INTERNATIONAL ACCOUNTING STANDARDS

Comparable, transparent and reliable financial information is fundamental for the smooth functioning of capital markets. In the global arena, the need for comparable standards of financial reporting has become paramount because of a dramatic growth in the number, reach, and size of multinational corporations; foreign direct investments; cross-border purchases; sales of securities; and the number of foreign securities listings on the stock exchanges. Nevertheless, because of the social, economic, legal, and cultural differences among the countries, the accounting standards and practices in different countries vary.

To improve the comparability of financial statements, harmonization of accounting standards is advocated. Harmonization strives to increase the harmony between accounting principles by setting limits on the alternatives allowed for similar transactions. Harmonization differs from standardization in that the latter allows no room for alternatives even in cases where economic realities differ.

The international accounting standards (IASs) resulting from the harmonization efforts hold important benefits. Investors and analysts benefit from enhanced comparability of financial statements. Multinational corporations benefit from not having to prepare different reports for the different countries in which they operate. Stock exchanges benefit from the growth in the listings and volume of securities transactions. The international standards also benefit developing countries and other countries that do not have a national standard-setting body or do not want to spend scarce resources to undertake the full process of preparing accounting standards.

THE ROLE OF THE INTERNATIONAL ACCOUNTING STANDARDS BOARD

The most important driving force in the development of IASs is the International Accounting Standards Board (IASB), an independent, privately funded accounting standard-setter based in London, United Kingdom. The IASB, established in 2001, is committed to developing a single set of high-quality, understandable and enforceable global accounting standards that require transparent and comparable information in general-purpose financial statements. Standards issued by the IASB are designated International Financial Reporting Standards (IFRSs). Standards issued by its predecessor, the International Accounting Standards Committee (IASC), from 1973 to 2001, continue to be designated IASs. Many published sources use the term IFRSs to encompass IFRSs, IASs and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC).

MEMBERSHIP

The IASB, consisting of fourteen members (12 full time and 2 part time), follows due process of setting accounting standards, which allows for a great deal of consultation and discussion and ensures that all interested parties can express their views at several points in the standard-setting process. The final standard requires approval by at least eight members. The IASB uses a principle-based approach rather than a rules-based approach in issuing accounting standards. IFRSs thus provide guidance for applying the general principles to typical transactions and encourage professional judgment in applying them to transactions specific to an entity or industry.

The IASB members are selected by the trustees of the IASC Foundation. In addition to reviewing broad strategic issues affecting accounting standards, the trustees raise funds for the IASB and also appoint members to two other committees, IFRIC and the Standards Advisory Council (SAC). IFRIC interprets the application of IFRSs and provides guidance on financial reporting issues not specifically addressed by the IFRSs. The SAC has forty-nine members with diverse geographic and functional backgrounds who provide advice to the IASB and the trustees of the IASC Foundation. The chair of the IASB is also the chair of the SAC.

STANDARDS ISSUED

As of December 31, 2005, forty-one IASs and five IFRSs had been issued. They cover a wide range of topics such as inventories, depreciation, research and development costs, income taxes, segment reporting, leases, business combinations, investments, earnings per share, interim financial reporting, intangible assets, employee benefits, impairment of assets, contingent liabilities, financial instruments, investment property, and agriculture. Of the forty-one IASs, only thirty-one were already in force, the remaining being withdrawn or replaced by later standards. The IASB also added to its agenda a project to jointly develop with the Financial Accounting Standards Board of the United States a single conceptual framework that converges and improves upon the existing frameworks of both boards.

RELATIONSHIPS WITH OTHER STANDARD-SETTERS

In addition to issuing accounting standards, the IASB cooperates with national accounting standard-setters to achieve convergence in accounting standards around the world. Seven of the full-time members of the IASB have formal liaison responsibilities with leading national accounting standard-setters (in Australia, Canada, Germany, France, Japan, the United Kingdom, and the United States) and are resident in their jurisdiction.

IFRSs are not mandatory. Their acceptability, however, has been on the rise—more than ninety countries claimed that they would be following IFRSs by 2005. Many stock exchanges accept IFRSs for cross-border listing purposes. The International Organization of Securities Commissions (IOSCO), an organization comprising of securities regulators from over 100 countries, has recommended that all its members allow multinational issuers to use IFRSs, as supplemented by reconciliation, disclosure, and interpretation where necessary to address outstanding substantive issues at a national or regional level. Notably, some countries that do not permit the use of IFRSs without a reconciliation to domestic generally accepted accounting principles (GAAP) are Canada, Japan, and the United States. In September 2004 the chief accountant of the U.S. Securities and Exchange Commission (SEC) stated at an IASB meeting that the SEC was considering the steps needed to eliminate the reconciliation from IFRSs to U.S. GAAP.

