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The Implementation of a Single Set of Global Accounting Standards

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Christabelle Grech

on 15 March 2013

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Transcript of The Implementation of a Single Set of Global Accounting Standards

The Implementation of a Single
Set of Global Standards TIMELINE... 1973 - IASC which was set up to promote the
harmonisation of a set of accounting standards 2007 - The SEC voted for the requirement to reconcile to US GAAP for non-US companies reporting IFRS to be removed. Introduction Harmonisation can be defined as “the process
of bringing international Accounting Standards into some sort of agreement so that the
financial statements from different countries are prepared according to a common set of principles of measurement and disclosure” (Haskins et al. 1996:29). According to the thesis done by Mifsud Bonnici Simon in 2003, it was found that Global standards are effective and consistent if they follow the following 5 elements:

> Well-specified and understandable financial reporting and disclosure standards

> Ethical, trained preparers

> Ethical, trained and independent auditors

> Effective regulatory oversight and enforcement, including the threat of litigation, economic and criminal penalties for fraud and non-compliance

> Shareholder and investor responsibility and involvement in corporate governance. (Global Financial Reporting Advocacy Committee AIMR, 2002) By: Christabelle Grech
Janise Aquilina
Lara Caruana
Raissa Arpa
Joanne Borg
Christina Gauci
Jessica Abela
Ilenia Diacono
Raisa Grima 1977 - Report published by an expert group nominated by the UN on international standards of Accounting and Reporting for transitional companies (Choi et al., 2002). 1987 - The IASB was introduced stating to the IASC that if the IASs were more clear, their members would start using them.
Despite of this however, the US is still today not making use of IASs or IFRSs. 1996 - SEC stated that it supports the IASC's objective to develop standards to be used in financial statements 1997 - the SEC encouraged the
efforts of the IASC to develop
a core set of accounting standards 1999 - The SEC took a leading role
in the design of the reform of the IASC 2002 - IASB and FASB enter into a MOU on
convergence called the Norwalk Agreement.
EU countries were also obliged to use IFRSs. 2008 - The SEC issues a proposal referred to as a roadmap which stated the possibility of US issuers of FS to prepare them according to IFRSs to be decided upon by 2011 for use of IFRS in 2014.
- The Pozen Report was published called 'Improvements to Financial Reporting'. 2009 - standards for SMEs were launched... 2010 - There were 5 projects still to be completed.
-Commitment to a single set of standards was confirmed by the SEC.
- Work plan to support harmonization was developed. 2011 - IASB-FASB progress report on
convergence was issued with the date
of completion of convergence projects
being moved to end of 2011 2012 - The SEC Staff Report was issued
about the possible implementation of IFRS by
- the IASB established a technical program for the 3 years coming and it decided to work on five new projects and another seven research projects. 2013 - The IASB will form an Accounting Standards Forum to enable it to coordinate more with national standard-setters and regional bodies as one collective body. Reasons for the harmonisation process ADVANTAGES Users, Regulators & Preparers of FS Preparers Users > Savings for subsidiary companies in using the same Accounting System.
> Better comparisons, less confusion and mistakes between the parts of the company.
> Preparation of consolidated financial statements will be easier for companies.
> Access to main financial markets will become easier for global acting companies and by this it will be possible to acquire capital simpler for them. . > Similar FS would make it possible for users to make useful comparisons between countries and companies.
> Better comparability enables users to make better decisions leading to more efficient selections of investments.
> For society at large, having harmonised standards lead to a well-developed and good functioning capital market. Critics of the Harmonisation Process Wagenhofer and Nobes argue that International Accounting Standards may not be compatible with the national environment of every country. In truth, it is still questionable as to whether international standards are able to handle differences which are present in different countries such as traditions and economic environments. Pellens puts forward an argument stating that not all users of financial statements will understand the rules of IASs. The IASB Constitution speaks about a "partnership"
between IASB and national bodies as they
work together to achieve the convergence
of Accounting Standards world-wide (IASB, 2002 n). Pellens further argues that national comparisons with competitors and branch information are the only necessary comparisons which companies should endeavour, therefore international comparisons are not needed and hence neither are the international standards! As the IASB is a private body and cannot enforce its standards, it needs the support of national standard-setters for the implementation of the IAS (Ruder, 2001). The FASB & US regulators have become more flexible about convergence. Probably because IASs were adopted by the EU and due to scandals like those of Enron & Worldcom. Transition
Approaches Retain US GAAP & convergence/
endorsement Reject IFRSs Adoption of IFRSs Benefits of Adoption Drawbacks of Adoption Benefits of Rejection The rejection approach gives the United States the option of refusing the use of IFRS in general. Drawbacks of Rejection involves US to implement IFRSs as issued by the IASB Simplification of:
