resolved by following U.S. rules. However, the reporting of research
The issue is not whether costs that will have future benefits should be capitalized. Most
accountants around the world would recommend capitalizing a cost that leads to future
Conversely, under IFRS, development costs must be recognized as an intangible asset when an
enterprise can demonstrate all of the following:
(a) the technical feasibility of completing the intangible asset so that it will be available for use
or sale;
(b) its intention to complete the intangible asset and use or sell it;
(c) its ability to use or sell the intangible asset;
The IFRS treatment of development costs begs the question: How easy is it for an accountant to
determine whether the development project will result in an intangible asset, such as a patent,
that will generate future economic benefits?
In the U.S., a conservative approach has been taken because of the difficulty of determining
whether an asset has been or will be created. To ensure comparability, all companies are
costs before making comparisons between companies from different countries.
Answers to Questions
1. The five factors most often cited as affecting a country’s accounting system are: (1) legal
system, (2) taxation, (3) providers of financing, (4) inflation, and (5) political and economic
ties. The legal system is primarily related to how accounting principles are established;
code law countries generally having legislated accounting principles and common law
countries having principles established by non-legislative means. In some countries,
financial statements serve as the basis for taxation and in other countries they do not. In
those countries with a close linkage between accounting and taxation, accounting practice
2. Problems caused by accounting diversity for a company like Nestle include: (a) the
additional cost associated with converting foreign GAAP financial statements of foreign
3. Gray developed a model that hypothesizes that societal values, i.e., culture, affect the
development of accounting systems in two ways: (1) societal values help shape a country’s
institutions, such as legal system and financing system, which in turn influences the
4. According to Nobes, the purpose for financial reporting determines the nature of a country’s
financial reporting system. The most relevant factor for determining the purpose of financial
reporting is the nature of the financing system. Some countries have a culture, and
5. Several of the IASC’s original standards were criticized for allowing too many alternative
methods of accounting for a particular item. As a result, through the selection of different
acceptable options, the financial statements of two companies following International
6. A major difference between the IASB and the IASC is the composition of the Board and the
manner in which Board members are selected. IASB has at least 12 and as many as 14
full-time members, the IASC had zero. Full-time IASB members must sever their
employment relationships with former employers and must maintain their independence.
7. This statement is true in that EU publicly traded companies are required to use IFRS in
8. The bottom section of Exhibit 11.6 shows the countries as of June 2012 that do not allow
domestic companies to use IFRS in preparing consolidated financial statements. The two
most economically important countries in this group are China and the United States.
9. The IASB and FASB have agreed to “use their best efforts to (a) make their existing
10. Convergence implies a joint effort between two standard setters to reduce differences in the
sets of standards for which they are responsible. Convergence could result in one
standard setter adopting an existing standard developed by the other standard setter or by
11. Since 2007, foreign companies listed on U.S. stock exchanges may file IFRS financial
statements with the U.S. SEC without providing any reconciliation to U.S. GAAP. Domestic
companies listed on U.S. stock exchanges must file financial statements prepared in
accordance with U.S. GAAP.
The SEC’s proposed condorsement framework combines the FASB–IASB convergence
process with the IFRS endorsement process followed in many countries and in the EU. The
12. When adopting IFRS, a company must prepare an “IFRS opening balance sheet” at the
date of transition. The date of transition is the beginning of the earliest period for which
comparative information must be presented, i.e., two years prior to the “reporting date.” A
company must follow five steps in preparing its IFRS opening balance sheet:
1. Determine applicable IFRS accounting policies based on standards that will be in force
on the reporting date.
13. The extreme approaches that a company might follow in determining appropriate
accounting policies for preparing its initial set of IFRS financial statements are:
1. Adopt accounting policies acceptable under IFRS that minimize change from existing
accounting policies used under current GAAP.
14. According to the accounting policy hierarchy in IAS 8, if a company is faced with an
accounting issue for which (a) there is no specific IASB standard that applies, (b) there are
15. Potentially significant differences between IFRS and U.S. GAAP related to asset
recognition and measurement are:
Acceptable use of LIFO under U.S. GAAP, but not IFRS.
Definition of “market” in the lower of cost or market rule for inventory – replacement cost
under U.S. GAAP; net realizable value under IFRS.
16. Even if all countries adopt a similar set of accounting standards, two obstacles remain in
achieving the goal of worldwide comparability of financial statements. First, IFRS must be