Chapter One
The development of International GAAP 1 THE EVOLUTION OF THE INTERNATIONAL ACCOUNTING STANDARDS BOARD
Globalisation - the removal of barriers to free trade and the closer integration of national economies - is a term now frequently used, when even a decade ago it was relatively rare. With globalisation has come the increasing integration of world markets for goods, services and capital - with the result that companies that traditionally were reliant on their domestic markets for their financing now have substantially increased access to debt and equity capital both inside and outside their national borders.
Yet - perhaps not surprisingly - the world of financial reporting has been slow to respond. Whilst the benefits of adopting common accounting standards for use in the international capital markets appeared obvious to some, vested interest has often seemed to triumph over common sense; people tended to be nationalistic about their accounting standards, and whilst they might have criticised their own rules, they nevertheless believed that they were better than those that existed in other countries. As a result, companies wishing to access the international capital markets were in many cases required either to prepare two sets of financial statements or to reconcile their accounts to the national standards of other countries. This was - until very recently - the case for all non-US companies that are listed on a US stock exchange, as they have to be registered with the US Securities and Exchange Commission (SEC); in turn, the SEC required all foreign companies to file financial statements that disclose information that is substantially similar to US GAAP financial statements.
However, in one of the most significant moves towards convergence and mutual recognition in recent times, the SEC issued in July 2007 a consultative document2 that proposed amendments to Form 20-F to accept - without reconciliation to US GAAP - financial statements prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). In November 2007 the SEC voted unanimously to approve this proposed rule amendment. (The SEC''s proposals for the removal of the reconciliation requirement for IFRS reporters are discussed more fully at 3.3.4 below).
Undoubtedly, one of the main advantages of a single set of global accounting standards is that it would enable the international capital markets to assess and compare inter-company performance in a much more meaningful, effective and efficient way than is presently possible. This should increase companies'' access to global capital and ultimately reduce the cost thereof; yet it is only in the last five years or so that this has been seen as even a realistic possibility - a possibility that has come about largely as a result of bold action on the part of the European Commission.
In May 1999, the European Commission issued its Financial Services Action Plan. The plan confirmed the Commission''s position that comparable, transparent and reliable financial information is fundamental to an efficient and integrated EU capital market, and that International Accounting Standards seemed the most appropriate benchmark for a single set of financial reporting requirements that would be the catalyst for the development of a single EU capital market.
This initiative was given further impetus by the summit of the European Heads of Government held in Lisbon in March 2000, where it was agreed that a single European capital market should be developed as a matter of priority. It was acknowledged further that the adoption of a single financial reporting framework for the European Union was a vital element in that process. The summit conclusions stressed the need to accelerate completion of the internal market for financial services and set a deadline of 2005 to implement the Commission''s Financial Services Action Plan.
Following this lead by the European Heads of Government, the Commission announced in June 2000 that it would present proposals to introduce the requirement that all listed EU companies report in accordance with IAS by 2005. This requirement - which was finally adopted in an EU Regulation in 2002 - has changed fundamentally not only the face of European financial reporting, but global reporting as well. Largely following Europe''s lead, scores of countries have either already adopted IFRS directly, or have aligned their national standards with IFRS, or have committed to do so in the foreseeable future.
Although the European Union is almost certainly the IASB''s most significant single constituency for the time being, there are also a number of other economically developed countries that either have already adopted - or will be adopting - IFRS as their primary system of GAAP. Notable examples are Canada, which has announced that Canadian GAAP will be replaced by IFRS from 2011 onwards, and Japan where, in August 2007, the Accounting Standards Board of Japan announced an agreement with the IASB to accelerate convergence between Japanese GAAP and IFRSs, with the aim of removing all differences on or before 30 June 2011. Significantly also, countries such as Brazil, China, India and Sri Lanka have made significant progress towards the adoption of IFRS, whilst countries such as Australia and South Africa have already aligned their national standards with IFRS (see section 6 below).
