In this article we will discuss about the International Financial Reporting Standards (IFRSs) in USA, Europe and Asia-Pacific Countries.
IFRSs in USA:
The Financial Accounting Standards Board is the USA’s principal financial reporting rule-making body. The FASB’s most important function is to issue standards that fine US GAAPs.
The accounting principles and practices of the USA are influential beyond the country’s national boundary and have, of themselves, provided a means of harmonisation for those other countries and business enterprises choosing to follow the US lead.
Companies listed on the US stock are required to present under an SEC regulation a reconciliation statement providing difference in the profit as arrived at on the basis of the GAAPs of the country of which the company is domiciled and the profit arrived at on the basis of following the US GAAPs.
Financial Accounting Standards in US are greater in volume and more detailed than those of almost any other country of the world but they are set by an independent standard-setting body.
The evolution of accounting standard setting in US GAAPs has started much earlier as compared to that at the IASB level. As a result of this, US GAAPs had a very strong influence over the rules in other countries, where the rule-makers often adopted rules that are very similar to and are clearly derived from, those of US GAAPs.
But the situation has changed now:
In 2002, the United States Congress enacted the Public Company Accounting Reform and Investor Protection Act of 2002, also known as the Sarbanes-Oxley Act.
The act requires the SEC to conduct a study on the ‘adoption by the United States financial reporting system of a principles-based accounting system’, including in s. 108(d)(1)(B):
i. The extent to which principles-based accounting and financial reporting exists in the United States
ii. The length of time required for change from a rules-based to a principles-based financial reporting system
iii. The feasibility of and proposed methods by which a principles-based system may be implemented.
iv. A thorough economic analysis of the implementation of a principles-based system.
As a result of the act, the FASB has invited comment on a proposal for a principles based approach to US accounting standard setting. The proposal addresses concerns about the increase in the level of detail and complexity in accounting standards.
The Sarbanes-Oxley Act in the US permits the SEC to look to a private-sector accounting standard setter, such as the FASB, provided that the standard setter:
Considers, in adopting accounting principles….the extent to which international convergence on high quality accounting standards is necessary or appropriate in the public interest and for the protection of investors (s. 108(b)(1)(A)(v) of the act).
In October 2002, the International Accounting Standards Board and the US Financial Accounting Standards Board jointly issued a memorandum of understanding (Mou), marketing a significant step towards formalizing their commitment to the convergence of US and international accounting standards. Both boards added to their agendas a short-term International Convergence project.
The FASB also voted to authorize its staff to expand its research project on international convergence. The FASB has already made a number of changes to its standards in the interests of convergence, and it has proposed others.
The working of IASB-FASB convergence programme includes Norwalk agreement for eliminating differences in existing standards, SEC road map for eliminating reconciliation requirements and 2006 MOU regarding replacing weaker standards with stronger standards. 11 major projects have been identified under the said MOU and the target date of completion of these major projects is stated to be June 2011.
To priorities have been assigned to the following: Revenue Recognition, Fair Value Measurement Guidance, Consolidation Policy, De-recognition, Financial Statement Presentation, Post-Retirement Benefits, Lease Accounting and Financial Instruments.
The joint efforts to analyse the respective standards and identify the best have already have some effect on standards. For example, the IASB has incorporated US GAAP rules into some of the international standards, such as accounting for assets held for sale and discontinued operation.
The FASB, on the other hand, is about to revise rules concerning changes in accounting policies, exchange of assets, cost of inventories, and earnings per share to the comparable IFRs.
Benston, Bromwich, Litan and Wagenhofer comment:
“IASB and the FASB have achieved convergence so far only with respect to minor issues. Currently, over 100 differences between IFRS and FASB standards remain. It is arguable as to which standard is the “better” one to which to converge.”
IFRSs in Europe:
In June 2000, the European Commission adopted a Financial Reporting Strategy for the 25 European Union (EU) member states that would require all listed EU companies to prepare their consolidated accounts in accordance with one single set of accounting standards, namely International Accounting Standards (IASs).
