International Accounting and

Multinational Enterprises 6th Edition

Radebaugh Solutions Manual
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 CHAPTER SEVEN
INTERNATIONAL ACCOUNTING STANDARDS
AND GLOBAL CONVERGENCE

CHAPTER OUTLINE

1. Introduction
2. Governments
1. United Nations
1. Working Group of Experts (ISAR)
2. Organization for Economic Cooperation and Development
3. European Union
1. Fourth Directive
2. Fourth Directive
3. Additional Directive
4. Adoption of IFRS
3. Trade Unions and Employees
1. Trade Union Proposals
2. Main Concerns
4. Investors
1. International Organizations
2. Comparable Information
5. Bankers and Lenders
6. Accountants and Auditors
1. International Accounting Standards Board
1. Formation and Structure
2. Achievements
3. Obstacles
4. IFRS and US GAAP
5. Rules vs. Principles
6. Noncompliance
2. International Federation of Accountants
1. IAASB
2. Reforms
3. International Forum on Accountancy Development
4. International Association for Accounting Education and Research
7. The International Harmonization and Disclosure Debate
8. Summary

CHAPTER OVERVIEW AND TEACHING SUGGESTIONS

 Chapter Seven concentrates on institutional influences on accounting standards and
practices, specifically on outside influences. Although investors are probably the major source
of influence, especially in the harmonization effort worldwide, you should spend a lot of the time
on the European Union and the International Accounting Standards Committee. The EU is
important because of its influence on current members and those who have applied to join -- such
as some of the East European countries. The directives of the EU are reaching far beyond the
borders of the 15 member states.

The IASB is important, because it is the major harmonization effort being undertaken by
accountants, and it is being strongly backed by the securities exchanges and IOSCO. However,
it is hard to measure the effectiveness of the efforts of the IASC. There is a continuing tension
between the IASB’s uniformity approach and the principle of mutual recognition favored by the
EU.

You might want to spend to discuss the first half of the chapter on one class section with
special emphasis on the EU and the second half of the chapter on the next class section with
special emphasis on the IASB. It is also fun for the students to try to match the EU financial
statement formats with previous chapter actual financial statements.

Much is spoken about the IFRS. A case gets students to discuss harmonization issues
within the IFRS framework. There is also a case on financial derivative IAS 39. This case
facilitates a discussion of a specific standard on a difficult topic – financial instruments.
 LECTURE NOTES

