Discussion 8 - IFRS vs GAAP

University of Abuja

Faculty of Management Sciences

Department of Accounting M.Sc. Accounting and Finance

A paper presentation

on

International Accounting

-Meaning

-Scope

by

Onu Uches Christian 1740601082

Olonite Oluyemi Ayodele 1740601104

Course title: Advanced International Accounting

Course code: ACC 804

Course facilitator: Dr. M.O.A. Mustafa

2018

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TABLE OF CONTENTS

Table of Contents ………………………………………………………………… i

INTRODUCTION ………………………………………………………………. 1

Background of International Accounting ………………………………………… 1

Learning Objectives ……………………………………………………………… 4

Learning Outcome ………………………………………………………………... 4

CHAPTER ONE: INTERNATIONAL ACCOUNTING: MEANING ……… 5

1.1. Definitions …………………………………………………………………. 5

1.2. Why International Accounting……………………………………………... 6

1.3. Causes and examples of international differences ………………………… 8

1.4. Conclusion on the causes of international differences …………………… 12

1.5. Objectives ………………………………………………………………… 12

CHAPTER TWO: INTERNATIONALACCOUNTING: SCOPE …………. 13

2.1. Scope according to syllabus ……………………………………………… 16

2.1.1. Financial reporting by listed groups ……………………………………… 14

2.1.2. Harmonization and transition in Europe and East Asia ………………….. 17

2.1.3. Financial reporting by individual companies …………………………….. 19

2.1.4. Major issues in financial reporting by mnes …………………………….. 19

2.1.5. Analysis and management issues ……………………………………........ 21

2.1.6. Islam and IFRS …………………………………………………………… 25

2.2. Nigerian University Commission – International Accounting Topics

Minimum Benchmarks …………………………………………………… 26

2.3. The Gap/s between the expected and the Nigerian Practice ………………29

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CHAPTER 3: CONCLUSION ………………………………………………... 37

CHAPTER 4: RECOMMENDATION…………………………………...........38

MEANING/DEFINITION OF WORDS USED ………………………………39

REFERENCES ………………………………………………………………… 41

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INTRODUCTION

BACKGROUND OF INTERNATIONAL ACCOUNTING

Creation of international system of accounting was an objective process that was

influenced by global economic development and was tightly connected to development of

accounting as a science; formalization of theories of accounting and establishment of

different schools of accounting and evolution of the entire economic profession.

International system of accounting was envisioned as a solution to the problem of

incompatibility of economic information across countries, economic entities and users of

such information who are tasked with economic decision-making. Accounting, as the

international language of business, should insure that information that is formed both on

the level of individual business entities and economy as a whole is understandable,

correct, sufficient and compatible.

Different developmental stages in International Accounting can be characterized by

various factors which are: growth of world economy, rapidly changing technology,

growing complexity of organization of production, global economic integration which

also lead to increase in capital flows, international trade and foreign direct investment,

expansion of international economic relationships, specialization and cooperation of

production, creation of transnational corporations, and the problem of incompatibility of

accounting.

Historical aspects of development of accounting have been studied extensively by many

academic researches such as Butynets F. F., Dankiv J. Y., Druzhilovska T. Y., Luchko M.

R., Mnyh E. V., Mizikovski Y. A., Ostap'yuk M. J., Paliy V. F., Pushkar M. S., Sokolov

Y. V., Tkach V. I., Tkach M. V., Shvets V. G., Shturmina O. S., Ahmad S., Basoglu B.,

Goma A., Doupnik T., Mueller G., Perera H., Flasher D. to name a few.

First stage: From the end of 19th century/beginning of 20th century until the middle of

20th century. This stage is characterized by inception of the idea of having an

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internationally accepted set of accounting standards, adoption of legislation in various

countries codifying their accounting principles, emergence of professional accounting

associations, rethinking of the role of accounting in the system of management, and

internationalization of information exchange among accounting professionals.

Second stage: From the middle of the 20th century until the end of 20th century,

international system of accounting begins to take shape. During this period appear first

international accounting standards, and the process of harmonization of accounting

systems across countries begins. Two international bodies – IASC and IFA are formed,

and their activity is gradually recognized and supported by major international

institutions.

Third stage: From the end of 20th century, until present day, the efforts to harmonize

accounting systems evolved into a broader concept of international convergence.

International accounting standards are official accepted in many countries and a larger

portion of global economy moves toward using IFRS. International system of accounting

moves toward becoming a global system of accounting.

It should be noted that different countries (UK, Nigeria, Germany, Ghana) to mention a

few have their accounting structure, thus we have the National accounting. International

Accounting started for reasons listed in the chapter 1, (1.3) of this document. Also, the

great depression in United States of America (USA) from August 1929-1941 added to its

emergence. After that period there was a need for a unified accounting system across

borders which gave birth to the International Accounting, international Accounting

Standard Committee (IASC) later repealed by the International Financial Reporting

Standards (IFRS), International Accounting Standards (Private and Public).

In 1967, the first textbook on international accounting that was written by Gerhard G.

Mueller was published. His biographer, Dale L. Flesher, considers Mueller to be the

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father of international accounting and claims that it was Mueller who, through his

academic work, spurred development of international accounting as a research field, and

his impact was felt in both among theorists and practitioners. Muller was the first

professor to offer international accounting as a field in a graduate school. He prompted

development of research in international accounting in two directions: first he focused on

importance of differences among international accounting and their significance for

accounting profession and businesses who take part in international trade; second, he

emphasized importance of learning about differences in how accounting is taught in

different educational institutions (Flesher et al., 2010).

On October 7th, 1977, at the 11th International Congress of Accountants in Munich, the

International Federation of Accountants (IFAC) was founded. This organization was

created with the aim of strengthening of accounting profession in the world in the interest

of society. The organization was responsible for creation of high-quality international

standards of auditing and accounting of government sector, development and

implementation of ethics and education for professional accountants, fostering

cooperation among members and with other international organizations, serving as

international representative of accounting profession Nataliya M. (2013).

