Identify the following organizations and describe the role each plays in the drive toward harmonization: a. The IASB b. The EU

Question

What will be an ideal response?

Answer 1

ANSWER:
a. The IASC (International Accounting Standards Committee) was formed in 1973 by professional accounting organizations from nine nations including the US. In 2001, the IASB was reorganized and its name was changed to the International Accounting Standards Board (IASB). It now has over 100 member organizations from 103 nations. The AICPA is the American organization holding membership in the IASB. No nation or any professional body from any nation has surrendered its accounting standard-setting sovereignty to the IASB. Rather, the members have pledged to use their “best endeavors” to bring the adoption of IASB standards to their countries. As of fall 2002, 41 international accounting standards had been issued by the IASB. Many less-developed nations with a limited professional accounting infrastructure use all or at least a majority of IASB standards.

The IASB has come up with what are deemed to be high-quality financial standards, and has greatly reduced the allowed number of treatments in particular event areas and also increased disclosure requirements. EU countries must use IASB standards for consolidated financial statements by 2005. Similarly, American stock exchanges will accept IASB standards for domestic listing by 2005 without reconciliation. Also by 2005 Australia will accept IASB standards for financial reporting by both domestic and foreign firms. Canada may also be aboard shortly.

b. The EU (European Union) was formed in 1967 with 12 member countries. In addition to its attempts to integrate European countries economically and politically, the EU has been concerned with harmonization of accounting standards of its member nations. The Council of Ministers of the EU nations has issued several directives with important implications for accounting. Directives become binding upon the member countries, although they may not be implemented in exactly the same way by each nation.

Two directives, the Fourth Directive and the Seventh Directive, contain important accounting matters. The Fourth Directive was adopted in 1978. The Fourth Directive concerns basic issues of financial reporting that are applicable to companies within the EU community. In addition to providing standard formats for financial statements, the directive states that financial statements be based on four concepts: consistency, going concern, prudence, and accrual accounting. The Fourth Directive permits current value statements in addition to historical costs and also calls for the application of the true and fair view. Since the true and fair view calls for going beyond accounting rules in order to portray economic reality, it is very questionable how it can be implemented given differences in definition, interpretation, and application among the countries constituting the EU. Furthermore, it is contended that the true and fair view is being interpreted in EU nations in terms of their own particular cultures and traditions. Increasingly, the true and fair view is seen as going from the need to “override” accepted accounting principles with full disclosures in order to show the facts and conditions of the enterprise truthfully to a diligent application of existing GAAP.

The Seventh Directive was passed in 1983. It extends consolidation accounting to firms within the member states of the EU under a very wide group of circumstances where one firm has substantive control over one or more other firms. This directive, like the Fourth Directive, requires the true and fair view. Legislatures of member nations had all passed the Seventh Directive by 1992. While the national laws are not exactly the same, it is clear that the Seventh Directive has increased harmonization in the area of consolidations among the member nations. However, there are options allowed under the Fourth and Seventh Directives that allow for differences in some areas such as the definition of a subsidiary and consolidation exemptions where the ultimate parent is not an EU firm.