Ian P. N. Hague York University

InternationalInternational Convergence in international accounting standards and consequences for Canadian standard setting

Ian P. N. HagueYork University

ObjectivesObjectivesDiversity in environments -> diversity of accountingAccounting differencesNational & international standard setting processesCurrent developments

Ian P.N. Hague York University

Approaches to International Approaches to International AccountingAccounting

World accounting - one best way

International accounting - legitimate ways by country

Entity accounting - differences between parts of entity in different jurisdictions


International AccountingInternational AccountingEnvironmental Factors [Environmental Factors [Choi & Mueller, 1992]Choi & Mueller, 1992]

Legal systemPolitical systemNature of business ownershipSize and complexity of organizationsSocial climateSophistication of preparers & users


International AccountingInternational AccountingEnvironmental Factors [Environmental Factors [Choi & Mueller, 1992]Choi & Mueller, 1992]

Legislative interferenceAccounting legislationSpeed of business innovationStage of economic developmentGrowth stage of economyStatus of professional education and organization


Classification of accounting Classification of accounting systemssystems [Mueller, 1968] [Mueller, 1968]

U.S. / Canada / NetherlandsBritish Commonwealth (excl. Canada)

Germany / JapanContinental EuropeScandinavia


Classification of accounting Classification of accounting systemssystems [Mueller, 1968] [Mueller, 1968]

Israel / MexicoSouth AmericaDeveloping nations of Near and Far EastAfrica (except South Africa)

Communist nationsGroups changing now


Classification of accounting Classification of accounting systems systems [Mueller, Gernon & Meek, 1991][Mueller, Gernon & Meek, 1991]

British American

Continental European

South American

+ Islamic & Communistic


Balance Sheet SimilaritiesBalance Sheet SimilaritiesHistorical costCurrent / non-current classificationInventory flow and valuation assumptionsAsset write downs for depreciationOperating leases v capital leases


Balance Sheet SimilaritiesBalance Sheet SimilaritiesMark-to-market/revaluation

Generally conservativeBut may wait for realizationSome upward revaluation

Goodwill - many different methods

Owners equity and reservesMany differences within the

basicsIan P.N. Hague York University

Balance Sheet DifferencesBalance Sheet Differences

Financial instrumentsImpairment lossesProvisionsEmployee benefit liabilitiesIncome taxesBusiness combinations


Income StatementIncome StatementObjectives:

fair presentation (Canada & U.S.)taxable income (Germany)distributable income (Japan)

Operating v ExtraordinaryChanges in accounting principlesPerformance statement


Performance StatementPerformance StatementOperating / Business xx

Financing / Treasury xx

Net Income xx ?Other gains and losses xx

Total Performance xx__________________________________

Delete other?

Separately classify re-measurements?


Consolidation/Joint VenturesConsolidation/Joint Ventures

Different concepts of control

Different extents to which consolidation required

Parent company reporting

Different bases for joint ventures


Foreign Currency TranslationForeign Currency Translation

Current methodCurrent / non-current methodsMonetary / non-monetary methodsTemporal method

Convenience translation v revision of underlying GAAP


Accounting Standards TodayAccounting Standards Today

Canada - Canadian GAAP

US - US GAAP

Rest of world - National or IASB

GAAP (+ some US GAAP)

Is this the most useful information?


High quality financial

reporting is essential to an

efficient capital market


Convergence - Why?Convergence - Why?

Capital Markets:

Greater transparency Less uncertainty

Reduced cost of capital

Also: reduced costs of compliance


What is Convergence?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 convergenceusing all reasonable efforts to arrive at consensus


Convergence - What?Convergence - What?

One set of high quality standards

comprehensive standards

leading to comparable and

transparent reporting

rigorously interpreted and applied


The PlayersThe Players

IOSCO (including OSC and SEC)

Standard setters (including IASB,

FASB and AcSB)

Investors, preparers, etc.


