CHAPTER 3 INTERNATIONAL CONVERGENCE OF FINANCIAL REPORTING
Answers to Questions
The ultimate goal of both harmonization and convergence is to achieve international comparability in financial reporting, and both are processes that take place over time. However, while harmonization refers to the reduction of alternative accounting practices in different countries, convergence refers to the process of developing a set of high quality financial reporting standards for use internationally (the process of global standard setting). Until the establishment of the IASB in 2001, the main objective of the IASC was to achieve international harmonization in accounting standards. Accordingly, the focus was to achieve consensus among different countries with regard to accounting standards. In this process different countries were allowed to have different accounting standards as long as they did not conflict, for example, the harmonization program of the European Union. On the other hand, convergence implies the adoption of one set of standards internationally.
The potential benefits for a multinational corporation from convergence of financial reporting standards are derived mainly as a result of international comparability of financial reporting standards and practices. Examples of such benefits include: reduction of financial reporting costs for multinational corporations that seek to list their stocks on foreign stock exchanges; reduction of cost of preparing worldwide consolidated financial statements; and ability to transfer accounting staff to other subsidiaries overseas more easily.
The EU Directives were not completely effective in generating comparability across EU member nations because the Directives:
a. allowed countries to choose among available options in many areas and
b. did not cover many accounting issues, such as leases and translation of foreign currency financial statements.
The three phases in the life of the IASC were:
a. 1973-1988 – lowest common denominator approach to standard setting
b. 1988-1993 – reduction of existing options in IASs through the Comparability of Financial Statements Project
c. 1993-2001 – development of core set of standards under the IOSCO Agreement
IOSCO’s endorsement of IASs legitimized the IASC’s claim as “the” international accounting standard setter. This also helped in addressing, at least partly, the problem of IASC’s lack of enforcement power.
Twelve of 14 members of the IASB are full-time. They are required to sever all ties to former employers to establish their independence. The most important criterion for selection of IASB members is technical competence. These aspects of the Board’s structure confirm the IASB’s commitment to develop the highest quality standards possible. In addition, the IASB follows an open process in which constituents are able to provide input and feedback on IASB projects and proposed standards. The geographical representation is achieved through the method of appointing the IASC Foundation Trustees.
A principles-based approach to accounting standard setting refers to the development of standards that provide the basic guidelines for accounting in a particular area without getting bogged down in detailed rules. The IASB uses a principles-based approach in developing IFRS. Traditionally, the U.K. and the member countries of the British Commonwealth have adopted this approach.
IFRS appear to cover most of the major accounting issues. With the issuance of IFRS 2, “Share-based Payments,” IFRS even provide guidance with respect to the accounting for stock options. Other than banks and financial institutions (IAS 30), IFRS do not provide rules for specific industries. On the other hand, IAS 41, “Agriculture,” provides guidelines for a particular sector of the economy for which rules are lacking in many countries.
The IASB has adopted a principles-based approach to...
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