OTHER ORGANIZATIONS PARTICIPATING IN INTERNATIONAL STANDARDS

Many other organizations have also played an important role in the march toward IASs. Among the more important are:

International Federation of Accountants

The International Federation of Accountants (IFAC) is a worldwide association formed in 1977 to develop the accounting profession, harmonize the auditing practices, and reduce differences in the requirements to qualify as professional accountants in its member countries. In 2005 it had a membership of 163 national professional organizations in 120 countries, representing over 2.5 million accountants. The IFAC issues international standards on auditing and assurance services, education, public-sector accounting, quality-control standards, and ethics. In June 1999 the IFAC launched the International Forum on Accountancy Development to promote transparent financial reporting.

United Nations

Several organizations within United Nations have been involved in the IASs. Its Group of Experts published in 1976 a four-part report titled "International Standards of Accounting and Reporting for Transnational Corporations," which listed financial and nonfinancial items that should be disclosed by multinational corporations to host governments. Since then, it has worked to promote the harmonization of accounting standards by discussing and supporting best practices in a variety of areas, including environmental disclosures.

Organization for Economic Cooperation and Development

The Organization for Economic Cooperation and Development (OECD), which was formed in 1960, had thirty of the world's developed, industrialized countries as its members in 2005. A valuable contribution of the OECD is its surveys of accounting practices in member countries and its assessment of the diversity or conformity of such practices. Its Working Group on Accounting Standards supports efforts by regional, national, and international bodies promoting accounting harmonization. In 2004 OECD revised its Principles of Corporate Governance, which support the development of high-quality, internationally recognized standards to improve the comparability of information between countries.

European Union

The European Union (EU), a powerful regional alliance of twenty-five nations, aims to bring about a common market that allows free mobility of people, capital, and goods between member countries. To promote the cross-country economic integration, the EU has made significant progress in the harmonization of laws and regulations. Its commission establishes standardization and harmonization of corporate and accounting rules through the issuance of directives.

Directives incorporate uniform rules (to be implemented exactly in all member states), minimum rules (that may be strengthened by individual governments), and alternative rules (from which members can choose). Directives are mandatory in that each member country has the obligation to incorporate them into its respective national laws. Each country, however, is free to choose the form and method of implementation and also to add or delete options. During the 1990s it was decided not to issue any more accounting-related directives. Instead, beginning in 2005 the EU adopted a regulation that required all publicly listed companies to prepare consolidated financial statements using IFRSs.

North American Free Trade Agreement

The North American Free Trade Agreement (NAFTA) was formed in 1993 between Canada, Mexico, and the United States to create a common market. It phased out duties on most goods and services and promotes free movement of professionals, including accountants, within the three countries. Projects were under way to analyze the similarities and differences between financial reporting and accounting standards of the member countries of NAFTA.

Other Organizations

Some regional organizations—such as the Association of Southeast Asian Nations, Community of Sovereign States, Economic Cooperation Organization, Baltic Council, Asia Pacific Economic Cooperation, Confederation of Asian and Pacific Accountants, and Nordic Federation of Accountants—have made efforts toward harmonizing accounting and disclosure standards. G4—a group of standard-setting bodies in Australia, Canada, the United Kingdom, and the United States—has also started playing an important role in the harmonization of IASs.

PROGRESS FOR INTERNATIONAL STANDARDS

The process of harmonized IASs has come a long way on a rough path. While some critics doubt the feasibility of such standards, it is becoming increasingly clear that the question is not whether but when the IASs will gain worldwide acceptance. The likely endorsement by the IOSCO and the SEC will bring that time closer.

see also Accounting; International Federation of Accountants

bibliography

Doupnik, Timothy S., and Perera, Hector (2005). International accounting. New York: McGraw-Hill/Irwin.

International Accounting Standards Board. http://www.iasb.org

McGregor, Warren (1999, June). An insider's view of the current state and future direction of international accounting standard setting. Accounting Horizons, 13, 159–168.

Pactor, Paul (1998, July). International accounting standards: The world's standards by 2002. The CPA Journal, pp. 14–21.

Zeff, Stephen A. (1998, Fall). The IASC's core standards: What will the SEC do? Journal of Financial Statement Analysis, pp. 67–78.

Zeff, Stephen A. (2002). Political lobbying on proposed standards: A challenge to the IASB. Accounting Horizons, 1, 43–54.

Mahendra Gujarathi