I. Introduction
A. Demand for harmonization comes from different groups and organizations -- See
Figure 7.1
1. Governments
2. Trade unions and employees
3. Investors (including financial analysts)
4. Bankers and lenders
5. The general public
6. Accountants and auditors
B. Reasons for the call for harmonization and better disclosure
1. More informed international comparisons
2. Understand and help constrain activities of MNEs
3. Contribute to national and international policy making
4. Demystify large and complex organizations
C. Different information needs between and within groups -- may lead to conflicting
demands. Standardization is substituted for harmonization, but not to the best outcome.
II. Governments
A. Governments generally can get whatever information they want, generally on a
confidential basis
1. Too voluminous to contain in corporate annual report
2. In spite of this, governments lead the call for increased disclosure, especially in
the UN
3. Specific circumstances where governments may be users of general purpose
information
a. A host government needs information about a subsidiary and the entire
corporate group
b. Due to the role of the MNE in world trade, governments need more
information and more comparable information to evaluate performance
and impact
c. Different government units require different information, so general
purpose reports may be more helpful than narrow special interest reports
for a specific agency
4. The power of governments is not unlimited and is often overstated--potential of
firms playing off countries against each other: the idea of regulatory hassle
5. Comparable world-wide aggregated reports combined with good segment
disclosures should help governments
6. Intergovernmental organizations function better than individual countries
B. United Nations
1. 1976 -- UN commission on Transnational Corporations established a group of
experts (ISAR)
a. Due to concern over impact of MNEs on development, etc.
b. Initial draft included lots of financial and nonfinancial disclosures
2. 1979 -- Intergovernmental working group of experts from 34 countries, 22 of
which were LDCs
 a. Stronger role for LDCs compared with the IASC
3. 1983 -- permanent intergovernmental working group of experts on international
standards of accounting and reporting
a. Annual meetings on various issues
b. 1989 publication of conceptual framework
c. 1994 publication of revised Conclusions
C. Organization for Economic Cooperation and Development
1. Represents 30 industrialized countries
2. 1976 -- "Guidelines for Multinational Enterprises"
a. Related to financing, taxation, competition, industrial relations,
financial disclosure -- see Exhibit 7.1
3. 1979 -- The establishment of a working group to discuss accounting issues
D. European Union
1. Trying to promote the community-wide flow of capital -- integration, taxation,
exchange rates, securities registration and regulation, disclosure of information
2. Each directive has the force of law within the union through action by
individual countries to implement in national laws
3. Regulations become law without having to go through the national legislatures
-- Exhibit 7.2
4. First Directive (1968) -- requires publication of annual report of limited
liability companies
5. Fourth Directive (1978) -- content and presentation of annual accounts
a. Initiated before joining of U.K. in 1973
b. Required significant compromise between continental and Anglo-Saxon
approaches
c. Resulted in more emphasis on disclosure of differences than in
elimination of differences
d. Allowed different balance sheet and income statement formats and a
simplified format if footnote disclosure is good -- see Exhibits 7.3-7.5
e. Required a true and fair view
6. Seventh Directive (1976, 1979 revised, 1983 approved) -- consolidated
accounts
a. Definition of group: Share ownership and legal rights (U.K.) vs.
effective management control as well as ownership (Germans)
b. Requires worldwide consolidation, fair value approach for acquisitions,
equity method, segmental analysis by turnover of sales and geographic
segments
7. Eighth Directive -- adopted in 1984; deals with the qualification and work of
auditors across EU member countries
8. Vredeling proposal (1980)
a. Employee information and consultation
b. Would require significant non-financial disclosure at the group and
subsidiary level of issues that would impact employees significantly
c. Very explosive politically -- especially for the British
d. Issues revised by EU social charter
9. Other issues
 a. Harmonization of stock exchange regulations
b. Half-year reports
c. Mutual recognition approach to accounting standards adopted rather
than increase the number of regulations -- more in line with EU in 1992
d. 1990 -- European Accounting Advisory Forum established to encourage
consultation with government and professional standard-setters
e. 2000 – European Commission introduced EU legislation that requires
IAS for all companies starting in 2005
10. Adoption of IFRS
a. EU requires IFRS in 2005
b. Includes all existing IASs and SICs with exception of IAS 32 and 39
III. Trade Unions and Employees
A. International trade unions -- ETUC, ECFTU, WCL
B. Issued “Multinational Charter” (1975) and “Disclosure Recommendations” (1977)
C. Main interests in information about subsidiaries, transfer pricing, related party
transactions, segmental reporting
IV. Investors
A. Interests represented by international financial analyst organizations and International
Organization of Securities Commissions (IOSCO)
B. Information requirements include:
1. Future prospects
2. Earnings
3. Asset values (up-dated)
4. Segment information
5. Comparability
C. ICCFAA and EFFAS -- analysts organizations
D. IOSCO -- very important role in promoting international harmonization of stock
exchange rules including accounting requirements
E. Comparable Information is key to good decision-making and disclosure is necessry to
investor understanding
V. Bankers and Lenders
A. Particular concern with the security of loans
B. Different emphasis but similar information needs to investors
C. Conservative influence on accounting measurements
D. Comparability
VI. Accountants and Auditors
A. International Accounting Standards Board (formerly Committee)
1. Established in 1973 -- responsible for International Accounting Standards
2. Objective is comparability
3. Issued 41 IAS standards by 2001 and created 5 new IFRS while revising 15 See
Exhibit 7.8
4. Conceptual Framework published 1989
5. Comparability project started in 1989, completed 1993 with wide-ranging
revisions to make existing standards more “uniform”
6. Focus on worldwide standards but more recently concerned with MNE cross-
border listing and capital raising
 7. Response to international standards by MNEs in practice has not been good
8. But IOSCO influence may encourage acceptance and compliance by MNEs
9. Revised structure in 2000 to become more independent See Exhibit 7.6
10. FASB is working on a convergence project with IFRS and the differences
appear to be declining except for property, plant and equipment, taxes and
goodwill
a. A debate currently exists on Rules vs. Principles in standard setting
11. Noncompliance with IFRS is a problem
B. International Federation of Accountants (IFAD)
1. Established 1977 -- responsible for international auditing standards and
coordination of accountancy progression worldwide
2. Also regional organizations involved -- AIC, CAPA, AFA, FEE
3. Trying to address MNE compliance which is problem noted by SEC and
IOSCO.
C. International Forum on Accountancy Development
1. Established after the Asian financial crisis
2. Has made country-by-country reviews and created a GAAP convergence
survey
D. International Association for Accounting Education and Research
1. Established to promote accounting education
VIII. The International Harmonization and Disclosure Debate
A. Regulation of MNEs vs. market forces
1. MNE governance and economics is becoming increasingly complex
B. Economic integration? Is there support worldwide?
C. Regulation a matter of self-interests?
D. International classification research and knowledge of cultural influences indicates
harmonization will be slow

Group Exercise: International Accounting Harmonization

Here is a good opportunity for a role-playing exercise on some key international

accounting harmonization issues. Students should be organized into groups and asked to think
about the exercise questions from the viewpoint of their interest group i.e. IASC, IOSCO, the
United States SEC, the European Union, developing countries and MNE managers. Additional
parties on specific countries can be introduced as appropriate to the make-up and interests of the
class.

A chair should be appointed to pose the questions to the groups and control the debate
which should be as free-flowing and wide-ranging as possible. Disagreements and controversy
should be encouraged. Indeed, students should try to imagine that they are really in a decision-
making situation concerning the resolution of the issues in question.