GAAP CONVERGENCE 2002 - IAS Plus — IFRS, Global .

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GAAP CONVERGENCE 2002A Survey of National Efforts to Promote andAchieve Convergence with InternationalFinancial Reporting StandardsBDODeloitte Touche TohmatsuErnst & YoungGrant ThorntonKPMGPricewaterhouseCoopersRe s e a r ch b yDonna L. StreetUniversity of Dayton

[Adoption of IFRS will meanthat] “investors and other stakeholders will be able to comparelike with like. It will helpEuropean firms to compete onequal terms when raising capitalon world markets.”Frits Bolkestein,European Commissioner forthe Inter nal Market“[ ] by drawing on the best ofUS GAAP, IFRSs and othernational standards, the world’scapital markets will have a setof global accounting standardsthat investors can trust.”Sir David TweedieChair man of the IASB

Ta b l e o f C o n t e n t s12Highlights4Backg round6This Year’s Repor t7Findings, Obser vations, andRecommendations14The Way Forward15Sur vey Methodology andLimitations16Appendix24EndnotesA S U RV E Y O F N AT I O N A L E F F O RT S TO P RO M OT E A N D AC H I E V E C O N V E RG E N C E W IT H I N T E R N AT I O N A L F I N A N C I A L R E P O RT I N G STA N DA R D S

Highlights Investors are increasingly making capital allocation decisions based on global opportunities. Globalisation of capital markets has helped fuel demand for a commonworldwide accounting framework. Use of different nationalaccounting standards makes it more difficult and costly foran investor to compare opportunities and make informedfinancial decisions.Differences in accounting standards also impose additionalcosts on companies that must prepare financial informationbased on multiple reporting models in order to raise capitalin different markets, as well as creating potential confusionas to which are the “real numbers.”In April 2001 the restructured International AccountingStandards Board (IASB) was given a strong mandate bythe major constituents of the world’s capital markets torealise the goal of developing a single set of high-qualityaccounting standards.The major accounting firms support the IASB’s efforts andhave conducted three annual surveys of reporting practicesworldwide to measure progress towards convergence. Thisdocument summarises the findings of our most recent survey.GAAP Convergence 2002 provides an overview of countryplans, as of December 2002, to promote and achieve convergence with International Financial Reporting Standards(IFRS). Highlights of our findings from surveys in 59countries include:CONVERGENCE IS COMING Over 90 percent of the surveyed countries intend toconverge with IFRS, indicating that the IASB isviewed as the appropriate body to develop a globalaccounting language.GA A P C O N V E RG E N C E 2 0 0 22The majority of the surveyed countries currently have formally stated their intention to converge. Typically, thisintention takes the form of a governmental or other regulatory requirement, or a policy announced by the nationalaccounting standard setting body. In many instances, thecountry initially will require only listed companies toadopt IFRS. In other countries, national standard settershave an agenda designed to remove existing differencesbetween IFRS and their national GAAP, covering listedand unlisted companies. Some countries are pursuing acombination of these two strategies.B U T O B STAC L E S ST I L L E X I ST: There are disagreements in some countries with therequirements of certain significant IFRS (such as financial instruments and other standards based on fair valueaccounting). In addition, there is tension between thecapital markets orientation of IFRS and the tax-drivennature of some national accounting regimes. The complicated nature of some IFRS is perceived as abarrier to convergence in about half of the surveyedcountries. Consequently, countries may be limitingimplementation of IFRS to listed companies. The resultof this approach will be a widening of the gap betweenIFRS and the national accounting standards utilised bysmall and medium-sized entities (SMEs).AND SIGNIFICANT CHANGE MANAGEMENTCHALLENGES LIE AHEAD: The coverage of IFRS in the education and training ofprofessional accountants needs to be increased. Timely national language translations of IFRS, includinginterpretations, need to be made available.

