In our discussion of the regulatory framework for financial reporting, we saw that financial reporting requirements are commonly derived from statute law and accounting standards. In this section, we consider the development of an international standard setting body and the process of setting international accounting and auditing standards.
Background
The development of international accounting standards began formally with the formation of the International Accounting Standards Committee (IASC) in London in 1973. The committee comprised representatives of professional accounting bodies from nine countries (Australia, Canada, France, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, the United States and West Its aim was to develop accounting standards for the private sector suitable for use in countries throughout the world. Prior to 2005, International Accounting Standards (IAS) were influential in the following They were adopted for use in countries without a national standard setting structure; for example in Papua New Guinea and Indonesia. In other cases, they were used in the development of national standards, such as in Singapore and Hong Kong. IAS were also used voluntarily from the early in the consolidated accounts of companies from countries such as Switzerland and In these countries, national accounting reflected a stakeholder orientation arising from their code law legal framework and tax-based accounting systems. Companies used IAS to provide additional information for capital market participants in a more transparent and comparable format.
The members of the IASC hailed from countries with a range of accounting practices and different approaches to setting accounting standards. Early IASC standards often allowed a choice of accounting policy to include the preferences of various member nations. During the late 1380s the IASC began work on the Improvements Project, to improve the quality of IAS and remove many optional treatments. The IOSCO, a body representing securities regulators throughout the world, sought a set of standards which its members could use in cross-border listings. The revised standards were endorsed by IOSCO in 2000, albeit with the proviso that member countries could add further The latter provision reflected the position of the market regulator in the United States, the SEC. It did not intend to remove the US GAAP reconciliation requirements (the so-called Form 20-F) for companies using IASC standards and listing on the more-regulated United States exchanges (such as the NYSE, NASDAQ and
Although use of IAS throughout the world was increasing, further acceptance was limited by the fact the IASC was not an independent standard setting board. Consequently, it was restructured in 2001 to create the International Accounting Standards Board (IASB), an independent board based on the structure of the Financial Accounting Standards Board (FASB) in the United States. The board comprised fourteen full-time members, chosen for their expertise and in professional accounting and standard setting. It was supported by dedicated technical staff, located in London. The IASC Foundation became the oversight body of the IASB and an interpretations committee was The formation of the saw the disbanding of the (a body comprising independent standard setters from Australia, Canada, New
the United Kingdom, the United States and the IASC), which was becoming influential in developing international standards. The IASB has responsibility for updating existing IAS (which still carry the label) and producing International Financial Reporting Standards (IFRS).
The importance of the activities of the IASB increased dramatically with the decision in 2002 by the European Commission (EC) to adopt IASB standards in 2005. The EC announced that all listed companies in European Union (EU) member countries would prepare consolidated accounts based on IASB standards. This fundamental change was an important step promoting the production of more transparent and comparable financial information by listed European companies. It was prompted by the goal of developing a single, unified capital market in Europe. The decision prompted a flurry of activity at the IASB and in EU member countries. First, the IASB was required to produce a 'stable platform' of standards by 1 March 2004, to be reviewed by the Accounting Regulatory Committee (ARC). The committee would recommend to the EC whether the standards should be endorsed for use in EU countries. Thus, the IASB had a heavy workload and tight timetable as it sought to finalise standards, including demanding and controversial projects such as accounting for financial instruments. Second, each EU member country had to prepare for adoption of international standards by considering how IFRS reporting would integrate with national reporting. For example, would parent company and private company accounts also use international standards or continue to use national GAAP? The setting up of independent national enforcement bodies, to promote compliance with international standards, was also Third, the accounting profession (including external auditors and public accountants) had to prepare for IFRS adoption. This involved technical training to acquaint themselves with standards, which in some cases were markedly different to existing national GAAP. Companies also faced many challenges. Personnel had to become technically proficient in the standards and companies had to revise accounting systems to record
information required by the new regime. In addition, they had to communicate with stakeholders such as investors and financiers about how IFRS adoption would on their financial statements.
The IASB and FASB convergence program
The work program of the IASB was further complicated by the announcement of the FASB convergence program, called the Agreement, in The FASB was formed in 1973 and is highly regarded throughout the world as a leading standard setter. The FASB has power delegated by the SEC to develop standards for financial reporting for listed companies. It has produced several accounting concept and a series of financial reporting standards focusing on providing high quality financial information which is useful for decision making. The use of international standards in the United States has been discussed at some groups, such as the stock exchanges, mounted arguments in favour of acceptance of IAS based financial statements, the SEC until 2007 maintained that reconciliation to US GAAP was necessary to ensure a 'level playing field'. The SEC issued a concept release in 2000 which outlined its views about desirable attributes of the financial reporting They include high-quality standards developed by an independent standard setting board, and compliance promoted by independent enforcement bodies. With the adoption of IAS in 2005 by many companies, pressure to allow the use of IAS without reconciliation from EU companies cross-listed in the United States) increased. In 2007, the SEC agreed to permit foreign registrants to file IFRS accounts with the SEC without the Form 20-F The SEC then began the process of considering whether domestic registrants be permitted to use IFRS instead of US there are some supporters for use of IFRS in the United States, de Lange and Howieson argue that political realities mean the US is unlikely to give up sovereignty over the setting of accounting
In the meantime, the convergence program has generated considerable work for both Boards. It complicated the process of producing the 'stable platform' of standard for 2005 as the IASB was working to this aim while at the same time considering the extent to which standards could be revised to converge with US GAAP. The convergence program requires the FASB and IASB to identify differences between their respective standards, to review available solutions and to adopt the better treatment. In practice, convergence is a complicated process. Some of the differences arise because of underlying differences between the two sets of standards. US GAAP have been described as rule-based standards while IAS aim to be
The greater involvement of the United States means that international standard setting (and, in turn, national standard setting) is now dominated by the FASB and IASB. The convergence process can only be a two-way dialogue between the FASB and IASB because of its inherent difficulties, which would increase if more parties were involved. However, the IASB has a policy of working with national standard setters on projects where they are able to contribute to the standard setting The current liaison standard setters are national standard setting bodies from Australia, France, Germany, Japan, New the United Kingdom and the United States. They participate in the work through research projects, project teams and joint projects. The IASB is dependent on the contribution of national standard setters, yet it is unclear the extent to which these bodies will influence the final decisions of the IASB. Since 2005 bodies from the EU (such as national standard setting boards and EFRAG) have become more vocal in the process of developing accounting standards. The IASB may see itself as the global standard setter, but for the EU it is their 'local neighbourhood standard Given that standards have economic consequences, there is vigorous debate
in Europe about the content of IASB standards and the direction of standard as discussed previously in this chapter in relation to financial instruments. Case study 3.3 provides an opportunity to consider a number of important developments relating to the adoption of international standards, which bring out key issues arising from use of common standards.