1.6 International Accounting Issues

Divergent national accounting practices around the world can have an extremely significant impact on reported financial statements. With the increasing integration of the worldwide economy, these accounting differences have become impossible to ignore. For example, to raise debt or equity capital, many non-U.S. firms, such as Sony, British Petroleum, and Nokia, list their securities on U.S. exchanges and borrow from U.S. financial institutions. As of March 2019, over 500 non-U.S. share issues (from more than 45 countries) were trading on the New York Stock Exchange (NYSE).

The international nature of business requires companies to be able to make their financial statements understandable to users all over the world. The significant differences in accounting standards that exist throughout the world complicate both the preparation of financial statements and the understanding of these financial statements by users.

International Differences in GAAP

As will be noted throughout this text, there are some differences between U.S. GAAP and GAAP of other countries. The good news is that the fundamental concepts underlying accounting practice are the same around the world. As a result, a solid understanding of U.S. GAAP will allow you to quickly grasp the variations that exist in different countries. Throughout this book, we will include specific coverage of the areas in which significant differences exist in accounting practices around the world.

International Accounting Standards Board

Just as the FASB establishes accounting standards for U.S. entities, other countries have their own standard-setting bodies. In an attempt to harmonize conflicting standards, the International Accounting Standards Board (IASB) was formed in 1973 to develop worldwide accounting standards. Like the FASB, the IASB develops proposals, circulates these among interested organizations, receives feedback, and then issues a final pronouncement. The 14 board members of the IASB come from many countries and represent a variety of professional backgrounds.1

As of March 2019, the 14 board members included individuals from the Netherlands, the United States, the United Kingdom, France, New Zealand, China, Australia, South Africa, Brazil, Germany, Korea, Canada, and Japan. Most of the board members are CPAs with audit experience, but in May 2010 the IASB also included a financial analyst and several people with national regulatory experience. While most of the IASB board members have accounting backgrounds, being a CPA is not a requirement for membership. Rather, the board seeks to maintain a wide representation of both technical expertise and international business experience.

The accounting standards produced by the IASB are referred to as International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS). The difference between these two sets of standards is merely one of timing; the IASB standards issued before 2001 are called IAS and those issued since 2001 are called IFRS. In practice, the entire body of IASB standards is referred to simply as IFRS. The international counterpart of the FASB’s Emerging Issues Task Force (EITF) is called the International Financial Reporting Interpretations Committee (IFRIC), which was called the Standing Interpretations Committee (SIC) before 2002.

IFRSs are envisioned by many to be a set of standards that can be used by all companies regardless of where they are based. In fact, as IASB standards have gained widespread acceptance through the world, they have supplemented or even replaced standards set by national standard setters. As mentioned earlier, in 2008 the SEC began allowing non-U.S. companies with shares trading on U.S. stock exchanges to issue their financial reports using IASB standards. Before this change, all non-U.S. companies wishing to have their shares traded in the United States were required to provide financial statements in accordance with U.S. GAAP. Historically, financial disclosure requirements in the United States have been the strictest in the world, and foreign companies had been reluctant to provide the U.S. GAAP disclosures. Since the SEC rule change, the number of non-U.S. companies listed on U.S. stock exchanges has increased dramatically. Up to this point, however, U.S. regulators have not embraced the use of IFRS for U.S. based companies and continue to require U.S. GAAP for their financial reporting.

Historically, the relationship between the IASB and the FASB has been mostly positive and has included a few periods of close cooperation. In 2002, the IASB and the FASB entered into a joint agreement, called the Norwalk Agreement, in which they pledged to work together to develop a set of “fully compatible” accounting standards as soon as possible, and to continue to work together to make sure that those standards stay compatible. This agreement was confirmed and expanded in an FASB/IASB Memorandum of Understanding updated in 2008. For a time, a complete merging of the two sets of standards (often referred to as convergence) seemed almost inevitable. Recently, however, the relationship between the IASB and the FASB has become more distant. While they have worked together in recent years to develop joint standards (ASU 2014-09, Revenue from Contracts with Customers and IAS 18 Revenue) and to harmonize existing differences between U.S. GAAP and IFRS, complete adoption of or convergence with international standards by the U.S. appears to be unlikely in the foreseeable future. In July 2012, the SEC staff issued a report on the issue and concluded that the adoption of IFRS wasn’t feasible due to 1) the need for the U.S. to maintain a significant influence on the standard setting process 2) the cost burden required of companies to convert to IFRS, and 3) the prohibitive effort required to revise the extensive references to U.S. GAAP “embedded throughout laws and regulations and in a significant number of private contracts” (Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers, Final Staff Report, July 13, 2012). Currently, the IASB and FASB monitor each other’s standard-setting efforts and seek to find common ground where reasonable. However, there are no current plans for significant joint standards.

In order to prepare you for a professional world in which both FASB and IASB standards will be used, both sets of standards will be covered in this textbook. The focus will be on FASB standards, but you will also receive comprehensive exposure to the IASB standards in each major topic area throughout the chapters of the text. In addition, Chapter 22 contains capstone coverage of International Accounting Standards.