 Hello and welcome to the session. This is Professor Farhad. In this session we're going to be looking at accounting, harmonization and specifically we're going to be looking at this topic from a historical background. So in this session you're going to see a lot of history as well as you're going to see a lot of acronyms for organization that were involved in this accounting, harmonization. This topic is obviously covered in international accounting. I doubted this will be covered on the CPA exam. Actually I can state it will not be covered on the CPA exam. As always I would like to remind you my viewers to connect with me only then. If you don't have a LinkedIn account please make sure you create one. It's very important for your professional image as well as network ability. YouTube is where I house all my lectures. Please like my lectures, share them, put them in the playlist. If you like my lectures there's someone else who would benefit from them as well. Please share the wealth. I'm also growing my Instagram account. Please connect with me on Instagram, follow me on Instagram and like my Facebook page. If you're looking for a CPA premium material I do have some product on Gumroad and I do have a website. So let's talk about this international harmonization of accounting standard. So this is going to be like basically background information. If you remember from the prior lecture we learned that accounting diversity exists and because that diversity exists it created challenges. So what happened is the accounting profession it's under pressure to do what? To eliminate those diversity, to reduce the challenges. And what are the main challenges? Well one thing we talked about is cost. Well it's going to cost a lot of money. Cross listing. If you're on a list and in other stock exchanges there's a lot of requirement you have to comply with. You're going to have limited access to to capital market. Investment decision, lending decision, those are all challenges because we have accounting diversity. So the accounting profession and the standard setters have been under pressure from who? From multinational companies, stock exchanges. Multinational companies they want to reduce their cost obviously, the cost of compliance. Stock exchanges they want more companies to be listed, securities regulators, it's easier for them to monitor the system. International lending institution, international investors, the World Bank they all want to reduce that complexity. Okay, why? Because it's easier for everyone. If we are using the same accounting standard it's easier for everyone to make decisions. So they want to reduce diversity and harmonize accounting standard and practices internationally. So we're going to be looking at in this session we're going to be looking at the International Accounting Standard Committee or IASC. And this committee is basically gone. Now we have the IASB, the International Accounting Standard Board. Basically the IASB is a continuation of the IASC. But it's very important to look at the IASC from a historical perspective to see how things evolved over time. Okay, they're both private entities and they are the main players in the harmonization and convergence effort with the support of accounting bodies, standard setters as well as capital market regulators, government authorities and financial statement prepares. Okay, so what is accounting harmonization? Well accounting harmonization is when you allow countries to have different standard as long as they don't conflict. So it doesn't have to be the same as long as they don't conflict. Now we can look at harmonization in two different ways, harmonization of accounting regulation or standard and harmonization of accounting practices. Standard and regulation basically it's what's written down, it's the same thing, but what comes to practices we might have different practices or we might have the same practices. So harmonization is a process that reduce alternative while retaining a high degree of flexibility in accounting. So what you do is rather than everyone using a different method you want to reduce harmonization reduces those alternative at the same time, keep in flexibility, keep in flexibility. Now bear in mind harmonization is different than standardization or uniformity which implies the elimination of alternatives and harmonization you might have more than one method. Okay, you would reduce the alternatives but you will have more than one. And the objective of harmonization is to have comparable financial statements from companies in different countries and that's the main problem. The main problem is if I'm an investor, if I'm a lender, how do I make a decision if I need to lend money in another country if they're using a different system? Okay, harmonization of regulation which is called Dijon harmonization which is the harmonization of the standard that's not necessarily produce harmonization of practices. Although you have the same rules in different countries but the way that rule is being implemented it could be different in practice which is de facto harmonization which we'll look at some of the reasons. Now keep in mind we're not talking about convergence yet we're gonna keep convergence we'll discuss later. Convergence is a little bit different it's the enforcement of a single set of accepted standard by regulatory bodies and this is one possible definition of convergence again we'll talk about convergence later on because you don't want to confuse convergence with harmonization. So why the factor of harmonization is difficult? Why is it difficult to have similar practices? There are many reasons we look at them in prior lectures legal reasons basis for account quality of audit may not be the same in different countries different countries might have different standards for example in the US we have