A Multi-Issue/Multi-Period Analysis of the Geographic Diversity of IASB Comment Letter Participation

The International Accounting Standards Board (IASB) establishes accounting standards now used in some form in over 100 countries. Diverse geographical participation in International Financial Reporting Standards (IFRS) standard-setting is seen as desirable as it may improve the consistency of IFRS applications, reduce criticism of regional over-influence, and promote the legitimacy of the IASB. This study investigates country participation and the regional and institutional factors that influence the geographic diversity of comment letters (CLs) in the IASB's standard-setting process. Using CLs regarding 57 IASB issues from 2001 through 2008, we find that countries with EU membership, G4+1 membership, donations to the IASB, and larger equity market development are associated with larger numbers of CLs and CL writers. Analysis of a subsample of more developed countries finds some evidence that countries with more historic divergence in accounting standards from IFRS also have more CL writers. In most countries, one of several major stakeholder interest groups, such as professional accountancy bodies, accounting standard-setters, and public accounting firms, send at least half of the CLs. While response levels for most countries vary greatly depending upon the nature or topic of an IASB issue, overall response levels remain low at just over 100 responses per issue and did not increase over time. While geographic diversity and response rates are greater than its predecessor the International Accounting Standards Committee, they are lower than those of many national standard-setters, possibly raising due process and legitimacy issues for the IASB.     

Interpreting the European Union’s IFRS Endorsement Criteria: The Case of IFRS 9

EU Regulation requires that any international accounting standards (International Financial Reporting Standards, IFRS) and interpretations (IFRIC) pronounced by the International Accounting Standards Board (IASB) meet three sets of criteria before they become binding for EU-based companies: a ‘true and fair view’ criterion, a list of qualitative criteria, and a ‘European public good’ criterion. During the endorsement process, EU institutions evaluate each standard or interpretation’s compliance with these three criteria. Nevertheless, despite plenty of past endorsement decisions, there is still disagreement about a unanimous interpretation of the criteria in the literature. In this study, we interpret all three criteria against the background of European accounting law and academic accounting research. Then, the paper illustrates for the case of the new IFRS 9 standard on accounting for financial instruments how these criteria can be applied in the endorsement practice. We conclude that the standard cannot reasonably be rejected on grounds of the IAS Regulation. We also explain that the vagueness of the endorsement criteria and the inherent discretion in the eventual endorsement decision help maintain the EU’s political influence on the IASB’s standard-setting ex ante.     

IFRS Developments in the USA and EU,and Some Implications for Australia

There have been several developments recently, both in the United States (US) and the European Union (EU), which will have consequences in Australia. The two major developments in the US are the decision by the Securities and Exchange Commission (SEC) to drop the reconciliation requirement for foreign registrants that adopt International Financial Reporting Standards (IFRS) and the serious consideration that the SEC is currently giving to allow US publicly traded companies to adopt IFRS. The developments in the EU involve its ever‐lengthening endorsement process and the increasing pressure being brought on the International Accounting Standards Board (IASB) and its oversight body, the International Accounting Standards Committee Foundation (IASCF) trustees, to alter their composition and the character of their operations. At the same time, there has been the FASB's appeal to the EU to accept IFRS without any endorsement process. The developments in the US have been lauded by the IASB and in Europe. They represent an impressive vote of confidence in the IASB and in the efforts being made by national standard setters and securities market regulators around the world. The US has already taken a long stride towards joining the more than 110 countries and other jurisdictions that have committed themselves to allow or require the use of IFRS for some or all reporting entities.     

Financial Reporting in Europe: Future Challenges

Abstract

A roundtable at the 11th workshop of the European Financial Reporting Research Group (EUFIN) on Friday 4 September 2015 in Paris brought together leading participants in the development and enforcement of International Financial Reporting Standards (IFRS) and the use of IFRS financial statements to debate the future challenges in European financial reporting. The panellists were Philippe Danjou, a board member of the International Accounting Standards Board (IASB), Roxana Damianov, team leader for corporate reporting at the European Securities and Markets Authority (ESMA) and Jacques de Greling, senior equity analyst at Natixis, vice-chairman of the European Federation of Financial Analysts Societies (EFFAS) financial accounting commission, member of the IASB's capital markets advisory group and member of the user panel of the European Financial Reporting Advisory Group (EFRAG). The panel was chaired by David Cairns. None of the panellists presented formal papers but instead spoke and debated freely about a range of current and future challenges. Not surprisingly, they focussed on the challenges arising from the use of IFRS in the consolidated financial statements by EU companies listed on EU regulated markets rather than the challenges that might arise from the use of EU or national requirements in non-IFRS financial statements.

