Accounting Chapter 10 Homework The IASB-FASB convergence projects started with the Norwalk Agreement of 2002 and are reaffirmed in the annual Memorandum of Understanding

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Chapter 10: International Accounting Instructor’s Manual

Accounting Theory (9

edition) Page 1 of 13

CHAPTER HIGHLIGHTS

Chapter 10 examines the standard-setting process in other English-speaking countries, and the

attempt to achieve international harmonization, convergence, or equivalence (whatever the term

du jour is) of accounting standards. There are subtle differences between the terms, but in

practice they are increasingly used as having similar meanings.

The Anglo-Saxon (also called the Anglo-American) and the continental approaches to

accounting reflect some marked cultural differences within Western civilization. The Anglo-

Saxon approach is grounded in strong equity capital markets and a strong accounting profession

with accounting rule making usually centered in a quasi-private organization. For continental

countries debt financing through major banks has been far more important than the use of equity

capital though this is beginning to undergo change. In addition, the accounting profession has

not been especially strong in continental countries and accounting rules have been determined by

law.

The IASB-FASB convergence projects started with the Norwalk Agreement of 2002 and are

reaffirmed in the annual Memorandum of Understanding. The projects are both short-term and

long-term in nature. The short-term projects are intended to remove numerous individual

differences in standards between IFRS and US GAAP. The long-term projects include those

areas where accounting guidance will be improved (e.g., share-based payments, revenue

recognition).

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Note: There is a short project at the end of this file that you may want to use in your course. We

have found that it is best assigned to small student groups, 2-3 members per group. Once the

papers are submitted, group presentations to the class complete the projects.

QUESTIONS

Q-1 What does harmonization of accounting standards mean?

Harmonization concerns the degree of similarity or uniformity among the various sets of national

Q-2 What is convergence and how does it differ from harmonization?

Convergence arose as a result of an effort to eliminate major differences between IASB

standards and U.S. GAAP. The reasons for the convergence projects vary, but a generally

accepted one is an effort to improve financial reporting efficiency. Convergence of the two

standards would allow for American security registrations and for published financial statement

purposes without reconciliation between the two. The term “equivalence” has also been used

when referencing convergence projects.

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Q-3 The EU opted to use exclusively IASB standards for consolidated financial statements

beginning in 2005. What drove this decision?

While the Fourth and Seventh Directives improved harmonization, the pace was not fast enough,

particularly since many firms needed access to major capital equity sources. As a result, the

Q-4 Compare the true and fair view of the United Kingdom, the “present fairly” outlook of

the United States, and the legalistic view of the Continental model.

The “true and fair” view is grounded in “economic reality” and refers to using judgment in order

to make financial statements more useful for decision-making purposes. This may well mean

Q-5 What are the different conceptions of the true and fair view?

The true and fair view, which is an abstract concept to begin with, appears to be subject to

individual interpretation within each of the EU nations according to their own needs. Note that

this term has drawn particularly strong responses from the UK accounting profession. The

Q-6 Why has no Continental model country developed a conceptual framework?

The primary purposes of the continental model—at least prior to the EU directives, which are

geared to the true and fair view though done within the cultural restraints of each member

Q-7 What is the relationship between the IFAC and IASB?

IFAC (International Federation of Accountants) and IASB (International Accounting Standards

Board) are complementary and work in different spheres, but they cooperate with each other.

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Q-8 What are the main distinctions between the Anglo-Saxon and the continental models?

Anglo-Saxon countries are more user-oriented and less oriented toward the primary purposes of

protecting creditors and determining income tax liability. Anglo-Saxon countries have stronger

Q-9 How does the role of government differ in the United Kingdom and the United States

relative to financial reporting?

Standard setting in the United States is accomplished through private sector bodies; today the

FASB is that body. The SEC has statutory authority to set accounting standards, but has

Q-10 What are the possible implications if accountants outsource the balance sheet to

external appraisers (applying fair value accounting) for period-end financial statement

reporting?

This is a thought question. Might the internal accounting function be relegated to simply

bookkeeping with periodic receiving of finished parts from external vendors for assembly into a

finished financial report. Discuss whether accounting as a manufacturing entity, producing

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Q-11 For years the FASB had little interest in pursuing international harmonization projects.

What prompted its seemingly new interest in 2002 to work with the IASB in such a

cooperative manner?

Remarks by Paul A. Volcker before the Accounting Regulatory Committee of the European

Commission, Brussels, 25 Feb 2005. Paul Volcker, former Chair of the International Accounting

Q-12 Evaluate the IASB’s approach to convergence.

The IASB sees development of a single set of high quality, global accounting standards to help

users make economic decisions as its objective. It assumes that if attained: (1) financial

reporting costs will be reduced, (2) comparability will be enhanced, (3) investment risk will be

reduced and, therefore, lower the cost of capital, (4) international capital flows will be improved,

and (5) financial returns will improve.

Q-13 As Schipper seets it, why do the rules based and principles based approaches to

standard setting tend to converge?

Schipper, Katherine (2005). “The Introduction of International Accounting Standards in Europe:

Implications for International Convergence, “European Accounting Review” (May, 2005),

pp. 101-126.

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Q-14 How will the role of national standard-setting bodies be affected by adoption of IASB

standards?

This is a thought provoking question, one with no single correct response. One extreme would

be to assume that adoption of IASB standards would negate the need for any local (country)

standard-setting body. Politically, this is not likely. New Zealand is a good example of what has

occurred when this change took place. We suggest that if (probably when) the U.S. adopts IASB

Q-15 How do de facto harmonization and de jure harmonization differ from each other?

De facto harmonization (also called material harmonization) refers to harmonization of the

Q-16 What are the advantages of convergence-harmonization of accounting standards?

