Discuss why MNEs are voluntarily adopting IFRS rather than the U.S GAAP

4. Why are MNEs voluntarily adopting IFRS rather than the U.S GAAP?

MNEs are also often motivated to increase the quantity of information disclosed in their corporate reports voluntarily through the process of competing for funds in the Eurocurrency and other international capital markets (Radebaugh, et al…, 2006). Because of economic benefits, MNEs would be able to reduce their costs of accounting and reporting if they were able to use a single set of standards across all business units.

Even small, privately held domestic firms would enjoy both cost-savings opportunities and expansion opportunities as a result of the universal availability of financial report talent trained in globally accepted country-neutral standards (Pounder, 2008).

7. Why did the IASC decide to create IASB to set out international accounting standards?

Deloitte What Is the IASB?

The IASC felt the need to restructure primarily because pressure had grown forth IASC to become more independent of professional accounting bodies from around the world with the aim of working more closely with those who actually set local standards to reach agreed solutions (Radebaugh, et al…, 2006).

The IABS is an independent, private-sector body that develops and approves International Financial Reporting Standards. The IASB operates under the oversight of the International Accounting Standards Committee Foundation (IASCF). The IASB was form in 2001 to replace the International Accounting Standards Committee (Deloitte, 2009).

Under the IASCF Constitution, the objectives of the IASB are:

(a) to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions;

(b) to promote the use and rigorous application of those standards; and

(c) in fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies; and

(d) to bring about convergence of national accounting standards and International Accounting Standards and International Financial Reporting Standards to high quality solutions.

8. What problems do you foresee with the implementation of IFRS by 90 countries by 2005?

Financial statements of small and medium sized entities are often use as the basis for tax preparation, banking covenants, and other reporting requirements. Involving representatives from small and medium sized entities and accounting firms in the standard-setting process is seen as critical.

From a magazine article, I found these other problems (Jermakowicz, Gornik-Tomaszewski, 2005):

(a) Technical differences between local GAAP and IFRS

(b) Costly and resource-consuming conversion process could last up to 24 months

(c) Shortage of well-trained personnel

(d) Addition or replacing new accounting system

12. Which body has been more successful in achieving harmonization, the European Union or the IASB? Explain.

I would say the EU because they were establishing back in 1957 with The Treaty of Rome. The governing body of EU the European Commission (EC) has complete enforcement powers of its accounting directives of all member nations. In the Strategic Decision Point in Chapter 2 page 61 its states that the IASB was created to increase comparability across nations they have no power to enforce the use of the reporting standards (Radebaugh, et at… 2006).

Since one of the EU’s goals, is to fully integrate European financial markets, the EC issued directives toward that end. They included raising capital on an EU-wide basis; establish a common legal framework for securities and derivatives markets. Establish a single set of accounting standards for listed companies. In 2005, the EU proposed that all EU companies listed on regulated markets, including banks, insurance companies and small to medium firms, prepare consolidated accounts in accordance with IFRS (Cascini, 2008).

Chapter 8

1. Why are consolidated financial statements useful? What are the drawbacks of consolidated information?

Consolidated financial statements should provide true and fair view of financial condition and operating result of a business group. The purpose of preparing consolidated financial statements is to report financial condition and operating result of a consolidated business group, which is assumed as one entity comprised of more than one companies under a common control (Radebaugh et al…2006).

A drawback of consolidated information could be the difficulty of comparing financial results from different periods, because you cannot tell whether the company’s current results are good or bad.

9. Discuss the reasoning behind the different treatments of joint ventures, noting the two types identified by the IASB. Which one do you feel is the better alternative?

The Benchmark Treatment recommended by the IASB is to use the proportionate consolidation approach by either combining its share of the joint venture’s assets, liabilities, income, and expenses on a line-by-line basis with the consolidated group amounts or by including separate line items for its joint ventures in the consolidated financial statements. Allowed Alternative Treatment is to use the equity method, whereby the share of net income and net assets in joint ventures is brought into the accounts as a single-line item with further information given about the various joint ventures involved in the notes to the accounts (Radebaugh, et al…2006).

I would think that the allowed alternative treatment is better because it provide users of the group’s consolidated financial statements with more useful information for assessing the accountability of management.

10. What are the arguments for and against the different accounting for goodwill (write-off, amortize, don’t amortize)?

Write-Off: Under this method, goodwill is immediately written off against an account in the stockholders' equity section, generally retained earnings. Advocates of this method argue that goodwill is not measurable and has no true future value. Thus, it should be written off against stockholders' equity. Writing off goodwill immediately can lead to distorted results when tangible assets are undervalued allowing goodwill to be overstated. Even though there are some good arguments for write-off method, it appears that it was used because it was the easiest and most widely used and not because it was conceptually correct (Johnson, 2005).

The rationale for non-amortization is premised on the notion that goodwill does not decrease in value. High managerial ability, good name and reputation, and excellent staff generally do not decrease in value but they increase in value. Goodwill could be viewed as an investment and should stay on the balance sheet unamortized. But, without amortization, abuse may occur, and the goodwill account will lose what limited significance it has now (Johnson, 2005).

Amortization enables companies to match the cost of intangible assets over the period deemed to and the unreliability of earnings without some attempt to recognize the impact. When amortization became required, the period for write-off became the focus. If the life of the asset is non determinable, which is normally the case with goodwill, amortization over a maximum of forty years should be used. This lengthy period was set to allow a minimum impact to the net income (Johnson, 2005).

14. To what extent are issues concerning intangible assets important in developing countries?

Dramatic growth in significance due to wave of international merger, pursuit of global leadership through acquisition of brand names, and expansion of service sector.

References:

Cascini, K. (2008). The EU Has Accepted IAS for Listed Companies: Will the U.S. Follow? International Business and Economics Research Journal (7)4, p11. Retrieved on April 23, 2009 from http://www.cluteinstitute-onlinejournals.com/PDFs/547.pdf

Deloitte Touche Tohmatsu. (2009). What Is the IASB? Retrieved on April 23, 2009 from http://www.iasplus.com/restruct/whatis.htm#objectives2005

Jermakowicz, E.K. & Gornik-Tomaszewski, S. (2005). The Brave New World of IFRS. Financial Executives Magazine. Retrieved on April 23, 2009 from http://www.iasplus.com/resource/0511feibravenewworld.pdf

Johnson, J.D. (2005). Goodwill – an eternal controversy. (Accounting). Market Evidence Business Resources. Retrieved on April 26, 2009 from http://www.marketevidence.com/articles/goodwilleternal.php

Pounder, B. (2008). What CPAs Should Know About IFRS. Retrieved on April 22, 2009 from http://www.cpavision.com/Content/Files/Member/Files/Outlines/2008-2009/Cleveland_Accounting_Show_(Sept._17-18,_2008)/61b_IFRS.pdf

Radebaugh, L. H., Gray, S. J., & Black, E. L. (2006). International accounting and multinational enterprises (6^th ed.). Hoboken, NJ: John Wiley & Sons