The recognized international accounting/standards setting boards are: The international

Accounting Standard Committee (IASC) established 29 June 1973 and issued the

International Accounting standards (IASs), later replaced by the International Accounting

Standards Board on 1 April, 2001 and issue the International Financial Reporting Standards

(IFRSs) in and the Financial Accounting Standards Board (FASB) was established in 1973,

International Organization of Securities Commissions (IOSCO) established April 1983,

International Organization of Supreme Audit Institutions (INTOSAI) established 1953, Bank for

International Settlements (BIS) established 1930, United Nations Conference on Trade and

Development (UNCTAD) established 1964, Information Systems Audit and Control Association

(ISACA), established 1967.

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Clearly, as seen in the above definitions above, international accounting encompasses an

enormous amount of territory (both geographically and topically). It is not feasible or

desirable to cover the entire discipline in one course, so an instructor must determine the

scope of an international accounting course. This document (presentation) provides an

overview of the broadly defined area of international accounting and also focuses on the

accounting issues related to international business activities and foreign operations.

LEARNING OBJECTIVES

1. To learn about the father of International accounting education according to Dale

L Flesher

2. To be able to identifies the three major stages of evolution and development of

international system of accounting.

3. To understand what International accounting is and is not

4. To know the areas cover by international Accounting – scope

5. To fully understand the Nigerian University Commission benchmarks on

International Accounting Topics

6. To know the gap/s between the expected and the Nigerian Practice

LEARNING OUTCOME

By the end of the presentation, the reader will know the:

1. Father of International accounting education according to Dale L Flesher,

2. Definitions of international Accounting,

3. Three major stages of evolution and development of international system of

accounting, and

4. Areas cover by international Accounting - scope.

5. Nigerian University Commission on International Accounting topics

minimum benchmarks.

6. Gap/s between the expected and the Nigerian Practice

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CHAPTER ONE: INTERNATIONAL ACCOUNTING: MEANING

1.1. DEFINITIONS

Most accounting students are familiar with financial accounting and managerial

accounting, but many have only a vague idea of what international accounting is. Defined

broadly, the accounting in international accounting encompasses the functional areas of

financial accounting, managerial accounting, auditing, taxation, and accounting

information systems. The word international in international accounting can be defined at

three different levels:

The first level is supranational accounting, which denotes standards, guidelines, and rules

of accounting, auditing, and taxation issued by supranational organizations. Such

organizations include the United Nations, the Organization for Economic Cooperation

and Development, and the International Federation of Accountants.

At the second level, the company level, international accounting can be viewed in terms

of the standards, guidelines, and practices that a company follows related to its

international business activities and foreign investments. These would include standards

for accounting for transactions denominated in a foreign currency and techniques for

evaluating the performance of foreign operations.

At the third and broadest level, international accounting can be viewed as the study of the

standards, guidelines, and rules of accounting, auditing, and taxation that exist within

each country as well as comparison of those items across countries. Examples would be

cross-country comparisons of (1) rules related to the financial reporting of plant,

property, and equipment; (2) income and other tax rates; and (3) the requirements for

becoming a member of the national accounting profession (Doupnik, T. ,Seese, .L 2001).

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International accounting, which includes both managerial and financial accounting, is

accounting for international transactions, the operations of international firms, and

comparisons of accounting principles and practices found in foreign lands and the

procedures by which they are established. International Accounting is the international

aspects of accounting, including such matters as accounting principles and reporting

practices in different countries and their classification; patterns of accounting

development; international and regional harmonization, foreign currency translation;

foreign exchange risk; international comparisons of consolidation accounting and

inflation accounting; accounting in developing countries; accounting in communist

countries; performance evaluation of foreign subsidiaries. International accounting is a

specialty within the entire discipline that is focused on using specific accounting

standards that are as relevant in the US as they are when you are balancing the books of a

company overseas (Kubin, Konrad, 1997).

1.2. WHY INTERNATIONAL ACCOUNTING

1. A common framework to enable review, analysis and interpretation of financial

information across entities, countries and regions.

2. Transparent, timely, reliable financial information instills investor confidence

3. To meet the requirements of a multiple audience of interests from different

countries, three identifiable approaches have been advocated:

4. Primary and secondary financial statements secondary financial statements will

have one or more of the following characteristics:

 The reporting standards of a foreign country will have been followed

 The statements will have been translated into a language that is not the language

of the company‟s country of domicile

 The auditor‟s report will have been expressed in a form not commonly used in

the company‟s country of domicile

5. Access to efficiently priced capital which is the key to economic growth (Kathleen

M. M. (2005).

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6. The different attitudes of management toward international operations which can

be any on these:

 Ethnocentric: emphasis on own nation - home-country oriented

 Polycentric: accepts other nations - host-country oriented

 Geocentric: truly international in scope

7. Single domicile reporting: Mueller gives the following explanation: The notion of

a single domicile for financial statements means that each set of financial

statements necessarily has a nationality, reflects style and customs at a particular

viewpoint or characteristic. Financial statements are anchored in a single set of

underlying account data prepared within a framework of quite specific accounting

standards, methods and procedures. Restatement of financial statements to a

different set of accounting principles produces different relationships between

individual account balances and financial ratios.

8. International reporting standards: This school of thought argues that

internationally accepted accounting standards should be adopted by all nations in

the preparation of their financial statements.

9. The Internationalization of the Accounting Profession can also be:

 Common bases of reporting: The foreign subsidiary is concerned not only with

meeting the accounting requirements of the host nation but also with showing

consistent application of principles required by the parent. An international

accounting firm can achieve both objectives.

 Common auditing standards: The parent firm would prefer to have its own

international operations examined by firms applying similar standards and

methods of auditing and to be judged by professionals applying common

criteria and demands for accuracy.

 Reliance on the work of other auditors: Because of the future of achieving

common standards of reporting and auditing, the auditors of parent firms must

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be careful about their reliance on the work of a foreign auditor, especially when

they have to assume responsibility for all subsidiaries included in the

consolidation.

