International Accounting Standards

International Accounting Standards

Accounting Standard Setting Bodies

  • Most industrialized countries have their own accounting standard setting bodies.
  • Accounting standards vary from country to country. This is due to:
    • Differences in legal systems
    • Levels of inflation
    • Cultural differences
    • Degrees of capital market sophistication
    • Levels of political and economic ties to other countries
  • Differences in accounting standards create difficulties for:
    • Multinational companies in terms of compliance
    • Investors in terms of comparability

International Accounting Standards Committee (IASC)

  • Formed in 1973 to develop global accounting standards.
  • Issued 41 international accounting standards over its life.

International Accounting Standards Board (IASB)

  • Replaced the IASC in February 2001.
  • Objectives:
    • Develop a single set of high quality, understandable, and enforceable global standards.
    • Foster convergence of accounting standards around the world.
  • Adopted the IAS standards.
  • Continues to issue new standards.

IFRS vs. US GAAP

  • IFRS (International Financial Reporting Standards):
    • Principle-based system.
    • Allows for more flexibility and interpretation.
  • US GAAP (Generally Accepted Accounting Principles):
    • Rules-based system.
    • More rigid and allows less room for interpretation.

Convergence Efforts

  • The differences between IFRS and US GAAP have decreased over time due to ongoing convergence efforts, but significant differences remain.
  • Examples of differences:
    • IFRS does not permit the use of the LIFO (Last-In, First-Out) cost flow assumption for inventory.
    • IFRS uses a single-step method for impairment write-downs, making write downs more likely, while US GAAP uses a two-step method.
    • IFRS has a different probability threshold and measurement objective for contingencies or contingent liabilities compared to US GAAP.
    • IFRS does not permit curing debt covenant violations after year-end, whereas US GAAP allows for it.

Principles-Based vs. Rules-Based

  • IFRS is a principles-based (or objectives-based) system.
  • US GAAP is a more robust, detailed, rules-based system.

SEC and IFRS

  • In February 2007, the SEC established that foreign companies whose stock trades on US stock exchanges were no longer required to provide a reconciliation of IFRS to US GAAP in their SEC filings.
  • In February 2008, the SEC issued a roadmap to requiring US publicly traded companies to adopt IFRS, but this initiative stalled.

Reasons for Stalled Adoption

  • Concerns that GAAP better addresses the more stringent legal and regulatory requirements of the US business environment.
  • Variation in implementation and enforcement would compromise the comparability across countries that IFRS is supposed to provide.
  • Concern that accounting standards will be less than optimal when competing standard setting bodies are eventually replaced with the IASB as the only standard setting body in the world.

Future Outlook

  • Efforts to converge US GAAP and IFRS will continue.
  • It is likely there will be two sets of standards for the foreseeable future.
  • SEC chairman Jay Clayton announced that a consideration to require or allow US public companies to use IFRS is not a focus for him, contrasting with the high priority former chair Mary Jo White placed on IFRS during her tenure.