Development in International Accounting Standards Setting

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Development in International Accounting Standards
Setting

• Jamie Wang
• Associate Professor
• University of Wisconsin-Parkside

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Internationalization

• There is considerable evidence that companies are
  increasingly operating in a global marketplace.
• Trade from 1970 to 1998, world trade has grown
  from 600 billion to 10,500 billion
• Strategic alliances
• Foreign direct investment
• Portfolio investment

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• Today the worlds capital markets know no
  borders.
• The participants in those markets need high
  quality, transparent, and comparable financial
  information to enable them to make sound economic
  decisions.

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• The diverse accounting and reporting practices
  across the world have been one of the major
  obstacles to economic globalization.

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Goodwill Accounting

• Goodwill is the excess of acquisition price paid
  to acquire another company over the total fair
  value of that companys net assets.
• Goodwill (Cost of investment)
• (FV of all identifiable net
  assets)

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• When Disney paid 18 billion dollars for ABC
  whose all identifiable net assets had a fair
  value of 6 billion, approximately 12 billion
  were paid for goodwill.
• 90 of the 12.9 billion Phillip Morris paid for
  Kraft Food was for goodwill.

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Goodwill Amortization

• For the 12 billion goodwill recorded by Disney,
  Disney will have to charge the following amount
  as an amortization expense and deduct it from
  income
• 2,400,000,000 according to Japanese GAAP
• 1,200,000,000 according to Swedish GAAP
• 600,000,000 according to Denmark GAAP
• 300,000,000 according to Canadian GAAP
• 0 according to U.S. GAAP

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• Obviously, there is a need for international
  accounting harmonization.
• Using U.S. standards
• Creating an international accounting standards

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• In 1973, International Accounting Standards
  Committee (IASC) was established by professional
  accounting bodies from nine countries the U.S.,
  Canada, Australia, France, Germany, Japan,
  Mexico, Netherlands, and U.K.
• The organization was renamed International
  Accounting Standards Board (IASB) in 2001

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• 1n 1975, first International Accounting Standard
  (IAS) was published.
• IAS No. 1 Disclosure of Accounting Policies
• Since then, 41 international accounting standards
  have been issued.

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IAS in Europe

• EU has adopted the financial reporting strategy
  which requires companies of all EU countries
  (including 15 member countries, 3 European
  Economic Area countries, and 10 additional
  countries approved for admission into EU in May
  2004) to follow IAS for consolidated financial
  statements no later than 2005.

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IAS in Asian-Pacific Countries

• New Zealand and Bangladesh adopted IAS as their
  national standards
• Australia, Hong Kong, Philippines, and
  Singapores new standards are generally
  word-for-word IAS
• China, Laos, and Myanmar allow domestic companies
  to use IAS
• Japan, Pakistan, Thailand, Australia, Hong Kong,
  New Zealand allow foreign companies to use IAS
  for listing in their stock exchanges

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IAS in Canada

• It is considering allow foreign companies listed
  in Canada to use IAS.

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IAS in the U.S.

• IAS is not accepted for listing in the U.S. stock
  exchanges
• The specific requirement is that the foreign
  issuers either use U.S. GAAP or use their own
  GAAP (including IAS), but have to reconcile their
  earnings and net assets to conform to U.S. GAAP,
  that is, the foreign issuers will have to keep
  two sets of books.

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Pressure on SEC

• Currently, there are about 1400 companies from 59
  foreign countries listed in the U.S. stock
  exchange. 40 of these companies are European
  companies.
• There is increasing pressure on the SEC to accept
  IAS
• SEC call for the study of the quality of IAS

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An Empirical Assessment of Fixed Assets Reported
under IAS No. 16

• Why IAS No. 16?
• Plant assets are one of the most important assets
  for almost all companies
• There is substantial difference between IAS and
  the U.S. regarding plant assets

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Upward Revaluation of Plant Assets

• Under U.S. GAAP, plant assets are reported at
  their book value (i.e., original cost less
  accumulated depreciation).
• If the fair value of the assets declines below
  the book value, companies are required to write
  down the assets and an impairment loss is
  recorded in the period of impairment.
• When the fair value is greater than the book
  value, upward revaluation is not allowed.

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• The rational for such treatment is conservatism.
  
• In addition, the fair value of plant assets
  before disposition has to be estimated. Such
  estimates are necessarily arbitrary.
• Management may use such discretion to dress up
  its financial statements.
• Potential tax related issues

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• Under IAS No.16, companies are allowed to write
  their assets up to their fair value (upward
  revaluation).
• Some have expressed significant concerns over
  this accounting treatment.
• My research examines the quality of reported
  fixed assets under IAS No.16
• In the process of collecting data.

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Thank you!