1.3 CAUSES AND EXAMPLES OF INTERNATIONAL DIFFERENCES

That there are major international differences in accounting practices is not obvious to all

accountants, let alone to non-accountants. The latter may see accounting as synonymous

with double entry, which is indeed similar universally. We try to identify the likely

causes of the differences. It is not possible to be sure that the factors discussed below

cause them, but a relationship can be established and reasonable deductions made. A

large list of possible causes of international differences can be found in the writings of

previous researchers (e.g. Choi and Meek, 2005, Radebaugh, Gray and Black, 2006).

Some researchers have used their estimates of such causes as a means of classifying

countries by their accounting systems. Different companies in a country may use

different accounting systems. The same applies to different purposes. For example, in

many EU countries, consolidated statements are prepared using IFRS whereas

unconsolidated statements use national rules.

 Culture: Clearly, accounting is affected by its environment, including the culture of

the country in which it operates. Hofstede (1980) develops a model of culture as the

collective programming of the mind that distinguishes the members of one human

group from another. Hofstede argues that, much as a computer operating system

contains a set of rules that acts as a reference point and a set of constraints to higher-

level programs, so culture includes a set of societal values that drives institutional

form and practice. As Gray (1988) notes: the value systems or attitudes of

accountants may be expected to be related to and derived from societal values with

special reference to work related values. Accounting „values‟ will in turn impact on

accounting systems.

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 Legal System: Some countries have a legal system that relies upon a limited

amount of statute law, which is then interpreted by courts, which build up large

amounts of case law to supplement the statutes. Such a „common law‟ system was

formed in England, primarily after the Norman Conquest, by judges acting on the

king‟s behalf (van Caenegem, 1988). This naturally influences commercial law,

which traditionally does not prescribe rules to cover the behavior of companies and

how they should prepare their financial statements. To a large extent accounting

within such a context is not specified in detail in law. Instead, accountants

themselves establish rules for accounting practice, which may come to be written

down as recommendations or standards.

 Providers of finance: The prevalent types of business organization and ownership

also differ. In Germany, France and Italy, capital provided by banks is very

significant, as are small family owned businesses. By contrast, in the United States

and the United Kingdom there are large numbers of companies that rely on millions

of private shareholders for finance. Evidence that this characterization is reasonable

may be found by looking at the number of listed companies in various countries.

 Taxation: Although it is possible to make groupings of tax systems in a number of

ways, only some of them are of relevance to financial reporting. For example, it is

easy to divide countries into those using „classical‟ and those using „imputation‟

systems of corporation tax. However, this distinction does not have a major effect

on financial reporting. What is much more relevant is the degree to which taxation

regulations determine accounting measurements, for reasons discussed in the

previous section. To some extent this is seen by studying deferred taxation, which is

caused by differences between tax and accounting treatments. In the United

Kingdom and the United States, for example, the problem of deferred tax has caused

much controversy and a considerable amount of accounting standard

documentation. Turning to national accounting rules in France or Germany, it is

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found that the problem is minor; for in these countries it is largely the case that the

tax rules are the accounting rules. In Germany, the tax accounts (Steuerbilanz)

should be the same as the commercial accounts (Handelsbilanz). There is even a

word for this idea: the Massgeblichkeitsprinzip (Haller, 1992).

 Other external influences: Also, it has been suggested that colonial influence may

overwhelm everything else. Many other influences have also been at work in

shaping accounting practices. An example is the framing of a law in response to

economic or political events. For example, the economic crisis in the United States

in the late 1920s and early 1930s produced the Securities Exchange Acts that

diverted US accounting from its previous course by introducing extensive

disclosure requirements and state control (usually by threat only) of accounting

standards. Other examples include the introduction into Italy of Anglo-American

accounting principles by choice of the government, and the introduction into

Luxembourg of consolidation and detailed disclosure as a result of EU Directives –

both against all previous trends there.

In Spain, the adoption of the accounting plan from France followed French

adoption of it after influence by the occupying Germans in the early 1940s. Perhaps

most obvious and least natural is the adaptation of various British Companies Acts

or of international standards by developing countries with a negligible number of

the sort of public companies or private shareholders that have given rise to the

financial reporting practices contained in these laws or standards. In its turn, the

United Kingdom in 1981 adopted uniform formats derived from the 1965

Aktiengesetz of Germany because of EU requirements. For their part, Roman law

countries now have to grapple with the „true and fair view. A major example of

external influence is the adoption of, or convergence with, the standards of the

International Accounting Standards Board (IASB).

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For example, the EU has made these standards compulsory for the consolidated

statements of listed companies. This was done for political and economic reasons

and it overrides the other factors in this chapter. More subtly, the remaining

national standards of the EU and elsewhere are gradually converging with the

international standards.

 Another factor which affects accounting practices is the level of inflation.

Although accountants in the English-speaking world have proved remarkably

immune to inflation when it comes to decisive action, there are some countries

where inflation has been overwhelming. In several South American countries, the

most obvious feature of accounting practices has been the use of methods of

general price-level adjustment (Tweedie and Whittington, 1984).

The use of this comparatively simple method is probably due to the reasonable

correlation of inflation with any particular specific price changes when the former

is in hundreds of per cent per year; to the objective nature of government-published

indices; to the connection of accounting and tax; and to the paucity of well-trained

accountants. Without reference to inflation, it would not be possible to explain

accounting differences in several countries severely affected by it.

 The profession: Other issues are closely related to financial reporting, and have

been thought by some researchers to cause international differences. One of these is

the accountancy profession. However, this may be a dependent variable, not an

explanatory one. The strength, size and competence of the accountancy profession

in a country may follow to a large extent from the various factors outlined above

and from the type of financial reporting they have helped to produce. For example,

the lack of a substantial body of private shareholders and public companies in some

countries means that the need for auditors is much smaller than it is in the United

Kingdom or the United States. However, the nature of the profession also feeds

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back into the type of accounting that is practiced and could be practiced. For

example, a 1975 Decree in Italy (not brought into effect until the 1980s), requiring

listed companies to have extended audits similar to those operated in the United

Kingdom and the United States, could only be brought into effect initially because

of the substantial presence of international accounting firms. This factor constitutes

a considerable obstacle to any attempts at significant and deep harmonization of

accounting between some countries. The need for extra auditors was a controversial

issue in Germany‟s implementation of the EU‟s Fourth Directive.

