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Home > Accountancy Best Practice > The Rationale of International Financial Reporting Standards and Their Acceptance by Major Countries

Accountancy Best Practice

The Rationale of International Financial Reporting Standards and Their Acceptance by Major Countries

by Véronique Weets

Executive Summary

  • Differences in accounting systems create inefficient transfers of information that have a negative impact on the allocation of resources, efficiency of capital markets, and tax harmonization.

  • International financial reporting standards (IFRS) are standards published by the International Accounting Standards Board (IASB), which is committed to develop a set of high-quality, global standards that require transparent and comparable information in general purpose financial statements.

  • The IASB is a private organization that has no legal power to enforce the application of its standards.

  • After the implementation of the 4th, 7th, and 8th directives, the European Union decided in 2002 to oblige the use of standards published by the IASB as from 2005 for the preparation of the consolidated financial statements of entities listed on a European market.

  • Foreign registrants in the United States no longer have to reconcile their financial statements to US GAAP if they apply IFRS.

  • Local amendments of IFRS reduce the comparability of IFRS financial statements, one of the objectives of the IASB.

Introduction

Why Financial Reporting Needs to Be Harmonized

Although basic accounting principles such as the accrual basis and the going-concern assumption are widely accepted, the application of these principles in different economic and cultural environments has led to significant differences in how accountants report similar transactions. Local differences exist in, for example, the treatment of goodwill, the definition of a group, treatment of borrowing costs, measurement of impairment, and the treatment of deferred taxes.

For entities that are globally active, these differences in financial reporting requirements create extra complications in terms of preparing, consolidating, auditing, and interpreting financial statements. This is because financial statements have to be reconciled before consolidated financial statements can be prepared, the analysis of potential acquirees in a foreign country increases the costs of the mergers and acquisitions department because they have to familiarize themselves with a foreign accounting system, and investors have to be informed about differences in financial reporting. In general, the differences in accounting treatments create non-optimal information for users of financial statements, which in turn leads to less than optimal allocation of resources.

The need for a harmonized, high-quality set of accounting rules is not new. Several initiatives have been taken to arrive at a globally accepted set of financial reporting standards. An important player in this is the European Union. Since the 1970s it has made serious efforts to harmonize the national accounting rules within Europe, resulting in several directives and regulations. Other organizations concerned with international aspects of accounting, active since the 1970s, are: the International Federation of Accountants (IFAC), the Accountants’ International Study Group, the International Organization of Securities Commissions (IOSCO), the Fédération des Experts Comptables Européens (FEE), the Inter-American Accounting Association (IAAA), and the Organisation for Economic Co-operation and Development (OECD).

Harmonization Work by the IASB

In 1973 the predecessor of the International Accounting Standards Board (IASB), the International Accounting Standards Committee (IASC), was founded by the professional accounting organizations of nine countries: Australia, Canada, France, Japan, Mexico, the Netherlands, the United Kingdom (together with Ireland), the United States and Germany. The IASC was operational until 2001, and published 41 International Accounting Standards (IAS), some of which were later replaced or amended. The objectives of the IASC were to develop a single set of high-quality, global accounting standards that require transparent and comparable information in general purpose financial statements.

In 2001 the IASC was succeeded by the International Accounting Standards Committee Foundation (IASCF). The organization within the IASCF that publishes standards and interpretations is the IASB. One of the changes was that new standards were no longer called International Accounting Standards (IAS) but International Financial Reporting Standards (IFRS). This means that the current list of IFRS consists of a series of IAS, standards originally published by the IASC before 2001 (although some were amended afterwards), and a number of IFRS, which were published by the IASB after 2001. Table 1 gives a list of standards published by June 30, 2008.

Table 1: Current and past standards (as of June 30, 2008)

IAS Topic Comment
1 Presentation of financial statements
2 Inventories
3* Consolidated financial statements Superseded by IAS 27 and IAS 28
4* Depreciation accounting Withdrawn in 1999
5* Information to be disclosed in financial statements Superseded by revised IAS 1
6* Accounting responses to changing prices Superseded by IAS 15
7 Statement of cash flows
8 Accounting policies, changes in accounting estimates, and errors
9* Research and development costs Superseded by IAS 38
10 Events after the balance sheet date
11 Construction contracts
12 Income taxes
13* Presentation of current assets and current liabilities Superseded by revised IAS 1
14* Segment reporting Superseded by IFRS 8
15* Information reflecting the effects of changing prices Withdrawn in 2003
16 Property, plant and equipment
17 Leases
18 Revenue
19 Employee benefits
20 Accounting for government grants and disclosure of government assistance
21 The effects of changes in foreign exchange rates
22* Business combinations Superseded by IFRS 3
23 Borrowing costs
24 Related party disclosures
25* Accounting for investments Superseded by IAS 39 and IAS 40
26 Accounting and reporting by retirement benefit plans
27 Consolidated and separate financial statements
28 Investments in associates
29 Financial reporting in hyperinflationary economies
30* Disclosures in financial statements of banks and similar financial institutions Superseded by IFRS 7
31 Interests in joint ventures
32 Financial instruments: presentation
33 Earnings per share
34 Interim financial reporting
35* Discontinuing operations Superseded by IFRS 5
36 Impairment of assets
37 Provisions, contingent liabilities and contingent assets
38 Intangible assets
39 Financial instruments: recognition and measurement
40 Investment property
41 Agriculture
IFRS Topic Comment
1 First-time adoption of international financial reporting standards
2 Share-based payment
3 Business combinations
4 Insurance contracts
5 Non-current assets held for sale and discontinued operations
6 Exploration for and evaluation of mineral resources
7 Financial instruments: disclosures
8 Operating segments

* Superseded or withdrawn.

Although the IASB cooperates with national accounting standard-setters to achieve convergence, it is a private organization with no legal power to enforce the application of its standards. Financial support is received from the major accounting firms, private financial institutions, and industrial companies throughout the world, central and development banks, and other international and professional organizations.

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Further reading

Books:

  • IASCF. International Financial Reporting Standards (IFRSs). London: IASCF Publications, 2008.
  • Nobes, Christopher, and Robert B. Parker. Comparative International Accounting. 10th ed. Harlow, UK: FT Prentice Hall, 2008.

Websites:

  • The International Accounting Standards Board (IASB) website gives access to all IASB standards and interpretations: www.iasb.org
  • Deloitte’s site IAS Plus has daily updates on what is happening in the IFRS world and information on almost all IASB standards: www.iasplus.com
  • IAS Plus also gives information on the acceptance of IFRS in nearly 200 jurisdictions on this page: www.iasplus.com/country/country.htm
  • The website of the European Financial Reporting Advisery Group (EFRAG) has information on the endorsement of standards in Europe: www.efrag.org

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