We have highlighted the following principal action itemsneeded to support convergence. While we identify certainconstituents to take the lead in actioning these items, everyone requires all capital market participants to join forcesand work together at both a national and international level.P R E PA R E R S : Actively participate in the standard-setting process, inparticular to identify practical application concerns Provide IFRS training for staff and managers, includingthose in non-financial roles Prepare to implement IFRS by identifying differencesand addressing required systems changesAC C O U N T I N G P R O F E S S I O N : Assist governments and standard setters in formulatingand enacting convergence plans Provide IFRS training and education Support the preparation of national language translationsof IFRSUNIVERSITIES: A N A LYST S A N D I N V E STO R S : Promote convergence of national accounting standardswith IFRS Actively participate in the IASB’s standard-settingprocess, in particular to identify users’ needs Educate staff regarding the IFRS reporting modelG OV E R N M E N T S : Establish formal convergence plans that include targetdates for implementation Address impediments to convergence (for example thelink between financial accounting and tax legislation)R E G U L ATO R S : Promote convergence of national standards with IFRS Set up efficient and effective enforcement mechanismsto increase the consistency and quality of applicationof IFRS Support the International Financial Reporting Interpretations Committee (IFRIC) and the IASB as the soleclearinghouse for interpretation of IFRSInclude IFRS in the core accounting curriculumA country’s intention to adopt IFRS or converge withIFRS is highly admirable and to be applauded. However,the accounting profession, governments, regulators,national accounting standard setters, and other constituentsmust continue to work together to eliminate differencesbetween national and international standards. Only with ajoint effort will we achieve a common accounting framework that is interpretedand applied consistently.Only with a joint effortN AT I O N A L STA N DA R D S E TT E R S : Decide on a strategy and timetable for achievingconvergence Develop an active standard-setting agenda aimed ateliminating existing differences with IFRS Actively provide feedback to the IASB standard-settingprocessI AS B : Address concerns about the complexity and operationalpracticality of IFRS Prioritise the SME project as an agenda item Oversee and authorise translations of IFRS in variouslanguages3This year’s survey revealswill we achieve a comthat significant progress ismon accounting framebeing made towardswork that is interpretedachieving the vision of asingle worldwide lanand applied consistently.guage of financial reporting, notably for listedcompanies. As a next step, it is necessary to extend the benefits of convergence to all companies and all countries.While change is always difficult, the reflex of maintainingfamiliar practice should be challenged, and national GAAPdepartures from IFRS should become a rare exception.A S U RV E Y O F N AT I O N A L E F F O RT S TO P RO M OT E A N D AC H I E V E C O N V E RG E N C E W IT H I N T E R N AT I O N A L F I N A N C I A L R E P O RT I N G STA N DA R D S

BackgroundIn GAAP 2001, we discussed the urgency for a globalaccounting and financial reporting framework and notedthat the IASB is best positioned to lead these efforts.Several significant events have occurred since that supportthis view. In 2002, the European Parliament and theEuropean Council of Ministers passed a Regulation thatrequires the adoption of IASB standards. From 2005, all EUlisted companies are required to prepare their consolidatedfinancial statements in accordance with IFRS.1, 2 ThisRegulation also will require listed companies based in thecentral and eastern European countries that plan to join theEU to prepare for adoption of IFRS.During the last quarter of 2002, several events also transpired in the United States that ultimately resulted in thenational accounting standard setter, the FinancialAccounting Standards Board (FASB), linking its agendaand priorities much more closely with those of the IASB.Following the appointment of former IASB board memberRobert Herz as chairman of the FASB, the IASB and FASBhave agreed that convergence of IFRS and U.S. GAAP is a“primary objective of both Boards.” In recent years, theexistence of a formal liaison relationship between the twoBoards, their monitoring each others’ major projects, andtheir working on joint projects have contributed to thereduction of differences between these two sets of internationally recognised standards. Yet, the Boards recognisethat many differences remain, which are “collectivelymajor irritants to those using, preparing, auditing, or regulating cross-border financial reporting.”GA A P C O N V E RG E N C E 2 0 0 24In addition, the IASB and FASB recently added a shortterm convergence project to their agendas. The scope ofthis project is limited to resolving those differences inwhich convergence around a high-quality solution appearsto be achievable in the short term, usually by selecting current practice under either existing IFRS or U.S. GAAP. Thetwo standard setters agreed to use their best efforts to issueExposure Drafts(ED) during 2003“[The IASB – FASB] announcementthat will reflectis a very positive move towards a singlecommon soluworldwide set of high-quality, best oftions to at leastsome of the idenbreed, principles-based financialtified differences.reporting standards, which would dramatically improve the efficiency ofSubsequently, theIASB and FASBglobal capital markets.”issued a memoFrits Bolkestein,randum of underEuropean Commissioner forthe Internal Marketstanding that formalises the commitment of both Boards to converge their standards basedon high-quality solutions. The Boards also committed tothen maintain convergence through continued progress onjoint projects and coordination of future work programmes.The U.S. Securities Exchange Commission (SEC) and theEuropean Commission welcomed this formal agreementbetween the IASB and FASB.

Senior officials of the SEC also have indicated that, if theIASB and FASB make sufficient progress in convergingtheir standards and if sufficient progress is also made in creating an effective infrastructure for interpretation andenforcement of standards, the SEC will consider allowingnon-domestic companies to file in the United States usingIFRS without reconciling to U.S. GAAP. While there is nocertainty with regard to what will occur by 2005, SEC officials have indicated their strong support for moving towarda common worldwide approach in accounting standards.Clearly 2002 was a memorable year for the newly restructured IASB. However, while the cooperation and supportof the European Union, the SEC, and the IASB’s liaisonnational standard setters are necessary to achieve convergence, they are not sufficient. Countries worldwide mustrespond to the challenge with an active agenda for achieving convergence. Our GAAP Convergence 2002 surveyreveals the extent to which this is materialising.Throughout 2002, the IASB continued to work with all ofits seven liaison standard setters: Australia/New Zealand,Canada, France, Germany, Japan, the UnitedKingdom/Ireland, and the United States. In addition, from2003, the European Financial Reporting Advisory Group isan observer liaison member of the IASB. These partnerships are crucial to achieving the goal of a single global setof standards. For example, 2002 also saw Australia andNew Zealand deciding to adopt IFRS.“[We] are confident that the IASB inpartnership with national standardsetters can meet the legitimateexpectations of the global businesscommunity.”Sir David TweedieChairman of the IASB5A S U RV E Y O F N AT I O N A L E F F O RT S TO P RO M OT E A N D AC H I E V E C O N V E RG E N C E W IT H I N T E R N AT I O N A L F I N A N C I A L R E P O RT I N G STA N DA R D S