This paper provides a synthesis of the panel discussions in the context of the European Commission's evaluation of the International Accounting Standards (IAS) Regulation, the International Financial Reporting Standards Foundation's (IFRSF) review of its own and the IASB's structure and effectiveness, and the ongoing work of the IASB and ESMA.     

The Political and Unstable Nature of the IASB's 'Stable Platform': Post-Convergence Australian Experience

On 31 March 2004, the International Accounting Standards Board (IASB) established the 'stable platform' of new and revised standards applicable from 1 January 2005. We review the major changes made by the IASB to its stable platform of standards to illustrate how politics and lobbying influence the standard-setting process. Furthermore, Australian experience since International Financial Reporting Standards (IFRS) adoption is used to illustrate the impact and extent of these and other changes within the local environment. Continuous changes to IFRS undoubtedly complicate the convergence process, particularly when they are largely indicative of political considerations rather than conceptual underpinnings.     

Constituent Participation and the IASB's International Financial Reporting Interpretations Committee

Abstract

While international convergence of accounting standards is becoming more of a reality, the International Accounting Standards Board (IASB) continues to seek greater acceptance and legitimacy as an institution. Constituent participation is one key component for an organization to obtain legitimacy and success. This study investigates constituent participation of one significant part of the IASB, the International Financial Reporting Interpretations Committee (IFRIC). IASB/IFRIC constituents are classified in two ways: (1) geographically (by country and region); and (2) stakeholder interest group (the accounting profession, regulators, preparers and users). Respondents writing comment letters in regards to IFRIC's first 18 Draft Interpretations are examined. A total of 272 respondents from 40 countries generated 714 comment letters. The European Union provided a majority of writers and letters, with the UK being the largest contributor. The USA, Canada and developing countries generated few letters. Constituent participation significantly increased over IFRIC's predecessor committee, but responses remain concentrated with 35 respondents, mostly professional accountancy bodies and accounting standard-setters, generating 58% of the comment letters. Users accounted for only 5% of letters. While improved constituent participation may support the notion of increased legitimacy, limited participation by some IFRIC constituents suggests that the IASB should further promote constituent participation to achieve greater legitimacy.     

The Political Economy of Convergence: The Case of IFRS for SMEs

This paper contributes to the discussion on the International Financial Reporting Standard for Small and Medium‐sized Enterprises (IFRS for SMEs) in the academic literature by examining the political economy of convergence, and illuminating the processes used by the International Accounting Standards Board (IASB) to achieve convergence and participation by developing economies. The IFRS for SMEs was developed to facilitate implementation of a two‐tier reporting regime in the developing economies. Since 2000, progress towards issuance of the IFRS for SMEs has been hindered by a lack of active engagement by SMEs and academics from developing economies. It is found that (1) a lack of grounded studies and empirical knowledge on SME users’ needs impeded the development of the IFRS for SMEs; (2) the capital market assumption adopted for the IFRS is clearly inappropriate; and (3) the under‐representation of developing economies in international standard setting remains an issue. It is recommended that the IASB ascertains the users of SME reports and their needs and then develops a coherent conceptual framework for SMEs (particularly those from developing economies). The IASB needs to take into consideration the needs, culture and regulatory infrastructures of the developing economies, the political agendas of the standard‐setting stakeholders, and barriers to implementation.     

