Topic 3: Harmonization and International Standards Flashcards
(36 cards)
What were the key problems with the ‘Roman law’ route to harmonization?
The EU Directive approach faced three major problems: 1) Compromises created options, omissions, and vague language, 2) Implementation was slow (some countries took over a decade), and 3) Once implemented, Directives became stuck in the past and difficult to update.
What was the ‘true and fair view’ concept and how did it spread?
The ‘true and fair view’ originated in the UK (Companies Act 1947) as an override principle allowing departure from rules if needed for fair presentation. The EU adopted it in the Fourth Directive, requiring translations like ‘image fidèle’ (French) and ‘ein den tatsächlichen Verhältnissen entsprechendes Bild’ (German).
How did the EU’s approach to harmonization change in the early 2000s?
In 2002, the EU shifted from Directives to an IFRS Regulation requiring all listed EU companies to use IFRS for consolidated statements from 2005. This represented a significant change in approach – from detailed legislation to adopting privately-developed standards.
What is the EU endorsement mechanism for IFRS?
Individual IFRS standards must be ‘endorsed’ by the European Commission before becoming part of EU law. This involves technical advice from EFRAG (European Financial Reporting Advisory Group) and approval by the Accounting Regulatory Committee and European Parliament.
What examples exist of EU modifications to IFRS?
The EU has occasionally modified IFRS through ‘carve-outs’ or delayed endorsement. Notable examples include parts of IAS 39 on financial instruments (the ‘fair value option’ and hedge accounting provisions), IFRIC 3 on emission rights, and aspects of IFRS 17 on insurance contracts.
What was the 2002 Norwalk Agreement and what did it aim to achieve?
The Norwalk Agreement between the FASB and IASB in 2002 committed both boards to developing high-quality, compatible standards and eliminating differences between IFRS and US GAAP. This formal convergence project aimed to create a single set of global standards.
How successful was the IFRS-US GAAP convergence project?
The convergence project achieved some successes (revenue recognition, business combinations, fair value measurement) but ultimately fell short of complete convergence. The SEC decided against mandatory IFRS adoption for US companies in 2012, maintaining separate systems.
What approaches have countries taken to IFRS adoption?
Countries have used various approaches: 1) Full adoption (Australia, EU for listed companies), 2) Convergence of national standards with IFRS (Japan, China), 3) Permission but not requirement (Japan), 4) Adoption with modifications (‘carve-outs’ in EU, ‘carve-ins’ in China), 5) Adoption for certain companies only (listed vs. unlisted).
What is the current global status of IFRS adoption?
As of 2024, over 140 jurisdictions require or permit IFRS for domestic listed companies. Major economies using IFRS include the EU, UK, Australia, Canada, and Russia. Major economies not using IFRS include the US, China (uses similar standards), and Japan (voluntary adoption).
What is the difference between harmonization and standardization?
Harmonization allows some differences while ensuring comparability, whereas standardization requires everyone to follow identical rules. Harmonization is more flexible, while standardization prioritizes complete uniformity.
What is the difference between de jure and de facto harmonization?
De jure harmonization refers to making laws and standards more similar across countries, while de facto harmonization refers to actual accounting practices becoming more similar. Research shows de jure harmonization doesn’t automatically lead to de facto harmonization.
What are the main parties interested in harmonization and why?
Key stakeholders include: investors (for cross-border comparability), multinational corporations (to reduce compliance costs), audit firms (for consistent methodology), stock exchanges (to attract listings), tax authorities (to address multinational taxation), and labor unions (for cross-border bargaining).
What were the two parallel paths to international harmonization?
Two paths developed: 1) The IASC/IASB route (international standards developed by professional accountants), and 2) The EU route (Directives implemented through national laws).
What was the IASC and how was it founded?
The International Accounting Standards Committee (IASC) was founded in 1973 by accountancy bodies from 9 countries. It developed International Accounting Standards (IAS) as voluntary global standards.
How did the IASC’s approach to standard-setting evolve over time?
Initially, IASC codified existing practice with many national options. From the late 1980s, it began reducing options and developing a conceptual framework.
What was the IASB and how did it differ from the IASC?
The International Accounting Standards Board (IASB) replaced the IASC in 2001 with a new structure and stronger funding. It developed International Financial Reporting Standards (IFRS) rather than IAS.
What were the key EU accounting Directives and their purposes?
The Fourth Directive harmonized formats and valuation rules; the Seventh Directive required consolidated reporting; and the Eighth Directive addressed audit requirements.
How successful were the EU Directives in harmonizing accounting?
The Directives achieved mixed success: they standardized formats and required consolidated statements and audit in countries that previously lacked them. However, measurement rules remained largely unharmonized.
What are ‘overt options’ in IFRS?
Overt options are explicit choices permitted in standards, visible in company reports. Examples include FIFO/weighted average for inventory, cost/fair value for PPE and investment property, direct/indirect cash flow, and interest/dividend classification choices. These reduce comparability despite common standards.
What are ‘covert options’ in IFRS?
Covert options arise from judgment areas in IFRS that aren’t intended as choices but allow different interpretations. Examples include materiality determinations, impairment indicators, development cost capitalization criteria, and control assessments for subsidiaries. These create less visible differences in practice.
What examples show how countries implement IFRS differently?
Research by Kvaal & Nobes (2010) identified national patterns: UK companies favor FIFO and fair value for investment properties; French companies prefer weighted average and cost model; UK presents net assets format while French use total assets; UK uses function of expense format while French use nature of expense.
What causes different IFRS implementation across countries?
Differences persist due to: 1) Path dependency (companies continuing previous national practices), 2) National enforcement mechanisms interpreting standards differently, 3) Tax influence seeping through from unconsolidated statements, 4) Different financing systems affecting information needs, 5) Cultural factors affecting judgment in principles-based standards.
Why do IFRS implementation differences matter?
Differences potentially undermine the comparability objective of IFRS adoption. Financial ratios may not be directly comparable across countries, creating challenges for cross-border investors and potentially distorting capital allocation. However, differences also allow adaptation to different institutional environments.
How have translation issues affected IFRS implementation?
Translation creates conceptual challenges - terms like ‘impairment’ are translated differently across languages (German ‘Wertminderung,’ French ‘dépréciation’). Chinese translates IAS 36 ‘impairment’ as ‘fall in value’ but paragraph 6 uses ‘damage.’ These differences can affect interpretation and application.
