Chapter 8
Global Accounting and Auditing Standards
Discussion Questions
1. The term convergence is associated with the International Accounting Standards Board.
Before the IASB, harmonization was the commonly used term. Harmonization means that
standards are compatible; they do not contain conflicts. Harmonization was generally taken to
2. a. Reciprocity, or mutual recognition, exists when regulators outside of the home country
accept a foreign firm’s financial statements based on the home country’s principles, or
b. With reconciliation, foreign firms can prepare financial statements using the accounting
standards of their home country or IFRS, but also must provide a reconciliation between
c. International standards are a result of either international or political agreement, or
3. Key rationales supporting the development and widespread application of IFRS include:
a. A growing body of evidence indicates that the goal of international convergence of
accounting, disclosure, and auditing has been widely accepted.
b. All dimensions of accounting are becoming converged worldwide.
h. Widespread application of IFRS might also result in:
2. Improved allocations of corporate investment money worldwide.
4. Cost reductions in accounting information processing and financial disclosure costs
for multinational enterprises.
4. Key rationales against the development and widespread application of IFRS include:
a. Accounting has built-in flexibility. Its ability to adapt to widely different situations is one
of its most important features. Critics doubt that international standards can be flexible
enough to handle differences in national backgrounds, traditions, and economic
environments, and may be a politically unacceptable challenge to sovereignty.
b. Comparability is not the right goal, fair presentation is. Fair presentation may be
5. Evidence indicating wide acceptance of IFRS around the world:
a. Growing numbers of companies are adopting IFRS voluntarily and refer to their use of
IFRS in their annual reports.
b. Dozens of countries base their national accounting standards on IFRS.
c. Some 7,000 EU listed companies now use IFRS in their consolidated financial
statements.
6. The International Accounting Standards Board is overseen by the International Accounting
Standards Committee, consisting of 22 trustees: six from North America, six from Europe,
six from Asia/Oceania, and four from any area. The trustees appoint the members of the
7. Accounting harmonization in the EU is just one element of the overall project of harmonizing
the legal and economic systems of the member states, and is part of the process of
harmonizing company law.
The Fourth Directive illustrates the concept of harmonization, and specifies accounting
measurement (valuation) and disclosure requirements. It provides format rules for the balance
8. Convergence of auditing standards will help ensure that audit quality will reach acceptable
levels worldwide. Auditing convergence may be less difficult to achieve than accounting
convergence because auditing is more technically oriented and there is wider agreement as to
what constitutes best practices in auditing than there is for accounting principles.
IFAC is a worldwide organization of 157 member and associate organizations in 123
9. IOSCO consists of securities regulators from more than 100 countries. Together, IOSCO
members are responsible for regulating more than 90 percent of global securities markets.
and 2002.
10. The UN and OECD now play supporting roles in harmonizing accounting and auditing
Exercises
1. One of the main problems with mutual recognition (or reciprocity) is that it actually may
make financial statements within the home market noncomparable. If many different
accounting standards are acceptable, then companies domiciled in countries with rigorous
The use of International Financial Reporting Standards would provide many benefits for
cross-border listings. Companies would have to provide only one set of financial statements
for all nondomestic capital markets, and investors would have to be familiar with only one set
Preferred approaches from perspectives of different groups:
a. Investors might prefer international standards, as they would increase the ease in
understanding information from nondomestic companies. Knowledge of only one set of
b. Company management might prefer mutual recognition, as it does not require a company
to prepare any additional information and requires no additional expense or time
c. Regulatory authorities might prefer international standards as IFRS are now generally
d. Stock exchanges might prefer international standards as they are the only method that
provides truly complete and identical information disclosure from companies outside the
home market.
2. The following discussions are based on the respective organizations’ Web sites at the time of
writing.
than 2.5 million accountants. Organized in 1977, IFAC’s goal is to develop the accountancy
profession and converge its professional standards worldwide to enable accountants to
provide services of consistently high quality in the public interest.
To achieve its objective, IFAC develops and promotes technical, professional, and ethical
The IFAC Council, comprised of one representative from each member body, provides
overall leadership of IFAC. The council elects the IFAC Board, and is responsible setting
IFAC’s professional work is done through its standard setting boards and standing
committees. IFAC standard setting boards are:
a. International Accounting Education Standards Board
b. International Auditing and Assurance Standards Board
IFAC standing committees are the following:
a. Compliance Advisory Panel
b. Developing Nations Committee
IFAC issues standards in these key areas: auditing, assurance, and related services; education;
ethics; and public sector accounting. IFAC’s International Auditing and Assurances
Standards Board issues International Standards on Auditing (ISA), which are intended for
international acceptance. ISAs deal with topics such as auditors’ responsibilities, risk
assessment and evidence, and audit reporting.