An examination of the perceptions of auditors and chief financial officers regarding principles versus rules based accounting standards

The debate over the adoption of International Financial Reporting Standards (IFRS) by United States issuers, or its convergence with U.S. Generally Accepted Accounting Principles (U.S. GAAP) has been going on for several years now. However, as of this writing, the Securities and Exchange Commission (SEC) has still not taken a definitive position on the issue. This is in part due to issues involving the cost of adoption, independence concerns relating to the IFRS promulgation body, the International Accounting Standards Board (IASB), and the debate over which type of accounting standards is superior for financial reporting: IFRS, which are said to be “principles-based,” or U.S. GAAP, which are said to be “rules-based.” In this paper we examined the views of two stakeholders in the U.S. financial reporting system, auditors in large public accounting firms and Chief Financial Officers in the Fortune 1000. We elicited their perceptions involving ten situations where specific rules are incorporated in U.S. GAAP. We asked if the elimination of the specific rule would be likely to better achieve the “qualitative characteristics of useful financial information” as defined by the Conceptual Framework for Financial Reporting adopted by the Financial Accounting Standards Board (FASB) in 2010 (FASB 2010) and the similar document adopted by the IASB at the same time (IASB 2010). We found that in eight of the ten situations both groups preferred the rules-based accounting regime (the current U.S. GAAP rules) over a principles-based approach.     

An Investigation into the Potential Adoption of International Financial Reporting Standards in the United States: Implications and Implementation

International Financial Reporting Standards (IFRS) have been adopted by most of the G20 countries. Given the broad worldwide acceptance of IFRS and significance of attaining comparability to facilitate free flow of capital, the US standard setter, the Financial Accounting Standards Board (FASB) made a commitment to jointly work with the International Accounting Standards Board (IASB) to explore the possibilities of convergence of US Generally Accepted Accounting Principles (GAAP) with IFRS. In 2007, the US Securities and Exchange Commission (SEC) eliminated the requirement that foreign companies listed on the US stock exchanges reconcile their IFRS‐based financial statements with the US GAAP. In the same year the US SEC issued a concept release to the public requesting comments on a proposal to allow US issuers to prepare financial statements in accordance with IFRS. Following these initiatives by the FASB and SEC, the aim of the present study is to investigate the implications of a potential full adoption of IFRS by the US. The present study details the challenges and benefits of adoption and outlines the steps required for a successful outcome of this process.     

Convergence between US GAAP and IFRS: Acceptance of IFRS by the US Securities and Exchange Commission (SEC)

Abstract

The world's capital markets stand to benefit significantly from widespread acceptance and use of global accounting standards that are high quality, comprehensive and rigorously applied. The US Securities and Exchange Commission (SEC) announced in April 2007 a series of actions it intends to take relating to the acceptance of International Financial Reporting Standards (IFRS). To implement this, the SEC proposed in July 2007 amendments to Form 20-F and conforming changes to SEC Regulation S-X to accept financial statements prepared in accordance with IFRS without reconciliation to US Generally Accepted Accounting Principles (GAAP) when contained in the filings of foreign private issuers with the SEC. This paper analyses the forces driving convergence between US GAAP and IFRS and discusses the most recent activities by the SEC in relation to IFRS and international cooperation, including the SEC vote as of 15 November 2007, to allow foreign private issuers to prepare their financial statements using IFRS as issued by the IASB without reconciling to US GAAP.     

Impacts of Additional Guidance Provided on International Financial Reporting Standards on the Judgments of Accountants

This pioneering study examines the impact of the provision of additional guidance on International Financial Reporting Standards (IFRS) as a “decision aid” on the accuracy of judgments of the accountants. To extend the prior research on accounting judgment and decision-making, we also examine the interactive effects of task complexity and additional guidance on the judgments of accountants. The results provide evidence that those accountants who are provided with decision aid in the form of additional guidance on IFRS make more accurate judgments than accountants who are not provided with such guidance. Furthermore, the study provides evidence that this additional guidance improves the judgments of accountants when they undertake tasks which they find complex. The results indicate that additional guidance on IFRS needs to be provided and suggests that accountants should exploit any guidance which is currently provided in IFRS and by the International Financial Reporting Standards Interpretations Committee.     