> Judgements
> Comparisons
> Presentation
Improved quality & reliability
of audits > US accountants will struggle with a rules-based approach
> increase in subjective accounting
> increase in litigations
> SEC would have no oversight authority over the IASB Voluntary Adoption Phased Adoption Voluntary adoption would permit multinational companies to realize cost savings by removing dual sets of accounting records. It would also allow U.S. issuers to set out resources that are best suited to address an entity’s unique transition complexities Phased adoption involves making IFRSs mandatory for a subset of internationally active companies, whilst companies that are mainly active in the domestic U.S. market would keep hold of US GAAP for a longer period. This option would result in fewer issues of comparability, because all internationally active companies would report under IFRSs Adoption could be either: Prospective OR Retrospective under the convergence approach, adjustments to accounting standards are changed over a time period considered appropriate by the country’s standards setter. Benefits of Convergence Drawbacks of Convergence > The country itself that maintains control over the accounting standards process and not the IASB.
> This approach 'buys' time > comparability is very
difficult or impossible
to achieve. > U.S. accountants can continue to make use of a set of familiar standards. > Rejecting IFRSs would be significant not just for U.S. itself but to the whole world due to the considerable influence that U.S. has over the convergence project (Staff of the U.S. SEC 2012) . The SEC initiated a work plan entitled ‘Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for US Issuers Final Staff Report’ (Staff of the U.S SEC, 2012). The purpose of the report was to take into account specific areas and factors relevant to the Commission as to decide whether, when and how IFRS might be incorporated into the US Reporting System. The SEC Staff Report comments on two aspects :
1. The comprehensiveness of IFRS as a set of financial reporting requirements;
2. The argument about principle-based versus rule-based standards. The SEC compared the written standards of IFRS to the text of U.S. GAAP and identified differences between their requirements. The Comprehensiveness of IFRSs Fundumental Differences
between US GAAP & IFRSs Principle vs Rule-Based Standards IFRS first-time adoption Consolidations & Income Statement Inventory IFRSs are principle-based US GAAP is rule-based First-Time Adoption of International Financial Reporting Standards, is the standard that is applied during preparation of a company’s first IFRS-based financial statements (PwC, 2012). IFRS favours a control model, whereas U.S GAAP prefers a risks-and-rewards model.
Under IFRS, extraordinary items are not segregated in the income statement, while, under US GAAP, they are shown below the net income. Under IFRS, LIFO is not permitted, while under US GAAP companies have a choice between LIFO & FIFO Business
Combinations Debt Share-Based Compensation Differences due to Industry-Specific Guidance IFRSs contain minimal industry-specific guidance. US GAAP provide extensive guidance. US GAAP and IFRS contain similar principles & requirements for accounting for business combinations. However, certain differences continue to exist that could impact the recognition and measurement of certain transactions, The differences between the standards primarily relate to U.S. GAAP’s provision of more arrangement- and industry-specific guidance than IFRS. There is an increased level of illustrative and application guidance under US GAAP.
These could give rise to differences in classification, measurement dates, and expense recognition for transactions accounted for under IFRS as compared to U.S. GAAP. The Consistency & Enforceability of IFRSs According to the SEC Report 2012 re IFRSs in practice, it was concluded that the majority of the companies reviewed, prepared their financial statements in accordance with IFRS requirements, but still the staff maintained that there exist areas for continued development, being:
1.The transparency and accuracy of IFRS financial statements
2.The variety in application Both the SEC staff and also the IASB point out that certain differences of comparability are brought about due to differences in legislations of different jurisdictions Improvement in the quality of IFRSs could lead to increased comparability which is derived through consistency.
Improvement in the quality of IFRSs could be achieved through expanding IFRS IC’s actions and also through providing continuous guidance, The IASB & National Standard-Setters According to the Sec Staff report, the IASB has the responsability of coming up with standards that are understandable,auditable, enforceable by local regulators, and also glabally accepted. The IFRS foundation staff maintained that the relationship between the IASB and different standard setters could be more effective if communication processes would be formalised and classifying such communication in accordance to a regional and global basis. The Chairman of the IOSCO policy committee 1 on 'Multinational Disclosure and Accounting' stated the number of SEC registrants using IFRSs is increasing. Therefore the SEC has a lot more to offer for successful results. The Weaknesses of the IASB 'Convergence' simply refers to the harmonisation of IASs and US GAAP

Developing countries are neglected Convergence neglects standards of other nations whilst overlooking the directives of the EU Convergence also requires that all participants
accept changes to their old systems Some argue that such developing counties are overlooked and neglected in the development of international standards Often the IASB encounters problems with regards to the interpretation & supervision of standards, which it cannot solve alone.