1.4 CONCLUSION ON THE CAUSES OF INTERNATIONAL DIFFERENCES

International differences in financial reporting are many and various, as is examined in

detail throughout this book. Cultural differences are clearly of relevance here, at least as

causes of factors that influence financial reporting. Doupnik and Salter (1995) suggest a

model in which accounting differences can be explained by Gray‟s cultural variable plus

others as seen above.

1.5. OBJECTIVES

The main objectives of the international Accounting is to prescribe solutions to the causes

of international differences through the International Accounting Standards to bring about

uniformity.

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CHAPTER TWO: INTERNATIONALACCOUNTING: SCOPE ACCORDING TO

SYLLABUS

The scope of international accounting takes us to the various problems and suggested

practical solutions that can be found in International Transactions as seen in chapter one,

this scope leads us to the wide range of topics found under international accounting.

T. Evans, M. Taylor and O. Holzmann. (1994) believe that the most important topics in

international accounting fall into two categories: Financial accounting topics: Translation,

Consolidation, Segment reporting, Inflation accounting, Disclosure, Auditing, Taxation,

Comparative accounting (with non-US nations). Managerial accounting topics: Foreign

exchange risk management, Foreign investment analysis, Information systems, Transfer

pricing, Budgeting, Performance evaluation, Control, Operational auditing.

These authors state that international accounting is a well-established specialty area

within accounting and has two major dimensions: (1) Comparative: Examining how and

why accounting principles differ from country to country; and (2) Pragmatic: accounting

for the operational problems and issues encountered by individuals and firms in

international business. Although, in our opinion, there is no common division in these

two systems of classification, Evans, Taylor and Holzmann add that the comparative

dimension of international accounting is oriented toward financial accounting, and the

pragmatic one tends to be managerial.

L. Radebaugh and S. Gray. (1993) also write that the study of international accounting

involves two major areas: descriptive/comparative accounting and the accounting

dimensions of international transactions/multinational enterprises. This second area

principally covers the problems encountered by multinational corporations: Financial

reporting problems, translation of foreign currency financial statements, information

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systems, budgets and performance evaluation, audits, and taxes. The scope is listed

below:

2.1 FINANCIAL REPORTING BY LISTED GROUPS:

2.1.1 The context of financial reporting by listed groups:

- IFRS in the EU

- Adoption of, and convergence with, IFRS

- Foreign listing and foreign investing

- Foreign exchange risk management

- Reconciliations from national rules to US GAAP and IFRS

- High-level IFRS/US differences

- Reconciliations from IFRS to US GAAP

- Convergence of IFRS and US GAAP

2.1.2 Requirements of International Financial Reporting Standards

- The conceptual framework and some basic standards: An outline of the

content of International Financial

Reporting Standards:

o IAS 1 Presentation of financial statements

o IAS 2 Inventories

o IAS 7 Cash flow statements

o IAS 8 Accounting policies, changes in accounting estimates and errors

o IAS 10 Events after the balance sheet date

o IAS 11 Construction contracts

o IAS 12 Income taxes

o IAS 16 Property, plant and equipment

o IAS 17 Leases

o IAS 18 Revenue

o IAS 19 Employee benefits

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o IAS 20 Accounting for government grants and disclosure of government

assistance

o IAS 21 The effects of changes in foreign exchange rates

o IAS 23 Borrowing costs

o IAS 24 Related party disclosures

o IAS 26 Accounting and reporting by retirement benefit plans

o IAS 27 Consolidated and separate financial statements

o IAS 28 Investments in associates

o IAS 29 Financial reporting in hyperinflationary economies

o IAS 31 Interests in joint ventures

o IAS 32 Financial instruments: presentation

o IAS 33 Earnings per share

o IAS 34 Interim financial reporting

o IAS 36 Impairment of assets

o IAS 37 Provisions, contingent liabilities and contingent assets

o IAS 38 Intangible assets

o IAS 39 Financial instruments: recognition and measurement

o IAS 40 Investment property

o IAS 41 Agriculture

o IFRS 1 First-time adoption of IFRSs

o IFRS 2 Share-based payment

o IFRS 3 Business combinations

o IFRS 4 Insurance contracts

o IFRS 5 Non-current assets held for sale and discontinued operations

o IFRS 6 Exploration for and evaluation of mineral resources

o IFRS 7 Financial instruments: disclosures

o IFRS 8 Operating Segments

o IFRS 9 Financial Instruments

o IFRS 10 Consolidated Financial Statements

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o IFRS 11 Joint Arrangements

o IFRS 12 Disclosure of Interests in Other Entities

o IFRS 13 Fair Value Measurement

o IFRS 14 Regulatory Deferral Accounts

o IFRS 15 Revenue from Contracts with Customers

o IFRS 16 Leases

o IFRS 17 Insurance Contracts

- Assets

- Liabilities

- Group accounting

- Disclosures

2.1.3 Different versions of IFRS practice

- Motivations for different IFRS practice

- Scope for different IFRS practice

- Conclusion

2.1.4 Financial reporting in the United States

- Regulatory framework

- Accounting standard-setters

- The conceptual framework

- Contents of annual reports

- Accounting principles

- Consolidation

- Audit

- Differences from IFRS

2.1.5 Enforcement of Financial Reporting Standards

- Modes and models of enforcement

- United States

- European Union

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- Australia

 Political lobbying on Accounting Standards – US, UK and International

experience

- Motivations for political lobbying

- Political lobbying up to 1990

- US political lobbying from 1990

- Political lobbying of the IASC/IASB

- Preparer attempts to control the accounting standard-setter

- Political lobbying of the FASB‟s convergence with the IASB

2.2 HARMONIZATION AND TRANSITION IN EUROPE AND EAST ASIA:

2.2.1 Harmonization and transition in Europe

- Harmonization within the European Union

- Transition in Central and Eastern Europe

2.2.2 Harmonization and transition in East Asia

- Japan

- China

List of Chinese Accounting Standards (CAS) known as the Accounting Standards for

Business Enterprises (ASBEs)

