Chapter 7

1. Chapter 7 International Accounting Standards and Global Convergence

2. Comparability of Accounting Information • International pressure exists for comparability, especially with MNEs • Different approaches to comparability • Harmonization is more flexible • Standardization suggests a state of uniformity International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

3. Which groups are interested? • Governments • Trade Unions • Investors (including financial analysts) • Bankers and lenders • Accountants and Auditors International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

4. Governments • Government involvement in accounting determination varies across the world • Do governments really use corporate reports? • Info needed by govt.’s is often extensive to include in the report • More relevant for Govt. involved countries like Germany/France • Governments can demand whatever information they need • Information needs are extensive and confidential • Influenced by government planning and regulation/tax • Power of government to obtain info suggest governments may not be important users of corporate report International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

5. Government use of annual reports • Use reports, along with segmental information, to check performance of local subsidiaries of MNEs • Governments wish to monitor MNE operations as a whole – their importance to commercial development • Governmental needs in differing departments can be accommodated by an annual report • Developing countries would have more information without bargaining for it with increased corporate disclosure – but MNE have more power to control the process – Host govt. fear of losing MNE International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

6. Governmental use of annual reports • Interest in extranational operations of MNEs – to some extent information sharing • Intergovernmental organizations use this information for policy formulation (UN, EU). • Many governments desire increased bargaining power for information as members of intergovernmental organizations International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

7. Intergovernmental Organizations • United Nations • 1976 study lack of information / int’l compararbility • 1979 – Working Group of Experts established • Emphasis on developing countries • Have different interests from those of OECD and IFRS • Major aim is international disclosure standards • Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) established in 1983 • Current issues deal with corporate governance • Monitoring role in endorsing desirable standards • UNCTAD – represented in • Standards Advisory Council of the IASB • Advisory Panel of Small and Medium-sized Entities of the IASB International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

8. Intergovernmental Organizations • Organization for Economic Cooperation and Development (OECD) • Represents industrialized nations – US, UK, Australia, Germany, France, Canada, Japan – most MNEs exist here • Issued Guidelines for Multinational Enterprises • Aimed at strengthening confidence between MNEs and governments • Not required by law – though govt.’s agreed to recommend guidelines related to financing, taxation, competition, etc. – as more of benchmark • Aim is to promote improvements in comparability and harmonization of standards – though not standard setting • Let’s go over exhibit 7.1 International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

9. Intergovernmental Organizations – European Union – 25 countries • Involved in international harmonization of standards as part of company law harmonization • Goal is to promote European economic integration and development • No company should be at a disadvantage because of legal differences between countries International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

10. International Organizations – European Union • Interests of shareholders, lenders, suppliers, and other parties are protected • Directives in the EU have the force of law and must be ratified by member nations • Regulations become law without national ratification International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

11. Intergovernmental Organizations – European Union • Fourth Directive – approved in 1978 • Requirements relate to • Disclosure • Classification and presentation of information • Methods of valuation • Compromise between continental European and Anglo-American systems • Contains detailed requirements for historical cost accounting with some flexibility International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

12. Intergovernmental Organizations – European Union • Fourth Directive • Level of disclosure and transparency increased • Historical costing concepts adopted with flexibility in valuing inventory, goodwill, depreciation. • “true and fair view” concept adopted • Different layouts of financial statements allowed • Starting point for harmonization process • Does not adequately address • Foreign currency translation • Leases and funds • Cash flow statement International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

13. Intergovernmental Organizations – European Union • Seventh Directive (1983) – Consolidated Accounts • Definition of Control Group source of controversy. • UK definition (Share ownership/legal control) v. German definition of effective control and ownership. • Compromise: control other than ownership could be applied on optional basis. • Requirements • Worldwide consolidations • “Fair value” approach for assets purchased through acquisitions • Equity treatment of associated corporations • Segmental disclosures of turnover by line of business and geographical area • Disclosure has been substantially improved International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

14. Intergovernmental Organizations – European Union • Additional Directives • Eighth Directive – adopted in 1984 • Deals with qualification and work of auditors • Includes minimum educational requirements • Encourages mobility of professional auditors • Proposed directive for employee disclosure was put aside due to MNE and government opposition • Issues readdressed in Charter of Fundamental Social Rights International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

15. Intergovernmental Organizations – European Union • Harmonization of stock exchange regulations and securities laws is also a prerogative • Ensure investor access to sufficient information • Promote capital market and stock exchanges • Reaffirmed commitment to harmonization in 2000 requiring all listed companies to adopt IFRS in 2005 • Includes all IAS except IAS 32 and 39 (as these under revision by IASB) • All Standard Industrial Classifications (SIC) International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

16. Trade Unions and Employees • International Trade Union Confederations • European Trade Unions Confederation • International Confederation of Free Trade Unions • World Confederation of Labor • Industry-specific trade unions • Deal with individual MNEs • National Trade Unions • Influence MNEs on a variety of levels • Information needs depend on contact with MNEs and purpose of information International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

17. Trade Unions and Employees • Power exists in the nation where they operate – Striking very powerful tool esp in EU • Unions have not grown beyond national boundaries as MNEs have • Trade union pronouncements are aimed at establishing policies concerning MNEs • Main concern centers on subsidiaries • Transfer pricing policies are a major concern • MNE subsidiary transactions have received little attention to date by regulatory bodies • Information about the terms, conditions, scale, security, and location of employment are of concern International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

18. Investors • Owners or potential owners of shares in the MNE parent corp. or a subsidiary • Interests are represented by international financial analyst organizations and IOSCO • Concerned with current lack of comparability • Some want information approach rather than a market approach to disclosure International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

