Module 8 Flashcards
(16 cards)
International Accounting Standards
- Issued by the International Accounting Standards Board (IASB)
- Called International Financial Reporting Standards (IFRS)
- SEC accepts IFRS for foreign companies that issue securities in US markets.
- Generally similar to FASB standards for U.S. GAAP, but more principles-based rather than rules-based. Convergence in process.
The U.S. FASB is working with the IASB on a convergence project in an attempt to make the U.S. GAAP more like the international standards.
International Auditing/Assurance Standards
- Issued by the International Auditing & Assurance Standards Board (IAASB) – part of the International Federation of Accountants (IFAC).
- Standards do NOT override country standards
- Generally similar to AICPA & PCAOB standards, but more principles-based rather than rule-based. Convergence in process.
Just like the FASB for accounting principles, U.S. auditing standard setters are also working to make them closer to the international auditing standards.
Topic 8.1: International Standards
- Issued by the International Ethics Standards Board for Accountants (IESBA) – part of the International Federation of Accountants (IFAC)
- Entitled the Code of Ethics for Professional Accountants.
- Very similar to the AICPA Code with fewer specific prohibitions regarding independence (so more principles-based rather than rules-based). (more later)
International accounting, auditing and ethical standards for accountants and auditors are generally less detailed than U.S. standards and more principles-oriented with significantly more professional judgment needed for compliance.
Difficulties
Rules-based:
- Often provides users a way of avoiding the intended rules.
Principle-based:
- Enforcement difficulties arise since little guidance exist on specific standards.
So, more use of ethical decision-making needed to interpret and apply the standards when standards are principles oriented.
SEC
SEC recommends standards generally following the principles-based approach but with the following characteristics:
- Based on improved and consistently applied conceptual framework
- Clearly state the accounting objective of the standard
- Provide sufficient detail and structure
- Minimize exceptions
- Avoid use of “bright-line” test
Objectives-Oriented Standards
- SEC’s favored approach.
- Greater responsibility for managers and auditors in applying standards.
- Cross between rules and principles-based approaches.
The SEC wants clear guiding principles, but with some of the details of rules-based standards for accounting and financial reporting. The SEC wants a clear objective to be “fair presentation” in financial reporting.
Accounting for Leases
Principles-based
- Emphasizing economic substance over legal form.
- If substance of transaction is effectively to transfer ownership to the lessee, then it’s capitalized.
- Drawback: Could lead to a lack of comparability among companies due to subjectivity.
Rules-based
- Form over substance with 4 lease agreement criteria for being a capital lease.
- If any 1 of 4 lease criteria are met, then must be capitalized.
- Drawback: Relies on implementation guidance which can be manipulated and terms of the lease agreement.
Both approaches do provide opportunities for manipulations, esp. when side agreements can be reached between the lessor and the leasee.
Valuation and Recording of PP&E
Principles-based
- Generic and considerably ambiguous.
- Drawback: lack of precise guidelines could create inconsistencies across organizations.
- Fair value estimates can be used.
- Cost or revaluation method can be used.
- Quantitative approach - application depends on the professional judgment of decision maker.
Rules-based
- Bright-line guidelines to some extent in terms of initial valuation.
- Reasonable person standard applies only to recording an impairment - somewhat subjective.
Different Approaches to Implementing IFRS
- Critical to monitor quality and robustness of converting to IFRS.
- A need for assurance that decisions are being made that are in the public’s best interest.
- Under IFRS 1: First-time Adoption of International Financial Reporting Standards
- Any restatement is usually viewed as negative by investors and regulators.
- Audit committees must assess this risk effectively.
- There will likely be a challenge in meeting stakeholder expectations given the changed reporting results.
Varying concepts on corporate governance international can result in different approaches to implementing IFRS. For example, will a liberal or conservative approach be taken to deciding if financial statement restatements will be made for comparative financial statements.
Organization of Economic Cooperation & Development
- OECD Principles of Corporate Governance serve as international benchmarks for policy makers, investors, corporations, and other stakeholders.
- Provide basis for extensive program of cooperation between OECD and non-OECD countries and basis for standards from the World Bank and the International Monetary Fund (lenders).
- Emphasis is on protecting the public interest against inappropriate behavior by top management.
OECD currently 34 members primarily from European countries and the U.S.
International Ethics Standards Board for Accountants (IESBA)
- Established by IFAC to develop and issue high quality ethical standards for professional accountants
- Issued Code of Ethics for Professional Accountants (IFAC Code)
Similarities between IFAC Code and AICPA Code
- Act in accordance with public interest.
- Identify threats to independence and develop safeguards to mitigate.
- Independence in mind.
- Independence in appearance.
- Adhere to standards related to integrity, objectivity, professional competence and due care, confidentiality, and professional behavior.
There are a number of similarities between the IFAC Code and the AICPA Code, especially in the overall principles and rules.
AICPA vs. IFAC Codes
AICPA Code
- Primarily rules-based with a conceptual framework for situations not covered by the rules.
IFAC Code
- Conceptual framework approach with only some specific prohibitions.
- Accountant should consider relevant facts, ethical issues involved, fundamental principles related to matter, established internal procedures, and alternative courses of action AND weigh the consequences of each possible course of action (risky?).
- Has separate sections for those in public practice and in business.
As you can see, the AICPA Code is more rules-based, like U.S. GAAP, while the IFAC Code is more principles-based like international accounting standards. Weighing the consequences of each possible course of action can create risks that the accountant or auditor will consider self interest in choosing among alternatives.
IFAC’s Code Exceeds AICPA’s Code in Some Aspects
- Adds independence restrictions for listed and regulated entities (public entities).
- More limits on finance & tax advisory services.
- Gifts can only be trivial and inconsequential, whereas the AICPA code has reasonable under the circumstances.
- More documentation required on analysis of threats to independence (even when safeguards are deemed as unnecessary).
Other International Ethics Codes
For Chartered Global Management Accountants:
- Certificate being pushed by AICPA.
- From the Chartered Institute Of Management Accountants (CIMA) based in the U.K.
- Based On IFAC’s IESBA Code.
Financial Executives International Code of Ethics:
- One-page long.
- More of a statement of overall guiding principles
International Audit Report
- Reference to IFRS versus GAAP in the U.S..
- Overall opinion to be couched in the words “present fairly” like the U.S. or more often a “true and fair view” in accordance with IFRS.
- Separate paragraph for entities required by law to report on compliance with legal and regulatory requirements.
In the U.S., auditors are to do some testing for noncompliance, but results are not reported unless a material misstatement is found and the client refuses to take corrective action and adjust the financial statements.
True & Fair View vs Present Fairly
- IFAC Code: both terms have same meaning.
- Some in US believe they convey different meaning and level of assurance to investors and creditors being lower with True & Fair View.
- Distinction may be blurred with move to IFRS.