Control over accounting standards within the European Union: The political controversy surrounding the adoption of IFRS 8

This paper presents an analysis of the struggle for power within the international accounting arena by examining a highly politicised debate surrounding the adoption of International Financial Reporting Standard (IFRS) 8, Operating Segments, which saw the European Union (EU) attempting to contest the authority of the International Accounting Standards Board (IASB). Informed by a broadly institutional approach, the paper reports the results of interviews with preparers, legislators, regulators, auditors and users about the introduction of IFRS 8 and focuses on how the European Parliament (EP) required the European Commission (EC) to initiate its own consultation procedures as part of a new endorsement process. Findings from this study highlight how the debate over the adoption of IFRS 8 led to the EU implementing a structure that is arguably more aligned to the European tradition of State involvement in the regulatory process. In this sense, while the EU's position vis-à-vis the IASB remains relatively weak, they have, however, initiated a forum whereby the pronouncements of the IASB can be contested.     

IFRS in the United States: If,When and How

This paper provides an overview of the convergence efforts of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board. It begins with their 2002 Memorandum of Understanding and traces developments up to the December 2011 announcement by the IASB Chair that convergence has come to a close, and it is now time to incorporate IFRS into the US financial reporting system. The paper then assesses approaches being considered by the SEC for incorporating IFRS into the US financial reporting model. The conclusion calls on the SEC to ‘make a decision’ and set a date for US adoption of IFRS. Otherwise, the SEC effectively will have abandoned its goal of a single set of high quality global accounting standards.     

Has the IASB Been Successful in Making Accounting Earnings More Useful for Prediction and Valuation? UK Evidence

When producing International Financial Reporting Standards (IFRS), one of the main goals of the International Accounting Standards Board (IASB) was to create a set of standards which were more useful to investors as a predictive tool. We assess the success of the IASB in achieving this goal by investigating the effects of the introduction of IFRS on the relative information content of reported earnings and forecasted earnings under UK generally accepted accounting practices (GAAP) and IFRS. Results indicate that the value relevance of forecasted earnings is significantly lower under IFRS while the value relevance of reported earnings is significantly larger. These findings suggest that IFRS substitutes price‐relevant information previously provided to the market in the form of analyst forecasts with information encoded by companies in their reported earnings. This implies that the IASB was indeed successful in its stated goal and points towards IFRS forecasts being more accurate and less dispersed than UK GAAP forecasts. This, in turn, implies that analysts are able to provide more informative forecasts under IFRS than under pre‐IFRS regimes and that the aforementioned substitution effect is not a consequence of any decrease in the quality of forecasts under the new regime.     

LARGE ACCOUNTING FIRMS’ SURVEY REVEALS EMERGENCE OF “TWO STANDARD” SYSTEM IN THE EUROPEAN UNION

Convergence with International Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB) is receiving great attention. In 2005, all listed companies domiciled in the European Union (EU) will be required to prepare consolidated accounts based on IFRS. Individual EU member states are, however, permitted to decide whether IFRS will be required or allowed for non-listed companies or for listed companies’ individual accounts. Based primarily on data collected by the six largest international accounting firms during their most recent convergence survey, this paper examines each of the 15 EU member states’ convergence plans and their perceived barriers to convergence.The findings indicate that most EU members do not plan to converge national GAAP with IFRS, thereby highlighting the great significance of the large firms’ concerns regarding emergence of a “two-standard” system in the EU. The survey indicates the majority of EU countries will continue to require or allow national GAAP for individual accounts. While Belgium is considering requiring IFRS for all consolidated accounts, other EU countries have decided to allow or are considering allowing non-listed companies to prepare IFRS consolidated accounts.In most EU countries, the link between financial accounting and tax accounting represents a major barrier to convergence. Other frequently cited barriers include disagreement with certain IFRS and the complicated nature of certain IFRS. International requirements for financial instruments are viewed as particularly problematic.     