IFAC has close ties with organizations such as the IASB and IOSCO, and its pronouncements
are receiving growing recognition for their quality and relevance. Financial statements of
United Nations Intergovernmental Working Group of Experts on International Standards of
Accounting and Reporting (ISAR)
ISAR was created in 1982 and is part of the United Nations’ Conference on Trade and
Development (UNCTAD). ISAR is the only intergovernmental working group devoted to
In recent years, ISAR focused on important topics that other organizations were not yet ready
to address, such as environmental accounting. It has also conducted technical assistance
projects in a number of areas such as accounting reforms and retraining in the Russian
Federation, Azerbaijan and Uzbekistan, and designing and developing a long-distance
learning program in accountancy for French-speaking Africa. Topics discussed at recent
ISAR conferences include practical implementation of IFRS, corporate responsibility
reporting, and corporate governance disclosures.
Organization for Economic Cooperation and Development (OECD)
OECD is the international organization of 30 (mostly industrialized) market economy
The OECD often publishes reports on the structure and regulation of securities markets, and
has played a leading role in promoting improved corporate disclosure and governance around
3. As an example, consider the Financial Accounting Standards Board (FASB) in the United
States. The FASB’s Web site presents detailed information on the FASB’s international
activities, including an overview, convergence with IASB, cooperative efforts with other
standards setters, and the FASB/IASB memorandum of understanding.
The FASB’s objective for participating in international activities is to increase the
international comparability and the quality of standards used in the United States. This
The FASB believes that the ideal outcome of cooperative international accounting standard-
setting efforts would be the worldwide use of a single set of high-quality accounting
standards for both domestic and cross-border financial reporting. At present, a single set of
4. a. Comparison of standard-setting procedures:
IASB
The IASB follows due process in setting accounting standards. For each standard, the
Board may publish a discussion paper that sets out the various possible requirements for
the standard and the arguments for and against each one. Subsequently, the Board
European Union
Accounting and auditing requirements are established under EU company law directives,
which are legal instruments that member countries must implement. Thus, all accounting
and auditing standards in EU directives become legally enforceable. The EU comprises
several key organizations that need to be understood in order to understand how EU
directives come into being. Briefly, the European Commission initiates EU policy and
acts in the community’s general interest. Commissioners are completely independent and
IFAC
The standard setting boards of IFAC also follows a due process procedure. Meetings to
discuss the development and approval of standards are open to the public and, where
practical, are broadcast over the Internet. Issues papers and draft standards are published
on the IFAC Web site along with updated project summaries and meeting highlights.
b. At what types and sizes of enterprises are their standards primarily directed?
IFRS are financial reporting standards for business whose applicability depends on the
context. For example, if IFRS are adopted as national accounting standards in a particular
country, their applicability depends on the type of entities that are subject to those
national standards.
c. Brief critique of statement:
It is true that IFRS are particularly useful to companies that operate in more than one
country, because IFRS are widely recognized and are acceptable in many different
5. Following is a sample essay on the 1995 European Commission adoption of a new approach
to accounting harmonization. The essay is based on material in articles by Gerhard G.
Mueller, “Harmonization: Efforts in the European Union,” in Frederick D.S. Choi, ed.,
International Accounting and Finance Handbook, New York: John Wiley & Sons, 1997,
page 11.28; and Peter Walton, “European Harmonization,” in Frederick D.S. Choi, ed.,
International Finance and Accounting Handbook, New York: John Wiley & Sons, 2003,
page 17.7.
Beginning in the early 1990s, the Commission examined a number of alternative
harmonization strategies. These included, among others, substantive revisions of the existing
The reality of international pressures and the need of European multinationals to be listed on
several stock exchanges finally made it clear that the creation of a strong European regional
level of accounting regulation was simply adding an unnecessary third tier, sandwiched
between national regulations and the international capital markets.
The new European Commission’s strategy for EU accounting harmonization is a major
change from the EU accounting harmonization policies that had been in place over the
preceding 25 years.
6. Note to Instructors: Exhibit 8-3 is current at the time of writing. It would be best for you to
log on to the IASB Web site, www.iasb.org, and complete this exercise yourself before
assigning it to students.
7. The following is taken from the IASB Web site at the time of writing (June 2009).
Name
Home Country
Prior Affiliation
Served on national
standard setting body?
David Tweedie
(Chairman)
United Kingdom
KPMG Peat Marwick
McLintock
ASB (United Kingdom)
Thomas E. Jones (Vice-
Chairman)—term
expires 30 June 2009
United Kingdom
Citicorp
No, but was on IASC
Board (+Trustee of
FAF) (United States)
time)—term expires 30
June 2009
Stephen Cooper
United Kingdom
UBS Investment Bank
Philippe Danjou
France
Autorité des Marchés
Financiers (AMF)
Jan Engström
Sweden
Volvo
Robert Garnett
South Africa
Anglo American
SAAPB
Gilbert Gélard
France
KPMG
Gomes
James J. Leisenring
United States
Bristol, Leisenring,
Herkner & Co.