IASCIASCEstablished 1973

Early role - “easy” standards, many alternatives - codify practice

1989 - improvements project

Since 1995: IOSCO agreement

2001: Restructured as IASBIan P.N. Hague York University

IASC / IOSCO AgreementIASC / IOSCO Agreement

“Core” standards by 1998

to be considered by IOSCO for

acceptance for cross-border

listings


IASC / IOSCO AgreementIASC / IOSCO Agreement“Core” standards by 1998

Income taxesEarnings per shareSegmentsPresentation of F/SDiscontinuing operationsInterim reportingInvestment property

Intangible assetsEmployee benefitsProvisionsLeasesImpairmentPost B/S eventsFinancial instruments


IASB Standards TodayIASB Standards Today

41 Standards

Interpretations programme

Similar concepts & style to Canada

Handbook Section 1501 analyzes differences


IASC Old StructureIASC Old StructureIASC Board - approves Standards

Standing Interpretations Committee - develops Interpretations

Advisory Council - oversight, policy, and fund raising

Consultative Group - link to non-accounting bodies


IASC Board - old structureIASC Board - old structure16 Members

AustraliaCanadaFranceGermanyIndia / Sri LankaJapanMalaysiaMexico

NetherlandsNordicS. Africa/ZimbabweSwiss IndustrialsU.K.U.S.A.F.E.I. (Preparers)Analysts


Concerns about old structureConcerns about old structure

Key attributes should be

Independent

Open

Technically expert

Result: High quality standards


IASB New StructureIASB New Structure

Full - time Board members

Link to national standard

setters

Independent trustees


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)

Standards Advisory Council (SAC)(advises Board)

Trustees (19)(appoint Board, IFRIC and SAC)

(6 North America, 6 Europe, 4 Asia/Pacific, 3 Other)

National standard setters (Australia/NZ, Canada, France, Germany, Japan, UK, US.)

IASBNew Structure


IOSCO Endorsement IOSCO Endorsement Recommendation to allow use of IASC 2000 standards for cross-border offerings and listingsSupplemental treatments to address outstanding substantive issues

limited reconciliationsadditional disclosureslimits on choice of alternatives


EuropeEurope

2005: All public companies follow IAS for consolidated accounts

Those using US GAAP allowed until 2007

Also Australia


IASB - IASB - Relevance to Canada?Relevance to Canada?1. IASB liaison role

partnership with national standard setters to promote convergence of national and international standardsalign agendas as far as possiblekey communication link with national board and constituentsregular meetings of liaison members and national board chairs


IASB - IASB - Relevance to Canada?Relevance to Canada?2. IOSCO responsibilities - questions

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?


More Questions!More Questions!

Confusion in the Canadian market?

Unlevel playing field?

Infrastructure?

Interest in pursuing the issues?


What Next?What Next?SEC Concepts release issued 2000

CSA Discussion paper - March 16, 2001

Continuous Disclosure proposals – 2002

(see www.osc.gov.on.ca)

Likely to be some allowance of US GAAP in Canada.

Maybe some allowance of IAS in US?


Canadian Standard Setting?Canadian Standard Setting?

International harmonization –

but with who?

U.S.?

IASC?

TFOSS v CGA Canada


AcSB Harmonization PolicyAcSB Harmonization PolicyHarmonization with US – eliminate

significant unjustifiable differences

Global convergence with highest

quality US and international

standards –improvements to existing

standards and development of new

standards


AcSB PrioritiesAcSB PrioritiesConvergenceConvergence

Share-based payments

Impairment, disposals, discops.

Asset retirement obligations

Financial instruments incl. hedging

Business combinations – phase II

Reporting financial performance


Other projects in the AcSB pipelineOther projects in the AcSB pipelineOil and gas guidelineRate-regulated operations ConsolidationsInsurance contractsIntangible assets - disclosureLiabilities and equityRevenue / Liability recognition


Other AcSB PrioritiesOther AcSB Priorities

Differential reporting

Cash flow per share

GAAP


IASB Work ProgrammeIASB Work Programme

Convergence / Improvements – EDs 2003

Including employee benefits & joint ventures

Financial activities


IASB Research ProjectsIASB Research ProjectsAccounting measurements – impairment

Lease accounting

Intangibles (incl. R&D)

Small and medium sized enterprises

Financial instruments – further aspects

Extractive industries


SummarySummary

Considerable differences in different environments

To extent reflect environments are legitimate

Move to converge


Ian P. N. Hague York University

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