Question

Required Reading:

Chapter 1 of the textbook INCLUDING the IFRS Insights (pages 29-34)

IFRS Adoption by country (https://www.pwc.com/us/en/cfodirect/assets/pdf/pwc-ifrs-by-country-2016.pdf)

1.      What are IFRS? (1 pt.)

2.      What does the IASB do? (1 pt.)

3.      What accounting methods/versions are used by Mexico, Bolivia, Germany, Macedonia, China, and Republic of Congo? (1 pt.)

4.      What are the advantages of converting to IFRS? (1 pt.)

5.      Who are the key players in the U.S. regarding the development and adoption of IFRS? (1 pt.)

6.      Discuss three benefits of a single set of high-quality accounting standards. (1 pt.)

7.      Discuss the difference between a principles-oriented approach and a rules-oriented approach to developing financial accounting standards; which standards-setting board uses which approach? (2 pts.)

8.      Give two examples of specific differences between IFRS and U.S. GAAP. (1 pt.)

9.      Briefly indicate several reasons why it is important to learn about IFRS. (2 pts.)

Answer 1

1. IFRS: International Financial Reporting Standards (IFRS) are a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements.

2. The International Accounting Standards Board (IASB) is an independent, private-sector body that develops and approves International Financial Reporting Standards (IFRSs). The IASB operates under the oversight of the IFRS Foundation.

3. Accounting Methods/Versions:

Country	Versions of IFRS
Mexico	IFRS as published by the IASB
Bolivia	No
Germany	IFRS as adopted by the EU
Macedonia	IFRS as adopted locally
China	China has adopted national accounting standards that are substantially converged with IFRSs
Republic of Congo	N/A

4. Advantages of converting to IFRS:By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier. Furthermore, companies with subsidiaries in countries that require or permit IFRS may be able to use one accounting language company-wide. Companies also may need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS, or if they have a foreign investor that must use IFRS. Companies may also benefit by using IFRS if they wish to raise capital abroad.  

5. The key players are the Securities and Exchange Commission, which is responsible for the supervision and regulation of the securities industry and has oversight responsibility for the FASB; the Financial Accounting Standards Board, an independent body that establishes and interprets U.S. GAAP; and the IASB, which is working with the FASB on the convergence of U.S. GAAP and IFRS. The AICPA has provided thought leadership to the IASB and the FASB on financial reporting topics.

6. Benefits of a Single set of high-quality accounting standards:

1. Comparability: The biggest advantage of a single set of global accounting standards is the enhancement in comparability between companies in different countries. Currently, accounting standards can differ greatly between countries. Before an investor can compare two potential investments, she must reconcile the two companies to the same basis of accounting. The problem is similar for creditors: When evaluating a company's creditworthiness, differences in accounting standards can make two companies that are in similar economic shape appear very different. Enacting a set of global accounting standards would put comparisons on equal footing, making it easier for small-business owners to evaluate international options for investment and cash management. Right now, many small-business owners do not have the resources to effectively compare international and domestic investment options. If financial statements were more comparable, owners would be able to complete more of these comparisons in house
2. International Expansion: Moving to a single set of global financial standards would also ease barriers to expansion for companies. If companies wish to expand overseas today, they need to consider international costs of compliance, which could mean adopting a completely new set of accounting records to meet statutory requirements in the new country. In some cases, this would nearly double the company's accounting costs. For many small businesses, even the large rewards of moving overseas are dwarfed by these expansion costs.
3. Central Authoritative Body: From a policy-making standpoint, moving to a single set of global standards puts rule making into the hands of one body. Currently, accounting standards are set within each country by each standard-setting body, as well as by an international group. One set of standards would reduce disagreement between countries and international regulators, and it might also cut costs. In some countries, businesses are required to pay reporting fees that go to fund these standard-setting bodies. While the costs may not affect large companies, they can have a huge impact on a small business. Moving to a central authoritative body could reduce these costs drastically

7. Difference Between Principal Oriented Approach and Rule Oriented Approach:

Principal Oriented Approach:

Principles-based accounting such as generally accepted accounting principles (GAAP) is used as a conceptual basis for accountants. A simple set of key objectives are set out to ensure good reporting. Common examples are provided as guidance and explain the objectives. Although some rules are unavoidable, the guidelines or rules set are not meant to be used for every situation. The fundamental advantage of principles-based accounting is that its broad guidelines can be practical for a variety of circumstances. Precise requirements can sometimes compel managers to manipulate the statements to fit what is compulsory. The problem with principles-based guidelines is that lack of guidelines can produce unreliable and inconsistent information that makes it difficult to compare one organization to another.

Rule Oriented Approach:

Rules-based accounting is basically a list of detailed rules that must be followed when preparing financial statements. Many accountants favor the prospect of using rules-based standards, because in the absence of rules they could be brought to court if their judgments of the financial statements were incorrect. When there are strict rules that need to be followed, the possibility of lawsuits is diminished. Having a set of rules can increase accuracy and reduce the ambiguity that can trigger aggressive reporting decisions by management. The complexity of rules, however, can cause unnecessary complexity in the preparation of financial statements.

Which standards-setting board uses which approach:

Principal Based Approach: International Accounting Standards Board (IASB)

Rule Based Approach: Sarbanes-Oxley Act of 2002

8. Specific Difference Between IFRS and U.S.GAAP:

IFRS	U.S.GAAP
Does not Permit Last In, First Out (LIFO)	It Permit (LIFO)
IFRS uses a single-step method for impairment write-down	U.S.GAAP uses a two-step method for impairment write-down