FASB
Warren McGregor
Australia
Stevenson McGregor
No, but was Executive
Director of AARF
John T. Smith (part
time)
United States
Deloitte & Touche
No, but member of
IASC board
Tatsumi Yamada
Japan
ChuuoAoyama Audit
Corporation (PWC)
Zhang Wei-Guo
China
China Securities
Regulatory Committee
CASC
The terms of two of the above board members expires 30 June 2009. Replacing these
individuals are:
a. Patrick Finnegan (Canada)—CFA Institute Centre for Financial Market Integrity. No
8. Seven differences are identified in Exhibit 4-2. Their effects on the balance sheet and income
statement are as follows:
1. Rules-based U.S. GAAP versus principles-based IFRS means that there is more
specificity under U.S. GAAP than under IFRS. There is greater scope for the exercise of
2. When PPE is revalued, the credit goes to equity, increasing the amount of equity. Also,
depreciation is higher when PPE is revalued, so net income is lower. Therefore, historical
3. This difference affects the format of the income statement, but not the amount of net
income. Extraordinary gains and losses under U.S. GAAP will be shown “above the line”
4. Generally, fewer subsidiaries are consolidated under U.S. GAAP. The effect on the
5. Under U.S. GAAP, joint ventures are accounted for using the equity method. The balance
sheet will show an asset, “Investment in joint venture.” Under IFRS, the proportional
percentage of each asset and liability will be brought into the consolidated balance sheet.
6. U.S. GAAP expenses development costs. We would normally think that this lowers net
income. (However capitalized development costs eventually get amortized, so the effect
7. LIFO generally results in a lower inventory number on the balance sheet and lower
profits (assuming that costs are rising). Total assets and equity should both be lower.
Their effects on selected ratios are as follows:
Current ratio
Debt-to–
Equity
Debt-to-Assets
Return on
Assets
based
1. Rules- versus
Cannot tell
Cannot tell
Cannot tell
Cannot tell
2. Revaluations
of PPE
No effect
Lower
Lower
Lower
3. Extraordinary
items on I/S
No effect
No effect
No effect
See below
4. Consolidation
of
Cannot tell
Cannot tell
Cannot tell
Cannot tell
subsidiaries
lower
(probably
6. Development
No effect
Higher
Higher
Marginally
7. LIFO
Lower
Higher
Higher
Lower
(probably)
9. The criticisms can be answered as follows:
a. High-quality standards set clear principles that guide users of those standards on how to
reflect the economics of transactions in financial statements. This guidance, combined
b. To date, the convergence process has proven long, difficult, costly, and not entirely
successful. Since starting their joint efforts in 2002, convergence efforts have
monopolized the FASB’s and IASB’s agendas. Despite their best efforts, many
c. U.S. interests are best protected when American businesses and investors compete more
effectively with other businesses and investors outside U.S. borders. The objective of a
global standard setter is to develop and maintain high-quality standards that benefit all
investors.
The United States has had, and will continue to have, substantial input into the
international standard setting process through its representation on the IASB, the
Note to Instructors: The above exercise and response are based on PriceWaterhouseCoopers, “Point of
View: Rethinking the Path to Global Accounting Standards” (April 2009), www.pwc.com.
10. a. (ii) Net realizable value of inventory is the estimated selling price in the ordinary course
of business less the estimated costs of completion and the estimated costs necessary to
make the sale. (IAS 2)
b. (ii and iii) The equity method and proportionate consolidation are both allowed for jointly
d. No. The effect of a change in an accounting estimate should be reflected (a) in the period
of change, if the change affects that period only, or (b) in the period of the change and
future periods, if the change affects both. (IAS 8)
e. False. The declaration of dividends on January 5 is an event after the balance sheet date.
Case 8-1 PetroChina Company Limited
1. The Summary of Principal Accounting Policies footnote of PetroChina Company Limited
describes the accounting policies used to prepare the company’s consolidated financial
statements. A comparison of accounting policies described there with International Financial
Reporting Standards at the IASB and IAS Plus Web sites reveals how well the company’s
accounting policies conform to IFRS. (Note that the IASB Web site has summaries as well as
complete IFRS available. The IAS Plus Web site has summaries of IFRS.) This comparison
follows, based on information at the time of writing (June 2009).
a. Basis of consolidation. Subsidiaries are consolidated when more than half of the voting
rights are owned or there is the power to govern the financial and operating policies. IAS
b. Investments in equity affiliates. The equity method is used for affiliates over which there
is significant influence but not control. This is consistent with IAS 28.
