Wolk 9e Instructor Materials 10.pdf - Chapter 10...

Chapter 10: International Accounting Instructor’s Manual
Accounting Theory (9
th
edition) Page 1 of 13
C
HAPTER
H
IGHLIGHTS
Chapter 10 examines the standard-setting process in other English-speaking countries, and the
attempt to achieve international harmonization, convergence, or equivalence (whatever the term
du jour is) of accounting standards. There are subtle differences between the terms, but in
practice they are increasingly used as having similar meanings.
The chapter covers several pre-IFRS approaches to accounting. Students may question why we
consider pre-IFRS; this lays the foundation for why variance from strict IFRS may occur. After
adopting IFRS, the countries’ historical accounting approaches may affect how IFRS may be
interpreted and comparability across countries may be affected.
The Anglo-Saxon (also called the Anglo-American) and the continental approaches to
accounting reflect some marked cultural differences within Western civilization. The Anglo-
Saxon approach is grounded in strong equity capital markets and a strong accounting profession
with accounting rule making usually centered in a quasi-private organization. For continental
countries debt financing through major banks has been far more important than the use of equity
capital though this is beginning to undergo change. In addition, the accounting profession has
not been especially strong in continental countries and accounting rules have been determined by
law.
The formation of the European Union (EU) brought changes to this picture, first by the issuance
of several directives that attempted to bring about harmonization of accounting to EU members.
However, in 2005 all countries within the EU began using International Accounting Standards
Board (IASB) standards for consolidated financial statements. EU standards are also allowed for
financial reporting on the New York Stock Exchange without the need for reconciling to United
States GAAP. The latter has come about as a result of an attempt to bring about “convergence,”
a moving together between IASB standards and U.S. GAAP. This EU adoption gave legitimacy
to the IASB as a global standards setter; it is now on equal ground with the FASB. For years, the
U.S. was relatively passive about international standards with little need to go beyond U.S.
GAAP. Without a doubt, U.S. GAAP provided the most developed and most broad set of
standards in the world for the last century. However, the corporate accounting and auditing
scandals left everyone reeling in the early 2000s. Hence, following directives from the SEC and
Congress, the FASB’s newfound interest in convergence with IFRS blossomed.
The IASB-FASB convergence projects started with the Norwalk Agreement of 2002 and are
reaffirmed in the annual Memorandum of Understanding. The projects are both short-term and
long-term in nature. The short-term projects are intended to remove numerous individual
differences in standards between IFRS and US GAAP. The long-term projects include those
areas where accounting guidance will be improved (e.g., share-based payments, revenue