Convergence with IFRS in an expanding Europe: progress and obstacles identified by large accounting firms’ survey

The International Accounting Standards Board (IASB) acquired greater legitimacy and stature when the European Union (EU) decided to require all listed companies to prepare consolidated accounts based on International Financial Reporting Standards (IFRS) beginning in 2005. This study examines the progress and perceived impediments to convergence in 17 European countries directly affected by the EU's decision. These include: (1) the 10 new EU member countries, (2) EU candidate countries, (3) European Economic Area (EEA) countries, and (4) Switzerland. We utilize data collected by the six largest international accounting firms during their 2002 convergence survey. Additionally, we analyze subsequent events and studies.While all surveyed countries will either require or effectively allow listed companies to prepare consolidated financial statements in accordance with IFRS by 2005, few are expected to require IFRS for non-listed companies. This suggests the development of a “two-standard” system. The two most significant impediments to convergence identified by the survey appear to be the complicated nature of particular IFRS (including financial instruments) and the tax-orientation of many national accounting systems. Other barriers to convergence include underdeveloped national capital markets, insufficient guidance on first-time application of IFRS, and limited experience with certain types of transactions (e.g. pensions).     

Commentary: Has Australia (or Any Other Jurisdiction) ‘Adopted’ IFRS?1

This paper replies to a statement made in this journal that ‘Australia definitely adopts IFRSs’. We analyse and compare the several methods that jurisdictions can use to implement International Financial Reporting Standards (IFRS). These include adopting the International Accounting Standards Board's (IASB) process of setting standards, as well as various forms of standard‐by‐standard implementation. We conclude that the Australian method of implementation is different in major ways from those used in such countries as Israel and South Africa, which involve adopting the IASB's process. By contrast, Australia follows a multi‐step process of enrolling each new standard into a category still entitled ‘Australian Accounting Standards’. To refer to the Australian method as ‘adoption’ of IFRS might therefore mislead, even though Australian companies eventually comply with IFRS.     

IFRS FOR SMEs: THE IASB'S DUE PROCESS

This study explores the role of the International Accounting Standards Board's (IASB) due process in developing its International Financial Reporting Standards for Small and Medium‐sized Entities (IFRS or SMEs) standard. There were tensions between the IASB's desire to minimise divergence from full IFRS and preserve recognition and measurement principles, and the primary reasons for undertaking the project – to meet the needs of users of financial statements of SMEs and to reduce the financial reporting burden on SMEs. Examination of events during the development of the project reveals much that was not apparent from material in the public domain. Most significantly, the IASB recognised that the final title of the standard, IFRS for SMEs, does not necessarily describe the scope of the standard. This paper also shows that the due process followed in the case of the IFRS for SMEs project barely reflected the ‘will of people’ but was more inclined towards acting as a communicative function for the IASB without any commitment to change its stance on the SME standard.     

Commentary: IFRS – The SEC's Roadmap and the Contribution of the Academic Community

In November 2008 the US Securities and Exchange Commission issued a roadmap for the possible adoption of International Financial Reporting Standards (IFRS) by US publicly traded companies. A team of distinguished academics and practitioners discussed the issues raised by the roadmap in a panel session at the American Accounting Association meeting in San Francisco in August 2010. This commentary summarises the discussion. Potential obstacles to US adoption of IFRS include concerns about the International Accounting Standards Board's governance, and the consistency of application of IFRS in different countries around the world. Another key issue is to make sure that there is real agreement on the purpose of financial reporting, which in the US is, by law, for the protection of investors. However, research shows the capital market benefits of IFRS adoption, and at least one study shows a high degree of comparability between US GAAP and IFRS.     

On the ‘Disclosure Initiative – Principles of Disclosure’: The EAA Financial Reporting Standards Committee’s View

Abstract

This paper summarises the contents of a comment letter produced by a working group of 12 academics in response to the International Accounting Standards Board (IASB) Discussion Paper on principles of disclosure. The comment letter was submitted by the Financial Reporting Standards Committee (FRSC) of the European Accounting Association (EAA). The work includes reviews of relevant academic literature of areas related to the various questions posed by the IASB in the Discussion Paper, including the ‘disclosure problem’ and the objective of the project, the suggested principles of effective communication, the roles of the primary financial statements and notes, the location of information and the use of performance measures. The paper also discusses the disclosure of accounting policies, the objectives of centralised disclosure, and the New Zealand Accounting Standards Board staff’s approach to disclosure.