Chapter 3

The process of
harmonization

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 Contents

• EU Directives
– Enforcement of IFRS in the EU
– The future of EU accounting regulation
• International Accounting Standards
• The structure of the IASB
• The objectives of the IASB
• The IASB’s due process of standard setting
• IFRS for SMEs
• The future?

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 Learning objectives

• Outline the role of the EU in the

development of accounting harmonization
• Explain the endorsement process of
IAS/IFRS in the EU
• Outline the history and changing role of the
IASC/IASB
• Describe the different steps in the due
process of standard setting
• Understand current developments and their
implications
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
How to improve financial
communication between
different countries

• Through harmonization: increasing the

compatibility of accounting practices by
setting bounds to their degree of variation
• Through standardization: the imposition of a
more rigid and narrow set of rules

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 EU-approach in the
20th century

• Harmonization through the EU-Directives of

financial reporting
• 4th Company Law Directive of 25 July 1978 on
the annual accounts of individual companies
• 7th Company Law Directive of 13 June 1983 on
the consolidated accounts

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
History of financial reporting
in the EU

• 1978: 4th Directive

• 1983: 7th Directive
• 1995: The new “Accounting Strategy”
• 1999: The Financial Services Action Plan
• 2002: Approval of Regulation (EC) N°1606/2002
on the application of IAS
• 2003: update of the 4th and 7th Directive

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
IAS-Regulation in the EU

• Scope: EU and countries of the European

Economic Area
• Requirement to publish consolidated
accounts in compliance with IAS/IFRS for
listed groups for accounting periods on or
after the 1 January 2005

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
The endorsement process
of the IASs in the EU

The EC decides on the applicability of individual IASs

in the EU. It may adopt an IAS only if:
a) it is not contrary to the principles of the 4th and
7th Directives;
b) it is conductive to the European public good; and
c) it meets the criteria of understandability,
relevance, reliability and comparability

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
The endorsement process
of the IASs in the EU

The EC is assisted in the endorsement

decision by the Accounting Regulatory
Committee (ARC), the European Financial
Reporting Advisory Group (EFRAG) and
the Standards Advice Review Group

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 Accounting Regulatory
Committee

• Consists of representatives of the member states

• Its function is to provide an opinion to the
Commission on proposals to adopt (endorse) IAS

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 European Financial
Reporting Advisory Group
(EFRAG)
• A technical group which advises the EC in its
endorsement process
• It provides proactive advice to the IASB
• It provides advice to the EC on resulting changes to
be made to the Accounting Directives and related
topics

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 The Standards Advice
Review Group

• Seven independent experts

• To give advice to the Commission that is not influenced
by governments (unlike ARC) or by stakeholders like
companies and audit firms (EFRAG)

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Commission of European
Securities Regulators
(CESR)

* Strive for consistent application of IFRS in

accounts of listed companies
* Analyse and discuss the decisions taken by
independent EU National Enforcrs in respect
of financial statements published by issuers
with instruments (equity and debt) traded on a
EU market

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 International Accounting
Standards Committee
• Created in 1973
• Creation related to the set up of
International Federation of Accountants
• Mission statement:
(a) to formulate and publish in the public interest
accounting standards to be observed in the
presentation of financial statements and to promote
their worldwide acceptance and observance;
(b) to work generally for the improvement and
harmonization of regulations, accounting standards
and procedures relating to the presentation of
financial statements
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 History of the IASC

• 1970s and 1980s standards with

many options
• 1989 “comparability project” – ED 32
• 1995 agreement with IOSCO to complete a
core set of IAS by 1999
• 1999 “Recommendations on shaping IASC
for the Future”
• 2000 acceptation of “core” standards by
IOSCO
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
In 2001 the structure of
the IASC changed

The reform of the IASC

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 Mission statement of the
IASB
1. To develop, in the public interest, a single set of high
quality, understandable and enforceable global
standards that require high quality, transparent and
comparable information
2. To promote the use and rigorous application of those
standards
3. To take account of the special needs of SMEs and
emerging countries
4. To bring about convergence of national accounting
standards and IAS and IFRS to high quality solutions

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
The structure of the IASB

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 The due process of
standard setting
Stage 1: setting the agenda
Stage 2: project planning
Stage 3: development and publication of a
discussion paper
Stage 4: development and publication of an
exposure draft
Stage 5: development and publication of an
IFRS
Stage 6: procedures after an IFRS is issued
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
The IASB’s due process of
standard setting

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 IASB: towards a global
standard setter?

• Mandatory application for listed companies in the EU,

European Economic Area, Australia and New
Zealand
• Mandatory compliance for listed companies
underway in:
- Brazil from 2010 onwards
- Korea from 2011 onwards
- Russia for banks
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 IASB: towards a global
standard setter? (cont’d)

• Canada : decision on mandatory compliance under way

for 2011 (IASB Insight 2008)
• A number of countries have adopted IASs as their
national standards: Hong Kong, Singapore, South Africa
• Voluntary adoptions in other countries

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 SEC Decision - 2007

• For financial statements of foreign private issuers

covering years ended after 15 November 2007, the SEC
decided that financial statements prepared according to
IFRS as issued by the IASB are accepted on American
stock exchanges without reconciliation to US GAAP

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
Most important element
for the near future

The further evolution of the convergence project

with the FASB and the position of the SEC with
regard to American listed companies
FASB and IASB reaffirm commitment to complete
convergence project by the end of June 2011
(november 2009)

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 IFRS for SMEs

• In 2003 discussions started on the need for such

statements, they could also be of help to developing
nations
• Discussion paper 2005
• IFRS for SMEs published in 2009
• SME – implementation group set up in January 2010

International Financial Reporting and Analysis, 5th edition

David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA
 IFRS for SMEs:
characteristics

• IFRS for SMEs – simplification of full IFRS through

– By the ommission of topics not relevant for
SMEs
– When IFRS have options, the simpler option
is retained, the more complex ommitted
– Recognition and measurement principles
simplified
– The number of disclosures reduced
International Financial Reporting and Analysis, 5th edition
David Alexander, Anne Britton and Ann Jorissen
ISBN 978-1-4080-3228-2 © 2011 Cengage Learning EMEA