 Hello and welcome to the session. This is Professor Farhad and this session we're going to be looking at the International Accounting Standard Board or IASB. And we're going to be looking specifically for going from harmonization to talking about convergence. In the prior session we looked at harmonization. Now with the International Accounting Standard Board we're going to shift to the concept of convergence. This topic is covered in international accounting and you do need to know something about the AISB for the CPA exam. As always I would like to remind you my viewers to connect with me on a professional level. If you don't have a LinkedIn account you should create a LinkedIn account. It's very good for your professional image and networking ability. YouTube is where I list all my lectures. Please subscribe to my channel so you're always up to date. Like my videos, share them, put them in playlists, let the world know about them. 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FASB is the U.S. position toward harmonization. And what we said, we said when FASB did a study, they find out that the International Accounting Standard differed 74% of the time versus U.S. gap, U.S. gap. And we're talking that's 1996, which is over 20 years ago. But the point that they differed that much, FASB said, no, we're not going to adapt your standard. We have a lot of work to do. So that's why the IASC was replaced with the IASB. And we changed the focus from harmonization to convergence, which we need to talk about convergence a little bit more in the session as well as the IASB. Now, the IASB is organized under an independent foundation called the IFRS Foundation, the International Reporting Standard Foundation. Now, let's take a look at the structure real quick of the IASB. Now, I'm going to talk a little bit more about the role of each member of the structure, but you don't have to know this unless you're interested in this. But I'm going to talk real quick about it. And some people might say, well, you're talking too much. Well, on the top, we have the mentoring board. What's the mentoring board? It oversees the whole foundation. Basically, it's on the top. It's compromise of relevant leaders, for example, relevant leaders from the EU, the US SEC, the international securitization, the Japanese Financial Service Agency. So you have a different voices representative. It participate in trustee nomination because we need to have trustee and we need to have trustee to run the foundation. It nominate those trustees and approve the appointments of those trustees. Then we have the IFRS Foundation. Basically, the monitoring board, think about it, it's a monitoring board, the oversees thing. But the IFRS Foundation is the foundation where you have the trustee and the role of the trustee. First of all, we have 22 trustees. They are appointed, they oversee the IFRS, the board, and the race funds for the board. They represent different geographical areas. So you have people from North America, I believe six from North America, six from Europe, six from Asia, and four from other countries. So six, six, six, 18 plus four, 22, that's 22. And its composition is, it's a balance of professional people, backgrounds and auditing, users of financial statements, preparers of financial statements, academicians, as well as other officials serving the public interests. And you need this diversity because remember one of the, one of the complaint against the IASC, they were mostly self-appointed accountants. So that's why you would see that diversity. So the trustee have the responsibility, obviously, of appointing the board. The board of the IASB, which we're going to talk about a little bit more, appoint the board and establish their contract of service and performance criteria. And obviously, if they appoint the board, it means they're going to oversee this process as well. Let's talk about the board a little bit because the board is important, because this is where basically people who are really working on setting the technical agenda, approving the standards, so on and so forth. The board is composed of 16 member, three part-time and 13 full-time. And again, one of the complaint against the IASC is they were mostly part-time. So they did not have a vested interest. Here, once they are selected by the foundation, 13 of them, the majority of them, they commit to working on the board. Okay, so it consists of 16 members. They come from different countries. I believe I have a slide that talks about this. 16 members, 13 are full-time. Board members are selected on the basis of professional competency and practical experience. Again, this was a complaint against the IASC. Now the board has practical, the members have practical experience and professional competency, and they expect to represent different geographical mix and to ensure a broad role of international diversity. Again, since July, we have four members from Asia, Asia-Oceania region, four members from Europe, four members from North America, one member from Africa, one member from South America, and two members appointed from any area subject to maintaining overall geographical balance. So notice it has a balance. The members are competent. They are professional, and they commit to it full-time. The board follows asserting a due process and issuing IFRS. And again, this is highlighted here. This is the most important statement. I overlooked it. Is the IASV, its sole responsibility is to establish what we're going to be learning in this chapter, is the International Financial Reporting Standard. That's the board that issue those standards. So this is basically the center of things, the center of things. We have interpretation committee, in case you need any help interpreting the standard. We have advisory console, basically helping the foundation, helping the board. We have other working groups. So if you're interested in the structure, you could read about them or you could visit the website. If that's what you are, if that's of interest to you, but that's the only thing I'm going to talk about, the IASV structure. So let's talk about convergence because this is what the IASV set to do. Set to create convergence. Now we have to accept that the IASV earned a great deal of goodwill from interested parties, accounting standard setting, securities regulation across the globe, geographical blocks like the EU, FASV, so on and so forth. So what is convergence? Convergence could mean many things. So we're going to look at convergence from the three different perspectives. The first perspective is a strict viewpoint of convergence. It refers to the enforcement of a single set of accepted standard by several