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Ian P. N. Hague York University

International Convergence in international accounting standards and consequences for Canadian standard setting. Ian P. N. Hague York University. Objectives. Diversity in environments -> diversity of accounting Accounting differences National & international standard setting processes

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Ian P. N. Hague York University

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  1. InternationalConvergence in international accounting standards and consequences for Canadian standard setting Ian P. N. Hague York University

  2. Objectives • Diversity in environments -> diversity of accounting • Accounting differences • National & international standard setting processes • Current developments

  3. Approaches to International Accounting • World accounting - one best way • International accounting - legitimate ways by country • Entity accounting - differences between parts of entity in different jurisdictions

  4. International AccountingEnvironmental Factors [Choi & Mueller, 1992] • Legal system • Political system • Nature of business ownership • Size and complexity of organizations • Social climate • Sophistication of preparers & users

  5. International AccountingEnvironmental Factors [Choi & Mueller, 1992] • Legislative interference • Accounting legislation • Speed of business innovation • Stage of economic development • Growth stage of economy • Status of professional education and organization

  6. Classification of accounting systems [Mueller, 1968] • U.S. / Canada / Netherlands • British Commonwealth (excl. Canada) • Germany / Japan • Continental Europe • Scandinavia

  7. Classification of accounting systems [Mueller, 1968] • Israel / Mexico • South America • Developing nations of Near and Far East • Africa (except South Africa) • Communist nations Groups changing now

  8. Classification of accounting systems[Mueller, Gernon & Meek, 1991] • British American • Continental European • South American + Islamic & Communistic

  9. Balance Sheet Similarities • Historical cost • Current / non-current classification • Inventory flow and valuation assumptions • Asset write downs for depreciation • Operating leases v capital leases

  10. Balance Sheet Similarities • Mark-to-market/revaluation • Generally conservative • But may wait for realization • Some upward revaluation • Goodwill - many different methods • Owners equity and reserves Many differences within the basics

  11. Balance Sheet Differences • Financial instruments • Impairment losses • Provisions • Employee benefit liabilities • Income taxes • Business combinations

  12. Income Statement • Objectives: • fair presentation (Canada & U.S.) • taxable income (Germany) • distributable income (Japan) • Operating v Extraordinary • Changes in accounting principles • Performance statement

  13. Performance Statement Operating / Business xx Financial xx Financing xx Net Income xx Other comprehensive income xx Comprehensive Income xx __________________________________ Delete other Separately classify re-measurements

  14. Consolidation/Joint Ventures • Different concepts of control • Different extents to which consolidation required • Parent company reporting • Different bases for joint ventures – equity method and proportionate consolidation

  15. Foreign Currency Translation • Current method • Current / non-current methods • Monetary / non-monetary methods • Temporal method Convenience translation v revision of underlying GAAP

  16. Accounting Standards Today Canada - Canadian GAAP US - US GAAP • Rest of world - National or IASB GAAP (+ some US GAAP) Is this the most useful information?

  17. High quality financial reporting is essential to an efficient capital market

  18. Convergence - Why? Capital Markets: Greater transparency • Less uncertainty • Reduced cost of capital Also: reduced costs of compliance

  19. What is Convergence? • Goal of convergence • different standard setters arriving at high-quality national or international standards on the same topic that areas similar as possible • Process of convergence • using all reasonable efforts to arrive at consensus

  20. Convergence - What? • One set of high quality standards • comprehensive standards • leading to comparable and transparent reporting • rigorously interpreted and applied

  21. Style of standards: principles v rules • Canadian style closer to IASB • How much detail to pick up? • Avoid “tinkering” • Limited implementation guidance • Sufficient detail to apply provisions consistently • Accept some non-comparability across entities

  22. Convergence: Who? • IOSCO (including OSC and SEC) • Standard setters (including IASB, FASB and AcSB) • Investors, preparers, etc.

