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CHAPTER 1 The Growth of National Standards 3CHAPTER 2 Developing International Accounting Standards 8 The Emergence of National Similarities 8 The International Accounting Standards Comm

FINANCIAL REPORTING STANDARDS DESK

REFERENCE

Overview, Guide, and Dictionary

Dr Roger Hussey

Dr Audra Ong

John Wiley & Sons, Inc.

FINANCIAL REPORTING STANDARDS DESK

REFERENCE

FINANCIAL REPORTING STANDARDS DESK

REFERENCE

Overview, Guide, and Dictionary

Dr Roger Hussey

Dr Audra Ong

John Wiley & Sons, Inc.

This book is printed on acid-free paper

Copyright © 2005 by John Wiley & Sons, Inc All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

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ISBN-13 978-0-471-71450-X

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10 9 8 7 6 5 4 3 2 1

CHAPTER 1 The Growth of National Standards 3

CHAPTER 2 Developing International Accounting Standards 8

The Emergence of National Similarities 8

The International Accounting Standards Committee 11

CHAPTER 3 The International Accounting Standards Board 15

Funding and Operation of the IASB 18

CHAPTER 4 Internationalization and the G4+1 Countries 23

Islamic Finance and Standard Setting 38

CHAPTER 6 Responding to Internationalization 41

CHAPTER 7 The Role of the Accountant 49

The Link with Corporate Governance 51

Part Two GUIDE TO INTERNATIONAL FINANCIAL

REPORTING STANDARDS

Framework for the Preparation and Presentation

Part Three DICTIONARY

vii

The effort to achieve a single set of global accounting standards has gainedsignificant momentum during the past three years The logic behind the devel-opment of a single set of high-quality global accounting standards for theworld’s integrating capital markets has been evident for some time The col-lapse of Enron and other corporate failures in the United States and elsewherehave led to the reevaluation of existing national and international accountingpractices and has served as a catalyst for work being undertaken at the Inter-national Accounting Standards Board (IASB) in conjunction with nationalstandard setters throughout the world

Increasingly, in recognition of the integrating nature of the world’s capitalmarkets, national authorities are opting for an international approach to ac-counting standards In 2005, some 92 countries throughout the world will re-quire or permit the use of international financial reporting standards (IFRSs),

as promulgated by the IASB

Nowhere is the embrace of high-quality accounting standards possiblymore significant than in Europe and Asia Most countries, however, are begin-ning to experience the influence of IFRSs in their everyday business

In Europe, a single economic market would be impossible to operate with

25 countries using 26 different methods of accounting as at present (OnlyIreland and the United Kingdom use the same accounting methods, and somecountries allow either or both U.S GAAP and international standards.)The Asian financial crisis of the 1990s demonstrated the central role thataccounting plays in globalizing capital markets and the potential devastating

effects that diminished confidence in financial reporting could have in slowingeconomic development The stakes of adopting a strong financial reportinginfrastructure are great for emerging economies, because these economiescannot reach their full potential without participation in global markets andwithout continuing inflows of direct investment.

Reaching the ultimate goal of having a single set of accounting standardsworldwide, however, still faces significant barriers These include a full under-standing of the terms used in their particular context and the differences inlanguage These are problems that the authors of this volume, Dr RogerHussey and Dr Audra Ong, understand well The IASB, located in London,sets its standards in English and considers the English language standards theofficial set It is evident that jurisdictions throughout the world may wish toapply the standards translated in their own language Without quality intranslation, we will risk losing consistency in application of the standards.The IASB has worked to expand its translation resources to improve the qual-ity of the standards provided in other languages, but there is always morework to be done

Therefore, I welcome this important contribution from Dr Hussey and Dr.Ong This volume marks a significant step forward to improving access to in-ternational standards for those whose native language is not English and forEnglish speakers This book is written by authors who clearly understand thechallenges facing all who seek to understand and apply international stan-dards I commend it to you

Sir David Tweedie

Chair of the International Accounting Standards Board

London, United Kingdom

December 2004

viii • Foreword

ix

The world of accounting and finance has been going through monumentalchanges in recent years At the international level, there have been intense ef-forts to establish credible and transparent methods for measuring and com-municating business financial results Key factors contributing to increasedscrutiny on accounting are the high-profile financial frauds and scandals thatreceived so much media attention Another key factor is that the increasingcomplexities of business in today’s high-tech, global economy require new ac-counting approaches

More and more companies today are doing business on an internationalscale, creating a need for accountants, executives, and organizations in differ-ent countries to reach agreement on accounting rules and standards The ac-counting profession has responded by establishing international accountingand financial reporting standards, and substantial progress has been made to-ward international acceptance of these standards

If you are a practitioner, manager, or student, or are involved in business inany way, this book will be invaluable It provides an overview of the Interna-tional Accounting Standards Board, including a guide to the standards issued

as well as a comprehensive dictionary of key international accounting, ing, and finance terms

report-This book consists of three parts and two appendices The first Part describesthe growth of national accounting standards setting, the events leading to the de-sire for international accounting standards, and the organizational structure,funding, and operation of the IASB It concludes with an examination of the

changes that must be implemented by organizations and countries adopting ternational accounting standards and the implications for education and train-ing, professional accounting bodies, regulators, and organizations.

in-The second Part, the Guide, describes the scope and main requirements ofeach current standard International Financial Reporting Standards (IFRSs)are lengthy and complex The Guide captures succinctly the key points ofeach standard