regulatory bodies. So what's going to happen? You could look at convergence as, well, we're going to have one set of single set and everybody will have to accept it. That's called the strict viewpoint. Another viewpoint, a softer viewpoint, it refers to diminishing differences, kind of more than harmonization, but diminishing differences among accounting standard issue by several regulatory. So basically rather than, it's more than harmonization, but it's not. It doesn't take that strict viewpoint. And the third point of view, it refers to a situation where two or more jurisdiction agree on a core set of common standard allowing variant interpretation regarding non-core issues. So we agree on the core standards and the minor issues as far as convergence. That's up to each jurisdiction to deal with it. So that's also could be considered a convergence. Now, it differ what are you looking for? For example, we might have a strict viewpoint on revenue recognition, softer viewpoint on other areas. So that's what convergence could possibly mean. But also the implementation of convergence is important. How the IASV implementing convergence? Also, they have three approaches. One approach is to merge all standard setting bodies into unified global body. Theoretically, this is the most optimal. Basically you have one accounting body, you have no national bodies. That doesn't exist yet. Okay, but that's in theory, if that's how you want to create convergence. And basically this goes hand in hand with the strict viewpoint where you only have one set of accepted standard. The second one is recognize each of the existing standard setting bodies as a sole authority in its representative jurisdiction. And give them discretion and flexibility in accounting standard through mutual recognition, which is theoretically more desirable than uniformity and rigidity. So basically this implementation state that guess what? We are going to let you do what you want to do. Okay, that's not a problem at all. We're going to give you discretion and flexibility, but you're going to recognize. So you're going to have mutual recognition. So what I do is accepted by you and what you do is accepted by me. The third way is national standard setting body can coexist with international coordination bodies. So basically we would still have a national standard body and they coexist with the international coordination body. And this is basically what we have technically right now. Number three is the closest thing to what we have to what we have right now. Okay, so, but overall we have to understand that the main objective is to is to achieve convergence. Now how we're going to be achieving convergence one way to describe one way. The best way to describe it is by the former, the former chairman of the ASP Sir David Tweedy. He basically say what we're going to do. The strategy is to identify the best standard around the world and build a body of accounting standard that constitute the highest common denominator of financial reporting. So what would you think the best standard around the world would be? Obviously they will be from well developed countries like the US and the EU. So that's what they want to do and build the standard around the most common denominator. Now bear in mind the IASP has adopted a principle based approach and this is important. It's important because in the US we did not use principle based approach because we use rule based approach. What's rule based? Basically rule based means we give you a lot of guidance. We give you a lot of guidance. This is how you do this. This is how you do that. Principle based is we give you a principle then it's up to you how you implement the principle. So the US did accept this is a great step in the process of convergence. We adopted a principle based approach to standard setting and that's very important. That's very important versus rule based. But what's basically a principle based? What does that mean? It means the IFRS they will establish general principles for recognition, measurement, financial reporting and they would limit the guidance. So what's going to happen is they will give you the principle and it's your judgment, your professional judgment and how to apply this general principle to your entity or to your industry. A case in point is the revenue recognition principle. For example, the revenue recognition principle is accepted in the US, accepted in Europe. It's the same principle but how a European company will implement it might be different of how a US company might implement it. Although they're looking at the same principle, the implementation might be different. Let's take a look at the major concern in achieving IFRS convergence. So what are the major concern or basically obstacles that could hinder this process? The complicated nature of particular standard, especially those that deals with fair value accounting, financial instruments and fair value accounting. Even within GAAP we have issues with fair value accounting. What's fair value accounting? Fair value accounting means you have to report your assets, specifically financial assets and financial liabilities, as well as other assets and liabilities at fair value. Fair value means how much they are worth today. Now how do you determine how much something is worth today? For some assets, that's really easy. If you have equity, if you have stocks, if you have Apple, stocks, if you have Amazon, if you have Walmart, well, that's easy to find out what's the fair value of that financial instrument. But if you own a building, if you own a piece of land, how do you know what's the fair value? Well, that's a complicated nature of a particular standard. How do we agree? How do we agree on how to find the fair value? Well, there is guidance, but it's not necessarily, it's the same across the board. That's not how everybody implemented the same way. Also countries with tax driven national accounting regime. For example, in some countries, that's all they have. One accounting system and that's the tax system. Now what you're doing is you're imposing IFRS and you're telling them you have to use IFRS for your taxation. And your taxation might be based on different factors, cultural factors, political factors, economic factors. Now you bring an IFRS and you're imposing it on them. That's a difficulty. That's a difficulty in implementing. Disagreement with certain significant IFRS, especially those related, again, to fair value accounting. Again, within gap, we have this agreement on fair value accounting. Also, a difficulty is insufficient guidance on first time application of IFRS. For example, when you first convert. How am I going to convert from my