o ASBE 1 Inventories

o l ASBE 2 Long-term Equity Investments

o l ASBE 3 Investment Property

o l ASBE 4 Fixed Assets

o l ASBE 5 Biological Assets

o l ASBE 6 Intangible Assets

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o l ASBE 7 Exchange of Non-Monetary Assets

o l ASBE 8 Impairment of Assets

o l ASBE 9 Employee Benefits

o l ASBE 10 Enterprise Annuity Fund

o l ASBE 11 Share-based Payment

o l ASBE 12 Debt Restructuring

o

o l ASBE 13 Contingencies

o l ASBE 14 Revenue

o l ASBE 15 Construction Contracts

o l ASBE 16 Government Grants

o l ASBE 17 Borrowing Costs

o l ASBE 18 Income Taxes

o l ASBE 19 Foreign Currency Translation

o l ASBE 20 Business Combinations

o l ASBE 21 Leases

o l ASBE 22 Recognition and Measurement of Financial Instruments

o l ASBE 23 Transfer of Financial Assets

o l ASBE 24 Hedging

o l ASBE 25 Direct Insurance Contracts

o l ASBE 26 Reinsurance Contracts

o l ASBE 27 Extraction of Petroleum and Natural Gas

o l ASBE 28 Accounting Policies, Changes in Accounting Estimates and Correction

of Errors

o l ASBE 29 Events after the Balance Sheet Date

o l ASBE 30 Presentation of Financial Statements

o l ASBE 31 Cash Flow Statements

o l ASBE 32 Interim Financial Reporting

o l ASBE 33 Consolidated Financial Statements

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o l ASBE 34 Earnings per Share

o l ASBE 35 Segment Reporting

o l ASBE 36 Related Party Disclosures

o l ASBE 37 Presentation of Financial Instruments

o l ASBE 38 First-time Adoption of Accounting Standards for Business Enterprises

2.3 FINANCIAL REPORTING BY INDIVIDUAL COMPANIES:

2.3.1 The context of financial reporting by individual companies

- Outline of differences between national rules and IFRS or US GAAP

- The survival of national rules

- Financial reporting, tax and distribution

- Special rules for small or unlisted companies

2.3.2 Making accounting rules for non-listed business enterprises in Europe

- Meaning of non-listed business enterprises.

- Who makes accounting rules?

- Which business enterprises are subject to accounting rules?

2.3.3 Accounting rules and practices of individual companies in Europe

- France

- Germany

- United Kingdom

2.4 MAJOR ISSUES IN FINANCIAL REPORTING BY MNEs:

2.4.1 Key financial reporting topics: Financial accounting

- Recognition of intangible assets

- Financial instruments

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- Provisions (1AS 37)

- Employee benefits

- Revenue recognition

- Comprehensive income

2.4.2 Consolidation

- Rate of adoption

-The concept of a „group‟

- Harmonization from the 1970s onwards

- Definitions of group companies

- Publication requirements and practices

- Techniques of consolidation

2.4.3 Foreign currency translation

- Translation of transactions

- Introduction to the translation of financial statements

- The US initiative

- The temporal method versus the closing rate method

- FAS 52

- IAS 21

- Translation of comprehensive income

- Accounting for translation gains and losses

- An alternative to exchange rates?

2.4.4 Segment reporting (IAS 14) - superseded by IFRS 8 Operating Segment.

- What is segment reporting?

- The need for segment information

- Evidence on the benefits of segment reporting

 Foreign Investment Analysis

 Inflation accounting

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2.5 ANALYSIS AND MANAGEMENT ISSUES

- Understanding differences in accounting

- Financial analysis and the capital market

2.5.1 International auditing

- Reasons for the internationalization of auditing

- Promulgating international standards

- The international audit process

2.5.2 International aspects of corporate income taxes

- Tax bases

- International tax planning

- Transfer pricing

- Tax systems

- Harmonization

2.5.3 Managerial accounting

- The balanced scorecard as an overview tool

- Currency and control

- Variances and foreign exchange

- Culture and management accounting

- Control and performance

- Performance Evaluation

- Information Systems

- Budgeting

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2.6. ISLAM AND IFRS

As Islamic finance moves into the mainstream, a key challenge is identifying a

suitably relevant and intelligible accounting framework that is comparable with

conventional finance without tainting compliance with Shariah.

- Overcoming the barriers

- Applying IFRS in practice

- The key guiding principles to Islam and the approach towards accounting

- Integrating Islamic Finance with Mainstream IFRS

- The new rules, - IFRS 9

- Differences between IFRS and ISLAM

- Accounting and Auditing Organisation for Islamic Financial Institutions

(AAOIFI)

- Accounting for Islamic finance

26

2.2. NIGERIAN UNIVERSITY COMMISSION – INTERNATIONAL

ACCOUNTING TOPICS MINIMUM BENCHMARKS

1.1. Introduction

The National Universities Commission (NUC), as regulatory agency for University

Education in Nigeria, has as one of its mandates, the definition and maintenance of

academic standards. The Commission has in the past organized the definition of

Minimum Academic Standards and subsequently accreditation for all approved

undergraduate Programmes offered in Nigerian Universities. For postgraduate

programmes, NUC has commenced the process of defining benchmarks and minimum

academic standards as a follow up to the success recorded in the undergraduate

programmes. This Benchmarks and Minimum Academic Standards (BMAS) for the

Higher Degree Programmes in Social Sciences pave the way for future accreditation of

all postgraduate programmes offered in Nigerian Universities.