To implement this strategy, the Parliament and Council of the European Union have approved an accounting regulation requiring all European companies listed on a stock exchange in the EU to follow IASB standards in their consolidated financial statements starting no later than 2005.
EU member states are authorised to extend the IFRS requirement to the consolidated financial statements of non-listed companies and also to the separate statements of parent companies. Most of the EU countries, in fact, have permitted (but not required) the non-listed companies to use IFRSs.
Member states were also authorised to exempt certain companies temporarily from the IFRS requirement—but only until 2007 —in two limited cases:
(1) Companies that are listed both in the EU and on a non-EU exchange and that currently use US GAAP as their primary accounting standards; and
(2) Companies that have only publicly traded debt securities.
Several EU countries did, in fact, allow the deferral to 2007 for one or both of those small groups of companies. The IFRS requirement applies not only in the 25 EU countries but also in the three additional European Economic Area (EEA) countries that are not in the EU.
There are an estimated 9000 listed companies in these 28 countries (all of which must use IFRSs), and upwards of 5000000 non- listed companies (most of which are permitted, and some even required, to use IFRSs) Also, many large companies in Switzerland (which is not an EU or EEA member) have long used IFRSs.
Before IASs/IFRSs become officially required under European law, they must be endorsed by an Accounting Regulatory Committee (ARC) of the EC. By July 2004, that ARC had endorsed all of the IASB standards in effect at that time, including both the old IASs (as revised by the IASB), as well as IFRS 1—with the important exceptions of the two standards on financial instruments: IAS 32 and IAS 39. The ARC has the on-going responsibility to review and ‘endorse for use in Europe’ each new IFRS or revised IAS.
The application of IFRS by listed EU companies is considered to be a crucial element in establishing a single European capital market. The Regulation will help eliminate barriers to cross-border trading in securities by ensuring that company accounts throughout the EU are more reliable and transparent and that they can be more easily compared.
This change should increase market efficiency and reduce the cost of raising capital for companies, ultimately improving competitiveness and increasing growth.
IFRSs in the Asia-Pacific Countries:
The Asia-Pacific countries are taking a variety of approaches towards the convergence of GAAP for domestic companies with IFRSs.
Bangladesh is the only Asian country that now requires IFRSs in place of national GAAP for all domestic listed companies, just as required in Europe. Both Australia and New Zealand have decided to adopt national GAAP that are generally word-for-word equivalents of IFRSs, but some changes may be made.
Australia’s IFRS equivalents take effect in 2005 and New Zealand’s in 2007 although adoption from 2005 is permitted. The auditor’s report is expected to refer to conformity with both IFRSs and national GAAP.
Both of those countries have in the past tried to develop a single set of accounting standards that applies not only to business entities but also to government and not-for-profit entities. This broader scope is one of the reasons asserted for the decisions not to replace national GAAP with IFRSs in Australia and New Zealand.
Hong Kong, the Philippines and Singapore have also decided to adopt new national standards that are generally word-for-word equivalents of IFRSs, but there is sometimes a time lag and in some instances changes are made to IFRSs. In these three jurisdictions, the auditor’s report refers to the national GAAP, not IFRSs.
Certain Chinese companies listed on the stock exchanges in China are required to prepare IFRS financial statements—namely those companies whose shares trade in US dollars and can be purchased by foreign investors. IFRSs are looked to in developing national GAAP to varying degrees in most of the rest of the Asia-Pacific.
Virtually all countries will assert that they base their national GAAP on IFRSs but—as the expression goes— the devil is in the details. The major economies of China, Japan and Korea have adopted only a few national accounting standards that can be described as being the same as the IFRSs.
Many of the recent accounting standards in India and Thailand are nearly identical to the IFRSs, although significant differences remain in some of the older standards, and not all IFRSs have been adopted.
In Laos and Myanmar, some domestic companies may use IFRSs; and in Australia, Hong Kong, New Zealand, Pakistan, Singapore and Thailand, foreign listed companies may use IFRSs. Japan has also permitted foreign companies to use IFRSs in several cases.