The third section, the Dictionary, is a comprehensive reference to wordsand phrases used in the global business world Definitions are included forspecific terms used in the international standards and are cross-referenced tothe particular standard Appendix A consists of a list of acronyms that relate

to the various terms and definitions used in the Overview, Guide, and nary In addition, a directory of national standard setters is provided as a ref-erence in Appendix B

Dictio-It would be imprudent for any authors, particularly compilers of an national guide and dictionary, to claim that their work is the final word on asubject The business world is complex and constantly changing, and IFRSswill be modified or developed in response to these changes This Desk Refer-ence is intended to provide a background on how the movement toward acommon language for international accounting evolved to its present state,summarize existing standards highlighting the key issues covered, and capturethose terms and phrases that are fundamental to an understanding of thecommon language of global business We believe that readers will find thisbook an invaluable reference in helping their comprehension of this language

inter-Roger Hussey Audra Ong

Canada

January 2005

x • Preface

xi

We wish to acknowledge the advice and comment we received from leagues around the world In particular, the following were most helpful ingiving perceptive opinions on Part One of the book

col-Roger Adams, FCCA, Technical Executive Director, Association ofChartered Certified Accountants (ACCA), United Kingdom

Sally Aisbitt, Ph.D., Open University Business School, EnglandRussell Craig, Ph.D., Australian National University, AustraliaIstemi Demirag, Ph.D., Queen’s University, Northern IrelandRob Gray, Ph.D., St Andrew’s University, Scotland

John Haverty, Ph.D., Saint Joseph’s University, Philadelphia, United StatesWan Nordin Wan Hussin, Ph.D., University Utara, Malaysia

Finally, we would like to thank Andrea Steele from the Faculty of Arts andSocial Sciences and Michelle Doerksen, Bree-Anne LaBute, and AlisonScratch from the Odette School of Business at the University of Windsor fortheir tireless efforts in preparing the manuscript for publication against tighttimelines

As always, the authors take full responsibility for any errors and omissions

FINANCIAL REPORTING STANDARDS DESK

REFERENCE

Part One

OVERVIEW: STANDARD SETTING

NATIONALLY AND GLOBALLY

“Our methods of measurement define who we are

and what we value.”

Ken Alder, The Measure of All Things.

The Free Press, 2002, page 2

CHAPTER 1

The Growth of National Standards

3

EARLY DEVELOPMENTS

National procedures, organizations, and regulations for accounting are rently at a watershed, due to the increasing influence of the International Ac-counting Standards Board (IASB) Effective April 1, 2001, the IASB hadassumed standard setting responsibilities from its predecessor body, the Inter-national Accounting Standards Committee (IASC)

cur-The national standard setting bodies are also at various stages in their sponse and strategies A number of major players, for example the EuropeanUnion, China, and Australia have adopted, or will soon be adopting, Interna-tional Financial Reporting Standards (IFRSs) for some or all entities The U.S.Financial Accounting Standards Board (FASB), through the Norwalk Agree-ment, and the IASB have given a formal commitment to convergence More

re-on this is discussed in Chapter 4 Other countries have also declared an tion to converge their standards with international pronouncements, andsome still have not decided on their course of action

inten-Smaller nations generally have not had the resources and infrastructure togenerate their own standards, and have either adopted or modeled their regu-lations on the standards of the United Kingdom or the United States With theformation of the IASB, several countries chose to adopt international ac-counting standards This was particularly true for emerging economies, wherethe flexibility of the standards made them easier to implement and where

there was a concern that adopting the standards of one particular countrywould have political connotations.

Although there is some public debate concerning the number of countriesthat will adopt IFRSs, very few countries or organizations will remain com-pletely unaffected by the influence of international harmonization Business isbecoming increasingly global, and accounting is changing rapidly to meet thedemands placed upon it Words and phrases originally used in one countryhave gained acceptance in others Pronouncements made by the IASB havefound their way, either in part or whole, into accounting practices Anyoneinvolved in business needs to understand the events that are taking place andhow businesses are affected by them

What is surprising, given the long history of accounting, is that these ternational events only commenced 30 years ago, with progress accelerat-ing over the last few years The following brief examination of the veryslow development of accounting will help explain the changes that are nowtaking place

in-Since the earliest times, individuals, societies, and civilizations have all perienced the need for some form of record keeping of events, transactions,and other phenomena Images carved on cave walls illustrated records ofquantities, for example, the number of cattle owned, the number of animalskilled, the size of enemy forces

ex-The use of a medium of exchange, whether beads, shells, or coins, allowed

a record to be made of economic transactions and events However, the actions recorded and the values placed on them possessed many great re-gional and local variations It was not until the twentieth century thatcountries began to establish regulations for identifying the transactions andevents that should be recognized and how they should be measured

trans-The progress over many centuries from simple local records to alization of accounting policies and practices has been slow, but the major in-fluences can be identified Some order was introduced into local practices bygovernments that require citizens to pay taxation Since most early taxationsystems applied only to the rich, it was clearly advantageous to claim poverty,

internation-an argument that is often used today in dealing with government deminternation-ands forpayments from its citizenry It was also useful to exploit any ambiguities onhow wealth should be measured, and even how best to conceal it

Even the impact of taxation did little to establish a common system of nancial record keeping At best, the records were simple and developed tomeet the immediate needs of one specific authority, whether to a tax collector

fi-or the lfi-ord of the manfi-or It was not until the publication of Luca Pacioli’s

Summa de Arithmetica in 1494 that a robust system for recording financial

transactions, known as double entry bookkeeping, was firmly established and

is now used throughout the world

4 • Overview: Standard Setting Nationally and Globally