1.2. Philosophy

The Philosophy and Mission Statement underlying the programmes of the Faculty of

Social Science is to produce graduates imbued with the ability to understand and make

contribution to the development of Nigeria and the global Community. This is to be

achieved by equipping them with a broad foundation in the general field of Social

Science as well as specialized knowledge in a particular discipline there in; prepare them

to meet the human resources needs of a developing society and develop in them

entrepreneurial knowledge needs of a developing society a sense of public responsibility

and spirit of self-reliance.

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1.3. Aims and objectives

Accordingly, social Science training shall:

i. Develop the students‟ understanding of social problems at the various levels of the

Nigerian and global society;

ii. Develop in the student ability for objective and critical judgment as well as to observe,

understand analyses and synthesized social-economic, political and environmental

problems using social science methods and techniques.

iii. Create an enabling environment for desirable behavioural change which would help

the student to develop values that are in consonance with hard work, probity,

commitment, discipline and patriotism.

iv. Enable the graduate of the Social Sciences to fit into various fields of human endeavor

both in the private and public sectors of the economy and equip them with entrepreneurial

skills and a sense of self-reliance.

 International Accounting under the Nigeria University Commission (NUC) for

undergraduate has the following benchmarks: Historical background to

International Accounting, the Concepts of international and universal Accounting,

International Accounting organizations, International Accounting Standards not

covered by IFRS. Other emerging IFRS. Preparation, translation and analysis of

financial statements of multinational companies. Accounting and control problems

of foreign companies. Method of transfer of dividends, Cost of foreign products,

Funds for foreign directors

 International Accounting for postgraduates is called “Advanced International

Accounting” and its benchmarks under the Nigeria University Commission (NUC)

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are still under review. Our research shows that Maters in Accounting and Finance

Benchmarks has not been reached by NUC.

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2.3. THE GAP/S BETWEEN THE EXPECTED AND THE NIGERIAN

PRACTICE

Nigeria is situated in Western Africa, bordering the Gulf of Guinea, between Benin and

Cameroon. It has an estimated population of over 175 million; it has the largest market

for goods and services in Africa. Its gross domestic product (purchasing power parity) is

$444.3 billion (2012 est). It has an active Nigerian Stock Exchange which has 257 listed

companies with a combined market capitalization of Nigerian Naira (NGN) 18.949

trillion (about US$115.68 billion) as at September, 2014.

The practice of Accountancy worldwide is guided by sets of guidelines and rules. The

rules and guidelines are compiled into accounting standards. They are statements of

principle that discusses the accounting treatment and disclosure of a particular item or

group of items. Before 2012, the Statements of Accounting Standards was used in

accounting practice in Nigeria. The local accounting standards are issued in Nigeria by

the Nigerian Accounting Standard Board (NASB) till 2011.

NASB was established in 1982 as a private sector initiative and became a government

agency in 1992, reporting to the Federal Minister of Commerce. The NASB was given a

legal backing by its inclusion in Section 335(1) of the Companies and Allied Matters Act

of 1990 which mandates all companies to prepare financial statements that complies with

the Statement of Accounting Standards (SAS) as developed and issued by NASB from

time to time. The NASB in 2003 was given the full autonomy as a legal entity with the

enactment of the NASB Act of 2003. The Nigerian Accounting Standards Board Act of

2003 provided the legal framework under which NASB set accounting standards. The

primary functions as defined in the Act of 10 July 2003 were to develop, publish and

update Statements of Accounting Standards to be followed by companies when they

prepare their financial statement, and to promote and enforce compliance with the

standards.

30

In the wake of financial crises in late 1990s, the international community emphasized the

major role that the observance of international standards and codes of best practices in

order to strengthen global financial systems. The international community called for the

preparation of Reports on the Observance of Standards and Codes (ROSC), an

assessment of the degree to which an economy observes internationally recognized

standards and codes. It was observed by the World Bank about Nigeria, that the NASB

lacks the financial and human resources as well as the infrastructure for monitoring and

enforcing compliance with its standards. The ROSC team observed from a review of

published financial statements that there are compliance gaps between the SAS and actual

practice.

Among the recommendations of the ROSC team was the creation of a new independent

oversight body called the Financial Reporting Council which would monitor and enforce

accounting and auditing requirements with respect to general-purpose financial

statements. The FRC Bill was signed into law on 20 July 2011. The FRC is a unified

independent regulatory body for accounting, auditing, actuarial, valuation and corporate

governance. It is expected that more meaningful and decision enhancing information can

now be arrived at from financial statements issued in Nigeria because accounting,

actuarial, valuation and auditing standards, used in the preparation of these statements,

shall be issued and regulated by this Financial Reporting Council.

Although the Nigerian Statements of Accounting Standards (SAS) are similar to IFRS in

certain respects, many differences exist. SAS promulgated by NASB were largely based

on past IAS promulgated by IASC. Due to the increasing complexity of financial

reporting requirements, some of the original IASs were reviewed resulting in their

amendment or withdrawal. The SASs were not reviewed or updated with the IASs/IFRSs.

The significant disparities between the Nigerian SASs and IFRSs have resulted in the

SAS being regarded as outdated and incomplete as an authoritative and internationally

accepted guide to the preparation of financial statements. This has significantly

31

diminished the degree of confidence on Nigerian Standards especially by international

users of financial statements produced in Nigeria.

The Nigerian SAS seems to be sub-standard in that the requirement of many SASs

accords substantially with the requirement of its equivalent IFRSs that had been

withdrawn or outdated. Some SASs does not have equivalent IASs/IFRSs. For example

SAS 1 (Disclosure of Accounting Policies) accords substantially with IAS 1 (Disclosure

of Accounting Policies) which had been reformatted in 1994. Also, SAS 2 (Information

to be disclosed in Financial Statements) agrees with IAS 5 (Information to Be Disclosed

in Financial Statements) originally issued October 1976, which has been superseded by

IAS 1, Presentation of Financial Statements in 1997. Another example is SAS 9

(Accounting Depreciation) which is in accord with IAS 4 (Depreciation Accounting)

which has been withdrawn in 1999.