The European Commission''s decision to adopt IFRS as the basis of financial reporting for all listed EU companies coincided also with the restructuring of the former International Accounting Standards Committee and the formation on 1 April 2001 of the present day International Accounting Standards Board (IASB), as discussed in section 2 below. Since then, the IASB and the US Financial Accounting Standards Board (FASB) have become increasingly committed to the convergence of IFRS and US GAAP. This is evidenced by the October 2002 Norwalk Agreement and the February 2006 Memorandum of Understanding between the FASB and the IASB, both of which are discussed at 3.3 below. Most significantly, the IASB and FASB have now largely aligned their agendas to the extent that most major projects - such as consolidations, impairment, income taxes, revenue recognition and employee benefit accounting - are now undertaken jointly.
The result is that in the last seven years global financial reporting has ceased to be characterised by numerous disparate national systems to the point at which there are today essentially only two - IFRS and US GAAP. However - perhaps even more remarkably - it now seems feasible that the ultimate goal of a single set of global accounting standards will be reached in the foreseeable future. This chapter is devoted to outlining how this has been achieved.
1.1 The Accountants International Study Group
Whilst many remarkable individuals have featured in the past 40 years'' evolution of international accounting, perhaps the single person that stands out as the visionary behind the formation of the International Accounting Standards Committee (IASC) - the predecessor to today''s International Accounting Standards Board - is Lord Benson, former President of the Institute of Chartered Accountants in England and Wales (ICAEW) and senior partner in Cooper Brothers & Co. Henry Benson foresaw the importance of international accounting standards and, as President of the ICAEW, pioneered the practical steps that led to the creation, first, of the Accountants International Study Group in 1967 and, ultimately, of the International Accounting Standards Committee in 1973. Henry Benson was the first Chairman of the IASC, serving from 1973 to 1975.
The idea of the Accountants International Study Group was publicly unveiled by Henry Benson during his term as President of the ICAEW, at the Annual Conference of the Canadian Institute of Chartered Accountants (CICA), held in August 1966. Following further discussions with the Presidents of the CICA and the American Institute of Certified Public Accountants (AICPA), the three institutes announced in January 1967 that agreement had been reached for the formation of the Study Group, with AICPA President Robert Trueblood appointed as its first Chairman.
It seems that the formation of the Group may well have been driven by Henry Benson''s early conviction of the essential need for harmonised accounting and auditing rules and procedures. The first indication of Henry Benson''s understanding of the need for international harmonisation may be found in the Terms of Reference of the Study Group, which read as follows: ''To institute comparative studies as to accounting thought and practice in participating countries, to make reports from time to time, which, subject to the prior approval of the sponsoring Institutes, would be issued to members of those Institutes''. Thus, it seems that Henry Benson believed that the UK, US and Canada should not each be operating in their own technical vacuums without considering developments in the other two.
The Study Group lasted for ten years, and was wound up in 1977. During its existence, it published 20 documents covering a wide range of accounting and auditing topics. These publications were, in effect, comparative studies of existing accepted practice, and the opinions expressed therein were termed ''conclusions''.
1.2 The International Accounting Standards Committee (IASC)
The origins of the IASC can be traced back to the 10th World Congress of Accountants, which was held in September 1972 in Sydney. It was here that Henry Benson - who had been asked by the major accounting Institutes to create an international accounting body based on the Accountants International Study Group - proposed the formation of a new body that would be responsible for the formulation of international accounting standards. Following further meetings between the Presidents of the AICPA, CICA, ICAEW and The Institute of Chartered Accountants of Scotland (ICAS) it was agreed to broaden the participation of countries in the formation of an international accounting body beyond the `three nations'' of the Study Group. Accordingly, invitations were extended to the accounting bodies in Australia, France, Germany, Japan, Mexico and the Netherlands to attend a meeting in London in March 1973.