the PCAOB which is the public company accounting oversight board and the reason we have PCAOB because we have a series of accounting fraud which let the securities fraud therefore the government had more now they have more oversight over the auditors well that may not be the case in different countries so different countries will have different requirement therefore the way you're going to do you're going to be doing auditing in one country it will be different in another because each country is different and we talked about this earlier also enforcement mechanism how do you enforce your securities laws how do you enforce if somebody violated accounting rules is it criminal offense is it then the civil offense for example in the US we have the SEC the SEC does not prosecute if there's any federal case will be FBI will prosecute so in different countries the rules might be different again cultural differences we talked about this some some some cultures are more secretive others are transparent that require more disclosure for example Asian usually in Japan they're more secretive the US and the UK they don't they don't have no problem having more disclosure and we talked about about why in prior session legal requirements for example if there is a violation of an accounting principle what type of penalties do you do you do you impose as the state involved as the court involved is the only the private accounting setting standard body and body involved you get slapped on the hand for example in some countries bribery is not is is not illegal in the US bribery is illegal so how do you how do you actually record a transaction if it's you know in the US that's illegal in another country it is legal how do you harmonize the practices so you could appreciate the the the differences in the difficulty also you might have different socioeconomic and political system for example what's the state role what's the legal system legal system it's a common law is a code law those are difficulties okay now most of the harmonization effort started with the IASC because that's the oldest organization quasi international organization it was established in 1973 by an agreement of the leading professional accounting bodies and 10 developed countries or 10 countries the US the UK the main countries it's it was its main objective was to issue international accounting standard okay and to do what to have harmonization to kind of have reduce the alternatives as much as possible and the life of the IASC can be broken down into three phases the first phase which is the first phase what they looked at is the lowest common denominator approach what they did they looked at the rules that are most common between all the different countries and they try to create those IAS international accounting standard IAS based on that lowest common denominator and that was from 1973 until 1988 considered the first phase of its life it issued 26 international accounting standard for example construction contract that's when they said well there are two acceptable methods hopefully you know what they are percentage of completion and the completed contract method for example all countries would either use the percentage of completion or the completed contract method those are the two acceptable method okay usually allowed multiple options so they did not really limit you to any particular option but they gave you the most common one but it produced little or no comparability of financial statements across the country so this was the start of this international effort but they issued 26 standard but those 26 standards did not really increase the comparability the second phase took place in the next five years from 1989 till 1993 and there was two major activities during those years the first one is they issued what's called the publication of framework for the preparation and presentation of financial statements also known as the framework so they issued the framework and in the framework they talked about the objective of financial statements why do we prepare financial statements the qualitative characteristics the definition of financial statement elements the definition of financial the criteria for recognition of financial statements now all these topics we're going to talk about when we talk about the IASV so we're going to look at them from an international perspective but this was the beginning of them 1989 1993 this is when they were published for the first time okay also what they wanted to do they wanted to start a comparability of financial statement project and what they did they reduce or eliminate certain choices for example if we go back to the percentage of completion and the completed contract method now what they did they put more restriction when you would use either or so they put little bit more rules to eliminate choices and to have more harmonization or more comparability the third stage or the final stage it was basically it's known as the international organization of securities commission agreement 1993 to 2001 this is when the IASC and the international securities commission the international organization of securities commission they tried to work together now you might be saying why well to solve the problem of cross-listing if one company if a US company wants to listen Europe or European company wants to listen the US what can we do to help them okay so they created a set of international standard endorsed by this organization this international securities organization for cross-listing purposes so they agreed on 30 core standard so they created a 30 core standard and in May 2014 of the largest developed countries developed countries accepted the 30 core standard to gain access to the country's capital market so as long as you use those standard you can cross-list and what happened after 2001 we have the