There are sixteen (16) IFRSs/IASs with no equivalent SASs: IFRS 1 (First time Adoption

of International Financial Reporting Standards), IFRS 2 (Share-based Payment), IFRS 5

(Non-current Assets Held for Sale and Discontinued Operations), IFRS 7 (Financial

Instruments: Disclosures), IFRS 9 (Financial Instruments), IFRS 13 (Fair Value

Measurement), IFRS 14 Regulatory Deferral Accounts, IFRS 15 Revenue from contracts

with customers, IAS 18 (Revenue), IAS 20 (Accounting for Government Grants and

Disclosure of Government Assistance), IAS 23 (Borrowing Costs), IAS 24 (Related Party

Disclosures), IAS 29 (Financial Reporting in Hyperinflationary Economies), IAS 32

(Financial Instruments: Presentation), IAS 36 (Impairment of Assets) and IAS 41(

Agriculture). Also SICs (1-33) and IFRICs (1-21) have no equivalent Nigerian

interpretations.

Based on the premise of NASB to promote general acceptable published financial reports

and high quality accounting standards that are consistent with international practices,

inaugurated a Stakeholders‟ Committee on the Roadmap to the Adoption of IFRS in

32

Nigeria on October 22, 2009. In July 2010, the Nigerian Federal Executive Council

approved the Roadmap to the Adoption of IFRS in Nigeria, it was iterated in the report

that, that it will be in the interest of the Nigerian economy for reporting entities in Nigeria

to adopt globally accepted, high-quality accounting standards by fully converging

Nigerian national accounting standards with International Financial Reporting Standards

(IFRS) by following a Phased Transition effective January 1, 2012.

It is a three phase transition programme. Phase 1 relates to the publicly listed entities and

significant public interest entities. They are to prepare their financial statements using

applicable IFRS by January 1, 2012. Phase 2 relates to other public interest entities,

which are expected to mandatorily adopt IFRS, for statutory purposes, by January 1,

2013. Phase 3 relates to Small and Medium-Sized Entities (SMEs) which are expected to

mandatorily adopt IFRS for SMEs by January 1, 2014.

The Nigerian banking sector is made up of commercial banks and other financial

institutions such as finance companies, micro-finance companies, discount houses and

mortgage institutions. The Central Bank of Nigeria (CBN) regulates their activities. The

CBN has authorized only 21 commercial banks to transact business in Nigeria. Out of

these 14 are listed banks. Nigerian listed banks and other public and significant public

interest entities were required to adopt IFRS for years beginning on or after January 1,

2012. Among the listed companies, the listed banks were the first to complete the

transition and have adopted the standard for their reporting.

Value relevance is one of the measures used in determining accounting quality. Sequel to

IFRS adoption researches on value relevance have been conducted by several researchers

in various countries: United States; for Finland; for Germany and United States; for

China; for United Kingdom:, for Germany; for Greece; for Spain; for Sweden; for

Greece; for Bangladesh; for Indonesia and for Sri Lanka.

33

Findings on these researches are very mixed; some studies show that the change to IFRS

positively impacts value relevance.

The comparative value relevance among IFRS, US and German accounting standards was

examined. The sample included 417 German companies listed on local stock markets

during the period 1998–2000. They conclude that the value relevance of IAS and US

based earnings is higher than that of German GAAP-based earnings suggesting higher

accounting quality under an IAS or US accounting regime. The research sample was for

the period 1992–1996 in which 89 non-US companies employs IFRS in their primary

accounts with a reconciliation to US GAAP. They find that IFRS amounts are more (less)

closely associated with prices-per-share (security returns) than US GAAP amounts. They

also conclude that US GAAP earnings reconciliation amounts are value-relevant after

controlling for IFRS amounts in market value and return models.

Event study methodology and a market value model to examine the market reaction to

and value relevance of reconciliation adjustments from UK companies in the transition to

IFRS compliance. The sample comprises of 85 firms from the London Stock Exchange

FTSE 350 for 2005. They find the reconciliation adjustment from UK GAAP to IFRS not

to be value relevant to shareholders‟ equity but has value relevant with respect to

earnings.

For Greece, they test the effect of the mandatory adoption of IFRS upon the value

relevance of earnings and book values. Using data from the Athens Stock Exchange that

covered a period of two years before and two years after the mandatory adoption of IFRS,

they find that the adoption of IFRS positively affected the value relevance of

consolidated net income and book value of assets.

Provide empirical evidence concerning value relevance of earnings and book values to

stock prices in Indonesia Stock Exchange. The sample comprises of 73 firms for the year

34

2000-2009. The research shows that earnings and book values individually are relevance

in explaining stock prices and it further analysis shows that earnings and book values

simultaneously are relevant information in explaining stock prices variance.

Examine the empirical relationship between share prices and explanatory variables such

as NAVPS, EPS, P/E, ROE for the period 2007-2011 at Columbo Stock Exchange at Sri

Lanka. Twenty companies were selected for this study. They conclude that value

relevance of accounting information has significant impact on share price and value

relevance of accounting information is significantly correlated with share price.

Investigate the incremental value relevance obtained from reconciling accounts prepared

under Chinese accounting standards to IFRS. The sample consists between 53 and 79

companies per year listed on Chinese stock markets for the period 1995–2000. Using the

returns model and Ohlson model they find that earnings and the book values of equity

determined under Chinese GAAP provide additional relevant accounting information for

the purpose of determining the prices of shares than IFRS. The value relevance of

earnings under German accounting standards and IFRS are studied and the research

sample include 12 companies publishing exclusively German GAAP consolidated reports

for the period 2000–2004 and 12 companies publishing exclusively IFRS consolidated

reports for the period 2000–2004). Using simple linear regression analysis, he finds that

German GAAP are significantly more value relevant than IFRS.

In Sweden, explores whether the quality of financial reporting has increased after the

mandatory adoption of IFRS. The analysis of accounting quality includes measures of

earnings smoothing, timeliness and association to share prices. Surprisingly, the results of

all these measures suggest a decrease to the accounting quality of the IFRS adoption.

