Chap003 - Chapter 03 - International Convergence of...

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Chapter 03 - International Convergence of Financial Reporting CHAPTER 3 INTERNATIONAL CONVERGENCE OF FINANCIAL REPORTING Answers to Questions 1. The ultimate goal of both harmonization and convergence is to achieve international comparability in financial reporting, and both are processes that take place over time. However, while harmonization refers to the reduction of alternative accounting practices in different countries, convergence refers to the process of developing a set of high quality financial reporting standards for use internationally (the process of global standard setting). Until the establishment of the IASB in 2001, the main objective of the IASC was to achieve international harmonization in accounting standards. Accordingly, the focus was to achieve consensus among different countries with regard to accounting standards. In this process different countries were allowed to have different accounting standards as long as they did not conflict, for example, the harmonization program of the European Union. On the other hand, convergence implies the adoption of one set of standards internationally. 2. The potential benefits for a multinational corporation from convergence of financial reporting standards are derived mainly as a result of international comparability of financial reporting standards and practices. Examples of such benefits include: reduction of financial reporting costs for multinational corporations that seek to list their stocks on foreign stock exchanges; reduction of cost of preparing worldwide consolidated financial statements; and ability to transfer accounting staff to other subsidiaries overseas more easily. 3. The EU Directives were not completely effective in generating comparability across EU member nations because the Directives: a. allowed countries to choose among available options in many areas and b. did not cover many accounting issues, such as leases and translation of foreign currency financial statements. 4. The three phases in the life of the IASC were: a. 1973-1988 – lowest common denominator approach to standard setting b. 1988-1993 – reduction of existing options in IASs through the Comparability of Financial Statements Project c. 1993-2001 – development of core set of standards under the IOSCO Agreement 5. IOSCO’s endorsement of IASs legitimized the IASC’s claim as “the” international accounting standard setter. This also helped in addressing, at least partly, the problem of IASC’s lack of enforcement power. 3-1
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Chapter 03 - International Convergence of Financial Reporting 6. Twelve of 14 members of the IASB are full-time. They are required to sever all ties to former employers to establish their independence. The most important criterion for selection of IASB members is technical competence. These aspects of the Board’s structure confirm the IASB’s commitment to develop the highest quality standards possible. In addition, the IASB follows an open process in which constituents are able to provide input and feedback
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This note was uploaded on 05/15/2011 for the course ACCT 221 taught by Professor Fe during the Spring '11 term at Abu Dhabi University.

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Chap003 - Chapter 03 - International Convergence of...

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