creation of the international accounting standard board and we'll see later on shortly in the session what were the challenges for the IASC and in the next session we'll talk more about IASB which is the current board and this is the most important okay now was the IASC the only player in the harmonization effort of course now we already saw that the international organization of securities commission they were they were interested other other players were the international federation of accountant iFAC European Union was a major player international form on accountancy development and other players such as the UN and other international blocks let's talk about a little bit shortly about each of these players and talk about the difficulty of the challenges that that that that that face the IASC the international federation of accountancy it's a global organization of 158 member bodies associate in 123 countries they represent 2.5 million accountant employed in public practice industry commerce government and academia its mission is to serve the public interest and to strengthen the worldwide accountancy profession and to contribute to the development of strong international economies by establishing and promoting adherence to high high quality professional standard on on it auditing ethics education and training and obviously you can see that there could be a disagreement between this organization and the IASC and that's that's one of the reasons why the IASC was one of the reasons was dissolved because there was a disagreement with this organization and May 2000 IFAC and the large international accounting firm established a forum of firms also aim at raising standard of financial reporting and auditing globally in order to protect the interests of cross-border investors and promote international flow of capital okay so once again this is one of the organization that helped in this harmonization effort the second party that helped in this accounting harmonization effort is the European Union and obviously because the European Union is is is a geographical block and it's it's one of they have most of the developed countries so but bear in mind the European Union is changing especially in the past decade when they included former Soviet Union block countries so it's not as developed as as northern Europe or western Europe the aim of the EU is to create a unified business environment and obviously if you need to create a unified business environment accounting it's going to play a part of it so you want to create a unified accounting accounting rules two directives has been aimed at harmonizing accounting in the EU the fourth directive which is that's what they call them those decision issued in 1978 deals with valuation rules disclosure requirement and the format of the financial statement and the seventh directive issued in 1983 deals with consolidated financial statements so the fourth directive was a little bit more comprehensive it have comprehensive accounting rules covering the content of annual financial statement the presentation measurement disclosure of both public and private companies and fair value fair value measurement how do you measure something at fair value whether it's an asset or a liability okay so bear in mind that those rules provide consider considerable flexibility therefore it did not lead to complete comparability across member nations they tried their most but it did not it did not lead to that comparability but it helped reduce differences in financial statements so again even within the EU you have different cultures you have different countries so bear that in mind in 1995 the EU decided to adopt effort undertaken by the international accounting standard council toward broader international harmonization said no more accounting directives now we're going to go with this council whatever they decide which eventually became again the I which we're going to talk about later became IASB some of the challenges faced by the IASC over the years one one complaint was it lacked legitimacy because it was created by the accounting profession which was a private sector with its own self-interest it doesn't mean that's true but that's the perception for example the UN or constantly complain about this the IASC also faced problem of legitimacy with in regard to constituent support independence and technical expertise for example the board members worked at the the international standard setting were only part-time so they were not committed full-time which has showed a lack of commitment and they were not necessarily selected because of their technical expertise okay which that's that gave doubt to them they may not be they may not be developing the highest possible equality of accounting standard US reaction was also a major challenge in 1996 I believe FASB found differences in 74 percent of accounting standard what does that mean it means then when FASB did a study and they compare the the international accounting standard to the US GAAP what they found is it's not comparable at all there is a differences in 74 percent of accounting standard which is that's a huge difference that's not even close to comparability and there was some disagreement with the IFAC basically they disagreed who's the boss who should be issuing those international accounting standards so in response to these challenges and others and other challenges other than those what they did is they appointed a new committee appointed a committee called strategy working party in 1996 which end up with recommending changes that gave the birth to what we're going to be looking at next the international accounting standard board IASB which is IASB what's going to be starting to be showing the IFRS that we need to learn about in this course if you have any 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