Investigates the extent of association between stock price and two influential accounting

variables (i.e. earnings-per-share and net asset value per share) to measure the relevance

35

of accounting information. The study is based on accounting information which are

available in DSE data base and published annual reports of 105 companies from 2000 to

2010. It is found that only 6.5% of changes in share price can be explained by changes in

defined accounting variables and here is a negative correlation between share price and

NAVPS of the sample company.

Examine the value relevance of earnings under Finnish accounting standards and their

reconciliations to IFRS. The sample consists of 18 Finnish firms that disclose earnings

under local GAAP and IFRS (1984–1992) using an earnings model. The result shows that

the change in local GAAP earnings, as well as the level and change in aggregate

reconciliation to IFRS, are value irrelevant.

After the adoption of IFRS in Spain, investigation of the book-to-market ratio of Spanish

companies before and after the IFRS adoption. They interpret the disparity between

market value of shareholders equity and book values as value relevance. They report no

improvement in Spanish reporting quality after IFRS adoption. Examine the combined

value relevance of book value of equity and net income before and after the mandatory

transition to IFRS in Greece. Contrary to their expectations, they find no significant

change in the explanatory power of value relevance regressions between the two periods.

The coefficients on book value of equity and net income are positive and significant in

both the pre-IFRS and post-IFRS periods.

To conclude, while one should fairly expect that the impact of IFRS adoption should be

more obvious in countries where local GAAP and IFRS have a great disparity

particularly in Nigeria. Prior literature has produced inconsistent and mixed findings. A

study on value relevance is needed in Nigeria, particularly for the banking sector due to

the strategic importance of the Nigerian banking sector to economic development.

Specifically, the objectives of the study are to compare the value relevance of book value

36

of equity and earnings in determining the share price of commercial banks in Nigeria

before and after the mandatory adoption of IFRS.

In the light of the above, the following hypotheses can be researched on:

H1: The value relevance of book value of equity and earnings in banks‟ financial

statement is higher in post IFRS periods than in the pre IFRS periods.

The banks were focused on to see the gap because they are the first to adopt the

Intentional Financial Reporting Standards (IFRSs).

Apart from the banks, Nigerians should do more research on the key indicators as listed

above by different countries to see the implication of the adoption and the gap between

the practices.

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CHAPTER 3: CONCLUSION

International Accounting can be seen as the mirror of society or organization because it

creates: organizational accountability and stewardship, rational allocation of resources,

proficient information, reconciliation between different interest group (labour union,

shareholder, employee, etc), a guide to resolving uncertainty and societal and

organization welfare assessment.

International accounting is a subset of accounting likewise the national accounting,

international accounting standards is a subset of international accounting just like the

local GAAP a subset of National accounting.

It should be noted as seen in the introduction that the Financial Accounting Standards

Board (FASB) established in 1973 is also an international accounting standards setting

board because some companies in some countries e.g China, Japan, Germany, France,

Uk, Switzerland and Australia to mention a few because comply to the US GAAP

because they are listed on US exchange.

QUESTION: Just like the US holding unto their GAAP instead of adopting the

International Financial Reporting Standards (IFRS) but amending and aligning their

GAAP to a rule-based system while influencing the IFRS to aligning to its GAAP (a case

study of IFRS 13 - fair value measurements and under the US GAAP broad transactions,

ASC 820 or FAS 157, should Nigeria have adopted IFRS or should they have held keenly

to its Statement of Accounting Standards (SAS) but keeps converging the differences in

the two standards just like the US?

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CHAPTER 4: RECOMMENDATION

After critical analysis of the international accounting, we recommend that Nigeria should

shape its own local gap which can be called: “The Nig-GAAP” to suite its economy just

like the US but keeps aligning the differences with IFRS and US GAAP to sustain

investors trust.

Also we recommend that Nigeria should reduce its loan collection rate from the

international organizations because that has prompted them to fully adopt the IFRS

without looking at its implication on the Nigerian Economy. This means that Nigeria

should revive its dead sectors to increase its Gross National/Domestic Product to generate

more revenue.

39

MEANING/DEFINITION OF WORDS USED

Supranational: A supranational union is a type of multinational political union where

negotiated power is delegated to an authority by governments of member states.

National: relating to or typical of a whole country and its people, rather than to part of

that country or to other countries

Ethnocentric: Ethnocentrism is the act of judging another culture based on

preconceptions that are found in values and standards of one's own culture.

Polycentric: a political or cultural system which contains many different centers,

especially centers of authority or control

Geocentric: When where the management looks at opportunities on a global scale.

Instead of focusing on the way that business gets done in a given country, it looks at how

to conduct business anywhere in the world, based on common ways of communicating.

Domicile: the country that a person treats as their permanent home, or lives in and has a

connection with.

Anglo-American: Anglo-Americans are people who are English-speaking inhabitants

of Anglo-America. It typically refers to the nations and ethnic groups in the Americas

that speak English as a native language or a majority of English-speaking people.

Inflation: Inflation is the rate at which the general level of prices for goods and services

is rising and, consequently, the purchasing power of currency is falling

40

Consolidated statements: are the "Financial statements of a group in which the assets,

liabilities, equity, income, expenses and cash flows of the parent company and its

subsidiaries are presented as those of a single economic entity", according to

International Accounting Standard 27.

Unconsolidated statements: financial statements are not included in the consolidated or

combined financial statements of the parent company to which it belongs.

Comparative: measured or judged by estimating the similarity or dissimilarity between

one thing and another; relative.

Pragmatic: dealing with things sensibly and realistically in a way that is based on

practical rather than theoretical considerations.

EU’s Fourth Directive: It strengthens the existing rules and will make the fight against

money laundering and terrorism financing more effective. It also improves transparency

to prevent tax avoidance. This entry into force comes as discussions with the European

Parliament and the Council on extra measures further reinforcing the Directive is already

at an advanced stage.

MNEs: Multinational Enterprises.

Transnational: Extending or operating across national boundaries.

EU: European Union

41

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