c. Investments in jointly controlled entities. The equity method is used. The equity method
d. Transactions with minority interests. The effects of these are recorded in equity. This is
consistent with IAS 27 that requires minority interests be shown in equity.
e. Foreign currencies. The functional currency approach is used. In the case of transactions,
f. Property, plant, and equipment. These assets are initially recorded at cost and
subsequently carried at revalued amount (i.e., fair value). Depreciation is recorded over
g. Oil and gas properties. The successful efforts method is used to account for oil and gas
exploration and production costs. IFRS 6 requires companies to determine a policy
h. Intangible assets. These are capitalized and amortized over their useful lives. They are
not revalued. Internally generated intangible assets are not capitalized. Intangible assets
are reviewed for impairment annually. These policies are consistent with IAS 38.
i. Financial assets. Financial assets are classified into categories based on the purpose for
which the financial asset was acquired. (Note that PetroChina only owns two classes of
j. Leases. Leases are capitalized when the company assumes substantially all of the benefits
and risks of ownership. Leases are treated as operating leases when the risks and benefits
of ownership are retained by the lessor. This policy is consistent with IAS 17.
k. Related parties. IAS 24 requires the disclosure of related party transactions. This note
l. Inventories. Inventories are valued at the lower of cost or net realizable value. Net
m. Accounts receivables. These are initially valued at fair value and subsequently at cost.
They are written down when impaired. This treatment is consistent with IAS 39.
n. Cash and cash equivalents. This note only defines cash and cash equivalents. The
summaries available online do not contain a definition. However, the complete IAS 7
offers a comparable definition.
o. Accounts payable. These liabilities are initially recorded at fair value and subsequently at
q. Taxation. Deferred income tax is provided in full, using the liability method, for all
temporary differences arising between the tax bases of assets and liabilities and their
r. Revenue recognition. Sales are recognized upon delivery of products or performance of
services. This is consistent with IAS 18.
s. Provisions. These are recognized when there is a present legal or constructive obligation
t. Research and development expenses. Research costs are expensed and development costs
are capitalized when future economic benefits can be expected. This treatment is
consistent with IAS 38.
u. Retirement benefit plans. PetroChina expenses contributions to retirement plans as paid.
It has no material obligations to pay for other post-retirement benefits. Thus, the policy is
consistent with IAS 19.
v. Share-based compensation—share appreciation rights. These are measured at fair value
2. The above assessment has a moderate degree of reliability. First, it is based on a review of the
accounting policy note, which provides highly summarized information. However, even close
examination of the PetroChina’s complete annual report would yield incomplete
3. Examination of the complete text of PetroChina’s annual report, and communication with
4. The auditor’s report states that PetroChina’s consolidated financial statements are in
accordance with International Financial Reporting Standards. This information is useful,
Case 8-2 Whither The Withering Standard Setters?
1. The boards of the IASB and FASB differ in several ways:
a. Size—The IASB has 15 board members (13 full-time and 2 part-time) whereas the FASB
has 5 members (all full-time). (Note to instructors: The IASB board will increase to 16
members by 2012. Up to three members may be part-time.)
b. Membership requirements—The IASB board membership is based on “the best available
combination of technical expertise and diversity of international business and market
experience.” To ensure geographic diversity, (1) four members must be from the
corporations, and the investor community. Obviously, geographic diversity is not an issue
with the FASB.
The boards are similar in that members are appointed for five-year terms, renewable
once.
The two boards follow a similar due process in setting accounting standards. This is not
surprising because the IASB is modeled after the FASB. Both boards determine their
projects after getting input from various constituencies and their respective oversight
2. So much attention is paid to IFRS and U.S. GAAP convergence because, to a large extent,
national standards in many countries of the world have been based on IFRS or U.S. GAAP.
Other national accounting standard setting bodies cannot and do not ignore those two
substantial and advanced bodies of literature in developing their own national standards.
The evidence is that IFRS and U.S. GAAP are converging toward each other. For example,
3. U.S. accountants, analysts, and others involved in (U.S.) financial reporting need to know
about IFRS for several reasons, including:
a. As discussed in question 2, IFRS influence the direction of U.S. GAAP. Today’s IFRS
may be tomorrow’s U.S. GAAP and the implications of changing standards need to be
understood.
4. We doubt that the IASB and FASB will merge in the future. First of all, various points
discussed in the chapter mean that it is unlikely that the IASB will disappear and the FASB
will become the global standard setter. It also seems unlikely that the FASB will go away. It
is difficult to believe that the United States will cede its authority over accounting standard
setting to a multinational group. Even if the FASB felt that a merger was advantageous,
would politicians or even the SEC allow international interests to supersede domestic ones?