national, local gap, generally accepted accounting principle to this IFRS system? So it's going to be some difficulties. Also for countries with limited market capital, I'm not benefiting from IFRS. Why should I change my system? It might be cost me money. I don't need your capital market. I have no companies that are raising money on Wall Street or raising money in Tokyo or raising money in London. So why do I have to adopt this IFRS? Also, I could be happy with my national accounting standard. Why are you imposing this on me? So user investor slash user satisfaction with the current national accounting standard. Also, we could have language translation difficulties because IFRS is initially written in English. And sometimes they're finding difficulties finding a direct translation for certain words. So that's also a difficulty. And this could create some problems for some culture. Maybe they don't like to use the English word. They like to use their language. Although the IFRS has been translated in over 30 different languages, but are certain words, you may not find direct translation. Now, let's talk about argument for international convergence. Why convergence? Why do we need to convert? What are the reasons? Well, we talked about them, but let's go ahead and review, kind of put it in a nutshell. Facilitate better comparability of financial statement. And that's usually what we start with. We want the same financial statement across the globe. Why? Because that's going to make it easier for potential investors to look at your company and invest in your company. That's one of the reasons. So to facilitate comparability. So if I am in South Africa, I look at the financial statements of a company in Europe, I would understand the financial statements. And if I have some money, I might invest in that company because I understand their financial statements since they are using the same system that I'm using in South Africa. So it's easy. Okay. Facilitate international mergers and acquisition. Well, otherwise what's going to happen if you don't have the same set of financial statements, every time you need to buy a company, international company, you're going to have to do, you're going to have to translate your financial statements, do more diligence because they're using a different system. So in a sense, it benefits large companies. Reduce financial reporting costs. You just have one system. And you could use this system for cross-listing. So you could be listed in New York and Tokyo and in London. Okay. So cross-listing would allow access to less expensive capital because there is less risk. Reduce investor uncertainty and the cost of capital. Well, the less uncertainty is the less the risk. So think about it. If you are looking at a financial statement and you understand everything, your uncertainty goes down. Every time risk goes down, cost goes down because whoever's looking at your financial statements, they're taking less risk because they understand what you are communicating in the income statement in the balance sheet in the cash flow statement. Well, less risk for me. Well, I'm willing to take more chance and I'm willing to invest more money. Reduce the cost of preparing worldwide consolidated financial statements. Again, if you have one system, it doesn't matter. Then you can transfer your accounting staff from one area to the other. And it's simplified auditing. For everybody using the same accounting system, the auditor can understand financial statements across the globe. And overall, raise the quality level of accounting practices internationally. And that's another reason. Maybe, again, this could be a colonial point of view. It could be an imposing point of view. But the quality of accounting practices in certain countries is not as good. Maybe if they adopt AFRS, they would raise the quality. So it increased the credibility of their financial information. It enabled developing countries to adopt ready made set of high quality standard with minimum cost of effort. Now, you don't have to create your own standard. Just adopt hours and you are good to go. So you don't need any cost. Just learn how to work with hours. Now, since we talked about arguments for, to be fair, we have to talk argument against. So what are the argument against international convergence? What are some of the argument? Well, significant differences exist and will always exist. So it's going to be enormous political cost to eliminate those differences, especially cultural differences. Also, you have nationalism and tradition. Arriving at universally accepted principle might be difficult. What's accepted for you may not accept it for me. That means it's right or wrong. I don't accept this concept. The need for common standard is not universally accepted. Well developed global capital already exists. So why do we need, you know, a common standard? Well, if you want to raise money in the global capital market, the global capital market already exists. They can discount your information. They can convert your information if they're interested in investing in your company. Also, it might cause standard overload. They may have, you know, it may or may not. You may have so many rules. Also differences in accounting across countries might be necessary. Well, guess what? Differences is good. The way you do things, it's different than the way I do things because my background is different than yours. My requirements are different than yours. Therefore differences exist. Let's have different accounting standard. That's another argument. Even within the US, I mean, if you really think about it, even in the US itself, we have something called big gap versus small gap. So big gap versus small gap. A lot of companies, they don't like to comply with everything that gap asks you to do, generally accepted accounting principle. So we have big gap and small gap. So for smaller companies, we do allow them in certain circumstances to use different rules. Well, if you think about it, if you're talking within the same country, the US, think about globally. You may need big enough. Do we need a big IFRS and a small IFRS? It's interesting, but that's something for you to think about. And eventually as you practice, especially if you practice with multinational corporation, you will start to appreciate the differences as well as the similarities. And you could really form your own opinion whether we do need one set of accounting standard or we don't need one set of accounting standard or some compromise in between. This is basically my lecture about the IASP. If you happen to visit my website for additional lectures, please consider donating. Good luck and study hard.