This meeting led to the formation in June 1973 of the International Accounting Standards Committee as an independent private-sector body through an agreement made by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland and the United States of America. From 1983, the IASC''s members included all the professional accountancy bodies that were members of the International Federation of Accountants (IFAC). At the time when the Board of the IASC was dissolved in 2001, there were 153 members from 112 countries.
The IASC was founded to formulate and publish, in the public interest, International Accounting Standards (IAS) to be observed in the presentation of published financial statements and to promote their worldwide acceptance and observance. It was envisaged that IAS should be capable of worldwide acceptance and contribute to a significant improvement in the quality and comparability of corporate disclosure.
Although the composition of the IASC Board changed over time, during the last part of its life the business of the IASC was conducted by a Board comprising representatives of accountancy bodies in thirteen countries (or combinations of countries) appointed by the Council of IFAC, and up to four other organisations with an interest in financial reporting. Each Board Member was permitted to nominate up to two representatives and a technical adviser to attend Board meetings. The IASC encouraged each Board Member to include in its delegation at least one person working in industry and one person who was directly involved in the work of the national standard setting body. The Board also had a number of observer members (including representatives of the European Commission, the International Organisation of Securities Commissions (IOSCO) and the FASB) who participated in the debate but did not vote. In 1998, the People''s Republic of China became a member of IFAC and joined the IASC Board as an observer member. In 1999, IASC Board meetings were opened up to public observation.
The IASC Board established an international Consultative Group in 1981 that included representatives of international organisations of preparers and users of financial statements, stock exchanges and securities regulators. The Consultative Group met periodically to discuss the technical issues in IASC projects, the IASC''s work programme and its strategy. This group played an important part in the IASC''s due process for the setting of International Accounting Standards and in gaining acceptance for the resulting standards.
In 1995, the IASC established a high-level international Advisory Council, made up of outstanding individuals in senior positions from the accountancy profession, business and the other users of financial statements. The Advisory Council was responsible for the oversight of the IASC, including finances, and was expected to promote generally the acceptability of International Accounting Standards and enhance the credibility of the IASC''s work.
1.2.1 The IASC''s Standing Interpretations Committee (SIC)
The IASC Board formed a Standing Interpretations Committee (SIC) in 1997 to consider, on a timely basis, accounting issues that were likely to receive divergent or unacceptable treatment in the absence of authoritative guidance. Its consideration was within the context of existing International Accounting Standards and the IASC Framework. In developing interpretations, the SIC consulted similar national committees that had been nominated for that purpose by Member Bodies. The SIC had up to twelve voting members from various countries, including individuals from the accountancy profession, preparer groups, user groups and accounting academics. The European Commission and IOSCO had observer seats. In 2000, SIC meetings were opened up to public observation.
The SIC considered the following criteria for taking issues onto its agenda:
the issue should involve an interpretation of an existing Standard within the context of the IASC Framework;
the issue should have practical and widespread relevance;
the issue should relate to a specific fact pattern; and
significantly divergent interpretations must either be emerging or already exist in practice.
SIC interpretations were published initially in draft form for public comment (usually 60 days), and if no more than three of its voting members voted against an interpretation, the SIC asked the Board to approve the final interpretation for issue; as was the case for International Accounting Standards, this required three-quarters of the Board to vote in favour. The SIC dealt with issues of reasonably widespread importance, not issues of concern to only a small number of businesses. The interpretations that were issued covered both mature issues, where there was unsatisfactory practice within the scope of existing International Accounting Standards, and emerging issues relating to topics not considered when the standards were developed.
The SIC was reconstituted as the International Financial Reporting Interpretations Committee (IFRIC) in December 2001 (see 2.2.6 below).
1.2.2 The IASC''s comparability/improvements project
When International Accounting Standards were first issued, they permitted several alternative accounting treatments. The principal reason for this was that the IASC viewed its initial function as prohibiting undesirable accounting practices, whilst acknowledging that there might be more than one acceptable solution to a specific accounting issue.
(Continues...)
Excerpted from International GAAP 2008 Copyright © 2008 by Peter W. Bernstein. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
