Homework

WEEK 2

International Harmonization and International Financial Reporting Standards (IFRS)

IFRS Standards: Why do they matter?*

Financial Reports for the World Economy

· It is the life blood of capital markets

· Investors need information they can trust in cross-border investments.

IFRS – the global language of financial reports.

Why do they matter…three key benefits:

1. Transparency

a. High quality, comparable information

2. Accountability

a. Reduces the information gap between insiders and those outside the company

3. Efficiency

a. Single trusted global standard: lowers the cost of capital & reduces reporting costs

IFRS contributes the following to the global economy:

· Trust

· Growth

· Long-term financial stability

*Source: IFRS.com

Our focus this week is on major harmonization efforts worldwide and the major differences between IFRS and US GAAP

Harmonization

· Process of increasing the compatibility of accounting practices

· Sets limits on how much practices can vary

· More flexible and open

· Accommodates differences

includes….

· Accounting standards

· Disclosures

· Auditing standards

Standardization

· Set of rules

· Does not accommodate national differences

· More difficult to implement internationally

Comparability

· Financial information is comparable if it is similar in enough ways.

Convergence

· Convergence of international and national accounting standards involves gradual elimination of differences.

Other approaches to cross-border financials….

Reconciliation

· Preparing financials using home country accounting standards but providing reconciliation between critical accounting measures (net income and stockholder’s equity)

Mutual Recognition (Reciprocity)

· Regulators outside the home country accept foreign firm’s financial statements based on home country principles.

PROS AND CONS FOR HARMONIZATION OF ACCOUNTING STANDARDS

Arguments for Harmonization

· Financial statement from different countries would be more comparable, which in turn would make it easier for investors to evaluate multi-national companies (MNC).

· Raise the quality level of international accounting practices.

· Reduce costs for MNCs to consolidate foreign listed companies.

· Easier access to foreign capital markets.

· Simplify for MNC the evaluation of possible foreign takeover targets.

· Make it easier for MNCs and international accounting firms to transfer accounting personnel to other countries.

Arguments against Harmonization

· Considering the differences among countries in terms of socio-politico-economic systems, it would be almost impossible to arrive at a set of accounting standards that would satisfy all the parties involved.

· Nationalism…international standards could be perceived as a set of standards developed to suit the requirements of other countries and hence would not be received favorably.

· It is unnecessary to force all companies worldwide to follow a common set of rules.

· Today’s global capital market has evolved without harmonized accounting standards.

Efforts for harmonization…

began even before the creation of….

1973 International Accounting Standards Committee (IASC) - formed

Ten countries were involved: Australia, Canada, France, Germany, Ireland, Japan, Mexico, the Netherlands, the United Kingdom, and the United States.

Their objective was to create “international accounting standards”

The final work of the IASC began with the International Organization of Securities Commissions (IOSCO) agreement in 1993 and ended with the creation of the IASB.

For more information on IOSCO, http://www.iosco.org/

2001 International Accounting Standards Board (IASB) - replaced IASC

This group is an independent, private-sector, standards-setting body founded by professional accounting organizations in nine countries. The IFRS Foundation is the legal entity under which the IASB operates.

IASB Objectives:

1. To develop a single set of high-quality, understandable and enforceable global accounting standards….

2. To promote the use and rigorous application of those standards

3. To take in account the needs of all sizes and types of entities in diverse economic settings.

4. To bring about convergence of national accounting standards and IFRS.

The IASB represents accounting organizations from approximately 140 countries.

IASB Structure:

The IASB is organized under an independent foundation named the IFRS Foundation.

Number of trustees: Currently (2020) there are 22 Trustees. Initially the Foundation Board had 19 Trustees. https://www.iasplus.com/en/resources/ifrsf/governance/ifrsf-trustees

Geographic balance:

1. Trustees

a. Six from North America

b. Six from Europe

c. Six from Asia/Oceania region

d. One from Africa

e. Three from any area, subject to establishing overall geographical balance

2. IASB Board (14 members)

a. Establishes and improves standards of financials accounting and reporting for business. https://www.iasplus.com/en/resources/ifrsf/iasb-ifrs-ic/iasb-board

3. IFRS Advisory Council

a. 51 organizations across the globe are represented on the council with 50 individual members

b. Responsible to give board advice on its agenda and priorities

https://www.iasplus.com/en/resources/ifrsf/advisory/ifrs-advisory-council

4. International Financial Reporting Standards Interpretations Committee (IFRIC)

a. 14 voting members

b. Interprets standards in the context of IASB’s framework.