19. Investors • International organizations • ICCFAA and IOSCO • IOSCO - works for multilisting and international trading • IOSCO is closely associated with the IASB • Want comparable information • Interested in segmental information of MNEs • Interested in consolidated results International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

20. Bankers and Lenders • Information needs are focused on financial positions, performance, and future prospects • Concerned with security of loans advanced • Significant impact in France, Germany, Japan • Have more direct access to required info • International banks are involved in harmonization and often require special financial reports (IFC, World Bank, etc.) International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

21. Accountants and Auditors • International Accounting Standards Board • Formerly the IASC • Governed by 14 board members • Objectives • Propose international standards and promote their acceptance • Work toward improvement and harmonization of standards • Goal achieve comparability while minimizing cost of MNE to comply with accounting standards International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

22. Accountants and Auditors • IASB • Adopted 41 IAS standards, completed 5 new standards, and revised 15 existing standards • Achievements • Completed a core set of standards in 2000 as agreed with IOSCO for cross-board and national listings • Recent efforts are focused on EU compliance with IFRS in 2005 • Endorsement by IOSCO was limited • Members of IOSCO are permitted to require reconciliation of certain items, supplementary information, and eliminate some options existing in IAS • Members will individually determine whether or not to endorse IFRS for cross-boarder listings International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

23. Accountants and Auditors • IFRS and U.S. GAAP • IASB and FASB are working toward similar accounting standards • FASB is researching international convergence • Objectives include • Identify every substantive difference between U.S. GAAP and IFRS • Catalog those differences according to the strategy for resolving them • Recommend further agenda decisions to the Board to further the objective of convergence with IFRS International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

24. Accountants and Auditors • IFRS and U.S. GAAP • Benefits of convergence according to the FASB • Increased efficiency in capital markets by increased comparability and transparency from nation to nation • Reducing the administrative burden for MNEs by allowing only one set of financials to be prepared • Enable U.S. companies access to capital markets throughout the world without reconciling U.S. GAAP to IFRS International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

25. Accountants and Auditors • IFRS and U.S. GAAP • Street, Nichols, and Gray (2000) suggest the gap is narrowing • Major differences are in the areas of • Property, plant and equipment revaluations • Deferred taxes • Goodwill • Capitalized borrowing costs • SEC desires enforcement of international standards if they are in place International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

26. Accountants and Auditors • Rules versus Principles • Recent scandals and aftermath perhaps show a need for principle-based standards – Rules often lend more opportunity to form over substance • Sarbanes-Oxley requires the SEC to examine the feasibility of principles-based standards • Problems with principles-based standards • Guidance for application • Comparability • No guidance for complex transactions International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

27. Accountants and Auditors • Rules versus Principles • Survey by Mike Ng (2004) • 93% of companies surveyed reported that is was possible to apply rules-based standards but not reflect the economic substance of the transaction • Only 7% of companies surveyed believed principles-based standards would lead to a better reflection of economic reality • Results show that neither approach will ensure that companies report the economic reality of transactions International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

28. Accountants and Auditors • Noncompliance with IFRS is problematic • IASI states that compliance means following IFRS and each interpretation of IFRS • Improper accounting treatment is not condoned by explaining accounting treatments applied or by footnotes (paraphrase IASI). • Street and Gray (2000) found that only 77% of the 162 companies in their sample stated they were fully compliant with IAS. • International accounting firms are not supporting the enforcement of IAS • New structure of the IASB should help with compliance – raising standards of accounting and auditing worldwide International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

29. Accountants and Auditors • International Federation of Accountants • Sets international auditing guidelines • Promotes international convergence of standards • International Auditing and Assurance Standards Board • Independent body under the IFAC that creates International Auditing Standards (ISA) International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

30. Accounting and Auditors • Reforms by the IFAC in cooperation with accounting firms, member bodies, regulators, and accounting organizations include: • Establishment of the Public Interest Oversight Board to oversee IFAC’s standard setting process • Increased transparency with regard to IFAC governance and international standard setting • Public participation in the standard-setting process • A more formal process of communicating with international regulators International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

31. Accountants and Auditors • International Forum on Accountancy Development (IFAD) • Created after the Asian financial crisis to aid developing nations • Encourages conformity with IFRS • Developed the International Financial Framework to aid in improving standards within national financial frameworks • Conducted a GAAP Convergence Survey (2002) • 90% of countries surveyed plan to convert to IFRS • Majority of countries surveyed plan to converge with IFRS by establishing a government regulation or a standard-setting body • Half of the countries surveyed see a barrier to convergence in the complication of standards International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

32. Accountants and Auditors • International Association for Accounting Education and Research • Promotes excellence in accounting education • Contributes to development of international standards International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

33. The International Harmonization and Disclosure Debate • Some see harmonization and disclosure as a means to create a balance of power between MNEs and domestic corporations • More industrialized nations will not be totally supportive of increased regulation • Regional integration • Long-term goal to remove market imperfections and eliminate regulatory barriers (EU) • Many countries are more concerned with protecting their own business community at the expense of others International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

34. The International Harmonization and Disclosure Debate • Differences in reporting are due to differences in domestic needs • With domestic corporations, there is little concern for international standards • Natural accounting coordination will be a lengthy process according to research • Regional economic groupings (EU) and intergovernmental organizations (UN) will help International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black

35. The International Harmonization and Disclosure Debate • Future developments will be centered on MNEs • May be less disclosure now in practice because of the complex nature of MNEs • National reporting requirements may limit disclosure International Accounting and Multinational Enterprises – Chapter 7 – Radebaugh, Gray, Black