Financial reporting costs will be reduced. Comparability of financial reports will be enhanced.

Q-17 Is the revenue-expense orientation consistent with fair value measurement?

Benston, George, M. Bromwich, and A. Wagenhofer (2006). “Principles-Versus Rules-Based

Accounting Standards: The FASB’s Standard Setting Strategy,” Abacus (Vol. 42, No. 2), pp.

165-188.

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CASES, PROBLEMS, AND WRITING ASSIGNMENTS

1. What are the main distinctions between the Anglo-Saxon and the Continental models

relative to accounting and financial reporting? Within the Anglo-Saxon group, how

does the United States differ from other members of the group? What developments

are leading to erosion of differences between at least some members of the Anglo-

Saxon and Continental groups?

The Anglo-American model is more strongly oriented toward providing financial information for

users (mainly investors and creditors), whereas the continental group is more oriented toward

protecting creditors and providing tax information. The accounting profession is much stronger

in Anglo-American countries as opposed to continental countries, whereas governmental

influence is stronger in the latter.

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2. According to Alexander and Archer (2000), Anglo-Saxon (or Anglo-American)

accounting is a “myth.” Discuss their reasons for this. Do you agree with them?

Alexander, David, and S. Archer (2000). “On the Myth of ‘Anglo-Saxon’ Financial

Accounting,” The International Journal of Accounting (Vol. 35, No. 4), pp. 539–557.

CRITICAL THINKING AND ANALYSIS

1. Why do we need international accounting standards? Why not simply let each country

develop and use its own standards and let it go at that?

With increasing registration of foreign securities listings on domestic stock exchanges, securities

exchanges very likely want as much harmonization as possible whether it comes through IASB

standards or standards of the various nations. Securities exchanges such as the New York Stock

Exchange would also want harmonized standards which might be termed as “high quality”

standards.

2. The IASB and FASB are pursuing a single, converged conceptual framework. The

United States has a good start with SFAC No. 8. What additional changes should FASB

make to further improve its conceptual framework?

This is an appropriate in-class, small group discussion assignment. Have the students review the

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3. In 2003, South Africa was the first country to adopt IFRS with fair value accounting.

The country does not allow for differential accounting treatment depending on the size

of enterprise. What type of response do you expect from this implementation?

Many of the country’s small farmers were outstanding vintners, but not accountants. Principles-

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Note: A small project, one not listed in the text book, for the semester that you may want to

consider follows:

Objective of the project

Obtain an understanding of U.S. GAAP, IFRS, and GAAP as practiced by a third accounting

body (e.g., Canada, China, India, Mexico, Russia, Taiwan, Vietnam). This triangular review of

these systems should identify the commonalities and analyze the differences between the three

accounting systems.

Outline of the Paper

Introduction: Tell me what you are going to tell me.

Specific country

Comparisons

• Prepare a table that compares the three GAAPs. To facilitate comparability within the

class, format your table as follows:

o Column 1, IASB standard

o Column 2, FASB standard

o Column 3, your specific country’s GAAP

o Column 4, your qualitative assessment of the variance between the three GAAPs.

0. insignificant or no differences between the bodies

1. minor differences between the bodies

2. significant difference between two of the bodies

3. significant difference between all three bodies

• Convergence

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Summary

• What are your conclusions from your study?

• Tell me what you told me.

Style Requirements

Submit your assignment electronically to Professor Dodd before the beginning of the class on 22

March.

• Microsoft Word document

• 12-point font

• Use the header and footer in this document

• Single-spaced body of the text

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Example of the Comparisons section of your country-specific project

India

This is just a very brief comment to introduce you to the example country that follows.

The Institute of Chartered Accountants of India (ICAI) is the governing professional body

representing the accountancy profession at national and international levels. The Accounting

Comparisons

Prepare a table similar to the following one. Note that I added endnotes to clarify why I

classified the variance as a “1, minor differences in the bodies” in this single example. The

instructions do not require that you footnote/explain every number in your Variance column, but

you may find it helpful as you analyze each standard. I used IAS 7, Cash Flow Statements, as an

example of how to approach the assignment.

IFRS

FASB India

Variance

iii

IAS 1

Presentation of Financial Statements

IAS 2

Inventories

IAS 3

Consolidated Financial Statements

superceded by IAS 27 and 28

IAS 7

Cash Flow Statements

SFAS 95

Statement of Cash

Flows

AS 3, revised

1997

Cash Flow

Statements

etc. through IAS 41

IFRS 1 through 8

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or within your country. Once you have completed the table, go to the next step and analyze those

with variances rated as threes, significant difference between all three bodies, but limit your

analysis to only five standards. This will meet the requirements for this part of the assignment.

However, if you actually get interested in this assignment, you may want to go beyond this step

and identify differences that this methodology misses.

i The term ‘IFRSs’. The term International Financial Reporting Standards (IFRSs) has both a

narrow and a broad meaning. Narrowly, IFRSs refers to the new numbered series of

pronouncements that the IASB is issuing, as distinct from the International Accounting

Standards (IASs) series issued by its predecessor. More broadly, IFRSs refers to the entire body

of IASB pronouncements, including standards and interpretations approved by the IASB and

IASs and SIC interpretations approved by the predecessor International Accounting Standards

Committee. Reference: Deloitte URL: http://www.iasplus.com/standard/standard.htm

ii It may be helpful to add an appendix (for reference only) with the more detailed explanations

of each standard India uses. ICAI URL: http://www.icai.org/icairoot/resources/as_index.jsp

iii Qualitative assessment of the variance between the three GAAPs

0. insignificant or no differences between the bodies

1. minor differences between the bodies