As Turner stated, such a problem can be resolved through the establishment of supportive infrastructure which would consist of:
High-quality accounting and auditing standard-setters
Active regulatory oversight and
Audit firms with quality controls world-wide (Turner, 2001). Interpretation & supervision of IASs/ IFRSs This consideration includes the evaluation of the investors’ understanding and education on IFRS, given that the benefits out of a single set of high-quality, globally accepted accounting standards would only be attained if the investors have a good understanding and have confidence in the financial reporting results on which they may base an economic and informed decision. (Staff of the US SEC, 2012) The Staff of the SEC conducted research on how the investors are aware and how prepared they are for the incorporation of IFRS into the U.S. financial reporting system. In order to obtain information for this research, the Staff carried out three projects, being the Investor Comment Request, the Informal Discussions & the SEC IFRS Round Table (Jul 11) The issuance of the Investor Comment Request to seek feedback from investors
The Staff also asked questions directly to investors through informal discussion to gain a more in depth understanding of their perspectives.
The Staff organised the SEC IFRS Roundtable in July 2011, which consisted of a panel focused on investor understanding on IFRS and their views. a) Investor Understanding & Education re IFRSs Transition
Approaches Retain US GAAP & Convergence/ Endorsement Reject IFRSs Adoption of IFRSs Voluntary Adoption Phased Adoption Benefits of Convergence Drawbacks of Convergence Benefits of Rejection Drawbacks of Rejection involves US to implement IFRSs as issued by the IASB Benefits of Adoption Drawbacks of Adoption Simplification of:
> judgements
> comparisons
> presentations
Improved quality &
reliability of audits > US accountants will struggle with a principles-based approach
> increase in subjective accounting
> increase in litigations
> SEC would have no oversight authority over the IASB Voluntary adoption would permit multinational companies to realize cost savings by removing dual sets of accounting records. It would also allow US issuers to set out resources that are best suited to address an entity's unique transition complexities. Phased adoption involves making IFRSs mandatory for a subset of internationally active companies, whilst companies that are mainly active in the US market would keep hold of US GAAP for a longer period. > it is the country itself that maintains control over standards. > comparability is difficult or impossible to achieve under the convergence approach, adjustments to accounting standards are changed over a time period considered appropriate by the country's standard setter. > US accountants can continue to make use of a set of familiar standards. this approach gives the US the option to refuse the use of IFRS in general. > Rejecting IFRSs would be significant not just for the US itself but to the whole world due to the influence that US has on accounting standards. Cooperation with National Standard Setters, the IASB & FASB IFRSs as Global Accounting Standards b) Some Observations Although in general investors agree to the harmonisation of accounting standards, they tend to be uncertain about the quality & that this issue should be addressed by the SEC. They also believe that accounting standards should be based on decision-useful information. c) 'Standard-by-Standard' Approach VS The 'Big Bang' Approach In truth, no jurisdiction has been found
to use the standard-by-standard approach.
Other jurisdictions that have actually considered
this approach moved on to the big bang approach
where incorporation takes place in a 'single
transaction'. d) Current Awareness & Knowledge of IFRSs According to the Final Staff Report, the awareness & knowledge of IFRSs varies. Investors are the most aware of IFRSs and have gained their knowledge through studying, training, online resources & in-house training programs. Investors who focus on domestic companies tend to be the most familiar with IFRSs. However other stakeholders like financial analysts tend to have less knowledge on the subject. e) Investor Preparedness for Incorporation of IFRSs According to the SEC, since some of the investors stated that they are not yet committed to spend resources on developing their understanding and knowledge about IFRS, they do not seem to be prepared for a 'short-term', wholesale transition to IFRS”.

Many of them think that this issue of preparedness would not impose a significant barrier in the incorporation of IFRS in the U.S. reporting system.

Investors who focused on domestic companies “may not have the same resources as large institutional investors” and thus, they might not be prepared of such changes. In cases of small investors, they have to make an “up-front investment of time in learning about IFRS”. f) Necessary time & activities needed by investors to transition successfully to IFRSs A transition period would be necessary before any large scale incorporation of IFRS. As back up about this issue, the Staff have obtained feedback on a possible and suggested timeline of disclosures g) Other Investor Views Some investors believe that the use of international standards will provide long-term benefits to analysts, investors, and creditors by providing a consistent framework for financial reporting disclosure. This would result in (Staff of the US SEC, 2012);
- promoting better information flow,
- peer comparison, and
- global capital flow Most investors believe that the role of the FASB should have a substantial and trivial part in the standard-setting process whilst also retaining his authority to create new standards and interpret them.
Other investors stated that the FASB’s role “should be limited to providing support, resources, and expertise to the IASB and to participating in the development and improvement of international standards”. “The FASB’s role during the initial transition phase of incorporation and thereafter can be considered on a continuum”, mainly:
If more FASB discretion is exercised (e.g. commentators expressed that the FASB should be able to develop or modify standards to the extent necessary or appropriate)
If less FASB discretion is exercised (e.g. these commentators stated that the FASB’s authority to modify standards or issue interpretative guidance should be more limited because it could obstruct the role of the IASB or the IFRS IC) h) Investors' perspective of the ongoing role of the FASB The US Regulatory Environment Human Capital Readiness for this Transition to IFRS The SEC cites concerns about whether individuals are sufficiently prepared for a change to IFRS & about auditor competence & the availability & expense to be incurred in employing qualified auditors should the US transition to IFRS take place.