  23. IASC • Established 1973 • Early role - “easy” standards, many alternatives - codify practice • 1989 - improvements project • Since 1995: IOSCO agreement • 2001: Restructured as IASB

  24. IASC / IOSCO Agreement • “Core” standards by 1998 • to be considered by IOSCO for acceptance for cross-border listings

  25. Income taxes Earnings per share Segments Presentation of F/S Discontinuing operations Interim reporting Investment property Intangible assets Employee benefits Provisions Leases Impairment Post B/S events Financial instruments IASC / IOSCO Agreement“Core” standards by 1998

  26. IASB Standards Today • 41 IASs + 1 IFRS • Interpretations programme • Similar concepts & style to Canada • Handbook Section 1501 / Sig. Diffs. in GAAP / IFAD Study

  27. 16 Members Australia Canada France Germany India / Sri Lanka Japan Malaysia Mexico Netherlands Nordic S. Africa/Zimbabwe Swiss Industrials U.K. U.S.A. F.E.I. (Preparers) Analysts IASC Board - old structure

  28. Concerns about old structure Key attributes should be • Independent • Open • Technically expert Result: High quality standards

  29. IASB New Structure • Full - time Board members • Link to national standard setters • Independent trustees

  30. National standard setters (Australia/NZ, Canada, France, Germany, Japan, UK, US.) Trustees (19) (appoint Board, IFRIC and SAC) (6 North America, 6 Europe, 4 Asia/Pacific, 3 Other) IASB New Structure Standards Advisory Council (SAC) (advises Board) Board (14) (approves IAS [IFRS], ED, SIC [IFRIC]) 7 Liaison Members Intnl. Financial Reporting Interpretations Committee (12+1) (publishes draft Interpretations and prepares draft of final Interpretations)

  31. IASB liaison roles • partnership with national standard setters to promote convergence of national and international standards • align agendas as far as possible • key communication link with national board and constituents • regular meetings of liaison members and national board chairs

  32. IOSCO Endorsement • Recommendation to allow use of IASC 2000 standards for cross-border offerings and listings • Supplemental treatments to address outstanding substantive issues • limited reconciliations • additional disclosures • limits on choice of alternatives

  33. Europe • 2005: All public companies follow IAS for consolidated accounts • Those using US GAAP allowed until 2007 • Also Australia & New Zealand

  34. IOSCO responsibilities –Canadian consequences? • Should Canadian regulators accept IASs for foreign issuers? • If foreign issuers can use IASs should Canadian issuers also be able to do so? • What about US GAAP? • Use US GAAP in Canada? • Reconcile US to IAS in Canada?

  35. More Questions! • Confusion in the Canadian market? • Unlevel playing field? • Infrastructure? • Interest in pursuing the issues?

  36. What Next? CSA Discussion paper - March 16, 2001 Continuous Disclosure proposals – 2002 May 2003– Propose allowance of US GAAP in Canada for cross-listed companies, and use of IFRS for foreign companies (see www.osc.gov.on.ca) SEC Concepts release 2000 – but relying on convergence.

  37. Canadian Standard Setting? • International harmonization – but with who? • U.S.? • IASB? TFOSS v CGA Canada Canada

  38. AcSB Harmonization Policy • Harmonization with US – eliminate significant unjustifiable differences • Global convergence with highest quality US and international standards –improvements to existing standards and development of new standards

  39. Convergence - priority issues • Business combinations • Financial Instruments • Insurance contracts • Reporting financial performance • Revenue recognition • Share-based payments

  40. Other Convergence Issues • Pensions • Joint ventures • Consolidations • Income taxes • Work with other standard setters • Also need to keep up with IASB/FASB– e.g. liabilities/equity and short-term convergence projects

  41. IASB Research Projects • Measurement objective • Extractive industries

  42. Other projects in the AcSB pipeline • GAAP • Oil and gas guideline • Rate-regulated operations • Differential reporting • Not-for-profit organizations

  43. The Future • Few projects under unilateral AcSB control • Need to balance: • Topics of global importance • US/IASB changes • Specific Canadian needs • Ability of constituents to keep up

  44. Summary • Considerable differences in different environments • To extent reflect environments are legitimate • Move to converge

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