For more information:

on the IASB structure…

http://www.iasplus.com/restruct/restruct.htm#diagram

on the IFRS Foundation and the International Accounting Standards Board

https://www.ifrs.org/

Understand that the IASB’s primary responsibility is to develop a set of high-quality standards to be used worldwide. The IASB follows a due process procedure and uses a principles-based approach in developing these international standards.

NOTE: IFRS are primarily principle-based standards whereas US GAAP is rules-based but both have rules and principles within their respective structures.

Ways in which a country might adopt IFRS:

· Replace their national GAAP with IFRS.

· Require parent companies to use IFRS in preparing consolidated financial statements.

· Require stock exchange listed companies to use IFRS in preparing consolidated financial statements.

· Require foreign companies listed on a domestic stock exchange to use IFRS.

· Require domestic companies listing on a foreign stock exchange to use IFRS.

Concerns about adopting IFRS

· Too complicated

· Some IFRS are controversial

· Guidance for adopters is inadequate

· Language translation issues

· If a country does not have a well-developed capital market and their users are satisfied with local standards, IFRS are of little benefit.

Despite the above, there is a worldwide trend towards convergence with or adoption of IFRS.

· The European Union (EU) requiring the use of IFRS by publicly-traded companies in preparing consolidated financial statements.

· The FASB/IASB convergence project (the so-called Norwalk agreement).

The Norwalk Agreement refers to a Memorandum of Understanding between FASB and the IASB. It was the first step for the US to commit to converge US GAAP and IFRS. Unfortunately, this convergence is still a long way from being realized.

For more information on the agreement…

http://www.fasb.org/intl/convergence_iasb.shtml

HOMEWORK ASSIGNMENTS:

· How does harmonization differ from convergence?

· Are you for or against convergence and why? Write a short, one-paragraph statement supporting your position.

I will provide a summary of your positions at the end of the week.

· MNC Assignment

· On what exchange(s) is(are) your MNC listed? What are its call letters?

· Look at your MNC’s most recent published annual report. Are the consolidate financial statements in conformity with U.S. GAAP? IFRS?

Post your homework in this week’s discussion area.

Reconciliation is no longer required…please read update below….

Although the speech on the next page occurred in June 2008, I think it’s still important for you to read where we have been…

Speech by SEC Staff: IFRS and U.S. Companies: A Look Ahead

By

John W. White

Director, Division of Corporation Finance U.S. Securities and Exchange Commission

Financial Executives International Global Financial Reporting Convergence Conference New York, New York June 5, 2008

Thank you very much Michael [Cangemi]. Good morning. What a great title for the program — "The World Is Moving to IFRS: Are You?" This is exactly the topic I want to focus on this morning: the acceptance of International Financial Reporting Standards, or IFRS, in the United States. Among all the Commission's current initiatives, and there are many, I believe that this one has the potential to be the most far-reaching, affecting all U.S. capital markets participants:

· issuers, which report financial results;

· accountants, who audit those results;

· intermediaries, who play many roles; and

· especially, investors, who analyze and most importantly make investment decisions based on those results.

Before getting into the substance of my remarks, however, I need to remind you that as a matter of policy, the U.S. Securities and Exchange Commission disclaims responsibility for any private statements of any SEC employee. Accordingly, the views I express today are solely my own and do not necessarily reflect the views of the SEC or of any members of the staff other than myself.

Where We Are Today

So with that, let me start by setting the stage for what the Commission has done recently relating to IFRS. On the foreign issuer front, during 2007, the staff held a roundtable on the use of IFRS by foreign companies1 and published a report that provided observations on the staff's reviews of IFRS financial statements in the filings of over 100 foreign issuers.2 More significantly, this past November, after issuing a proposing release in July,3 the Commission voted to eliminate the U.S. GAAP reconciliation requirement for foreign private issuers that file their financial statements with the SEC using IFRS as issued by the International Accounting Standards Board, or the IASB.4

As a result, since early this year, the U.S. GAAP reconciliation is no longer required in foreign issuer filings with the SEC when the issuer asserts, and the auditors agree, that the financial statements are in accordance with IFRS as issued by the IASB. Even though there was little fanfare, I cannot emphasize enough the significance and the historic nature of this action. Actually, we recognized the event in Corp Fin on January 28 when Novartis AG filed its Form 20-F without a U.S. GAAP reconciliation, becoming the first foreign issuer to do so. For as long as any of us can remember, foreign issuers and their advisers have argued against the necessity of the U.S. GAAP reconciliation. Well, with the development of the high quality and globally accepted accounting principles embodied in IFRS, as issued by the IASB, as well as other important progress in this area, the Commission was able to come to the conclusion that the reconciliation was no longer necessary when the financial statements are prepared in accordance with these standards.

FOR THE ENTIRE SPEECH, GO TO www.sec.gov/news/speech/2008/spch060508jww.htm