However the SEC are highly confident that the US accounting profession would definitely deliver the necessary human resources without any difficulty. Cost of Transition The SEC was not provided with a specific cost analysis during the comment letter process. However, a number of factors need to be considered (IFRS Foundation 2012);
A distinction should be made between upgrade costs for systems which use IFRS and those incurred in relation to the US GAAP.
A distinction should between elective costs and IFRS transition costs.
The SEC report also noted that transition costs for a large number of multinational companies could result in cost savings and simpler internal systems. Summarizing the benefits identified through the research carried out by Ms Tarca, it can be concluded that capital markets do actually benefit from the adoption of IFRS, irrespective to the strength of investor protection and the quality of financial reporting within the country. Thus, any costs incurred for the transition to take place are considered to be reasonable in view of all the benefits identified (IFRS Foundation 2012). Our Opinion... We are unsure as to whether international standards are able to handle differences present in different countries, such as differences in traditions and economic environments.

We all agree that the convergence project is taking a bit too long, but this is attributed to the differences between the IFRS and U.S. GAAP.

Moreover, we also think that for the harmonisation project to be successful, the investors have to be fully educated and have to fully understand the financial reporting behind it.

We think that international comparisons of financial statements are important for companies to make business decisions that affect their operations and evaluate the performance of international companies against their own,. Through harmonisation this would be facilitated. Conclusion To date, IASB has come a long way. In fact today the number of countries using IFRS reaches one hundred. With regards to the Convergence Project, now, the IASB will stand alone because IFRS have already made a global impact which makes it practically impossible for countries to go back to regional standards, despite the differences in America’s beliefs. It is not obscure that the aims of the IASB are extremely challenging. As pointed out earlier, we are unsure as to whether a global harmonisation of accounting standards would ever be possible. Some believe that the SEC should acknowledge that if the US holds its prominent position in the development of accounting standards, IFRSs will ultimately have to be implemented in the US. However issues like the possible requirements for a harmonized socio-economic environment leave much to be debated. Thanks for your attention Different jurisdictions should help in implementing IFRSs as there might be situations were because such jurisdictions
look at same aspects from different angles it would result in different outcomes & potentially also lack of comparability.

For there to be a single set of global accounting standards, it is important that IFRSs take industry specific guidance into
consideration, as this would help in achieving consistency.

Adopting IFRSs as issued by the IASB will be the simplest option but we believe that U.S. will never choose to do this.

Rejecting all of this is another option, but in our opinion, this will result in waste of time after all the effort that has been set, by the FASB and IASB, on this convergence project.

We agree to the part in the SEC Report which says that all companies should adopt IFRS as a single set of accounting standards. irrespective of their size, Our Opinion... To delve deeper into this subject, we decided to carry out an interview with Mr Jonathan Dingli, an associate director at KPMG was carried out. He does not believe that international standards are able to handle differences between countries, such as traditions and economic environments. I
w According to Mr.Dingli, the fact that the convergence project has not yet been finalized should not render such project as being unsuccessful. Harmonised standards should be continually supervised to ensure that they are not interpreted or applied differently in different countries on 2 levels:
field testing
individuals should have the opportunity of sending questions to the IFRIC with respect to difficulties in interpretation on a particular standard When asked about the improvements
that should be made to improve
comparability, he mentioned the rules-
based & principles-based standards. He
prefers the latter because they are more
difficult to override in his opinion. Mr. Dingli believes that the IASB will ultimately achieve its goal of global harmonization of accounting standards. Similarities... Discretion of the FASB
(Final Staff Report 2012) In order to defend their interest, many standard-setters, companies and governments try to influence the work of the IASB. Novartis, a Swiss company, depicts an excellent and clear example of lobbying, because it will switch to the US GAAP if the IASB does not change its standard.

Another potential political intrusion in the work of the IASB might come from the EU screening mechanism (Zeff, 2002).

The use of the IASs within the EU can be seen as a challenge for the IASB, because the European countries may alter IASs to fit their needs. Lobbying of the IASB 2001 - The IASB began its activities
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