T h i s Ye a r ’s R e p o r tGAAP Convergence 2002 represents the third in a series ofsurveys conducted by the large accounting firms to encourage convergence of national accounting standards withIFRS. In the past two years, we provided a “status report” ofthe extent to which national accounting standards in variouscountries differed from international standards.Last year’s survey revealed that many national standardscontinue to have numerous and major differences fromIFRS, and that more effort should be made in these countriesto identify differences from international standards and towork to remove them over time. Hence, this year’s surveyhas been designed to learn more about each country’splans—or lack thereof—to promote and achieve convergence with IFRS.Focusing on listed companies, GAAP Convergence 2002provides an indication of the convergence plans of 59 countries and seeks to answer the following key questions: Is there a plan to adopt IFRS or converge nationalaccounting standards with IFRS? What is the nature of the convergence plan? What difficulties have been faced to date and what arethe obstacles to further convergence?GA A P C O N V E RG E N C E 2 0 0 26We conducted the survey by asking accounting professionalsin each of the countries to complete a questionnaire abouttheir countries’ convergence plans. The responses representthe views of the accounting professionals in each countryand not necessarily those of the national governments orstandard setters.Our report concludes with observations and recommendations to encourage national standard setters and other relevantparties, including the accounting profession, governments,and regulators, to move forward to achieve a single set ofglobal accounting standards.

Findings, Observations,and RecommendationsThe discussion and recommendations below are based onsurvey results that are summarised in the Appendix. Weencourage you to review our findings and observations inthe context of our survey methodology and limitations as setout on page 15.ObservationThe adoption of IFRS by most major countries around theworld, as well as general trends toward globalisation, shouldencourage these remaining countries to look to IFRS forguidance in the future.CONVERGENCE STRATEGIESFindingsPLANS TO ADOPT IFRS OR ENSURE CONVERGENCEWITH IFRSFindingsOur survey reveals that the IASB is viewed as the appropriate organisation to develop a global accounting languagethat provides high-quality financial information andenhances transparency. As illustrated in Figure 1,3 95 percentof the 59 countries surveyed in GAAP Convergence 2002either have adopted, intend to adopt, or intend to convergewith, IFRS. Iceland, Japan, and Saudi Arabia have not yetexpressed an intention to converge with IFRS.Two countries in our survey, Kenya and Cyprus, alreadyhave adopted IFRS as their mandatory standard. For the 54survey countries that intend to converge with IFRS in full orin part, Figure 2 indicates the basis that supports the countries’ intentions to converge.4Figure 2: Basis For Convergence Plan28%57%Figure 1: Intentions Regarding Accepting IFRS or ConvergingWith IFRS5%3%15%Governmental or other regulatory requirementFormal plan by the accounting standard setting bodyOtherSource: GAAP Convergence 200292%Have already adopted IFRSPlan to adopt or converge with IFRSNo current intention to converge with IFRSSource: GAAP Convergence 20027Thirty-nine of these countries have a formal plan for theadoption of, or convergence with, IFRS. This is evidencedby either a governmental or other regulatory requirement, ora formal plan announced by the national standard settingbody. Of the countries with a formal plan, 25 are EU member states or countries that plan to join the European Union.For many countries, the plan primarily consists of requiringA S U RV E Y O F N AT I O N A L E F F O RT S TO P RO M OT E A N D AC H I E V E C O N V E RG E N C E W IT H I N T E R N AT I O N A L F I N A N C I A L R E P O RT I N G STA N DA R D S

listed companies to prepare consolidated financial statements in accordance with IFRS from 2005 in line with EUlegislation. While a few EU member states and potentialEU accession countries either plan to require all companiesto adopt IFRS (for example, Bulgaria) or are working toconverge their national GAAP with IFRS (for example,Denmark and Estonia), most have not yet formalised a planfor non-listed companies.As reflected in Figure 3, almost 60 percent of the 54 countries surveyed that intend to converge plan to replace theirnational GAAP with IFRS for listed companies, supplemented only for national issues not addressed in IFRS.Figure 3: Approach to Convergence20%58%22%Replacing national GAAP with IFRS supplementedonly for issues not addressed in IFRSAdopting IFRS into national GAAP on astandard-by-standard basisEliminating differences between IFRS andnational GAAP when possible and practicalSource: GAAP Convergence 2002Observations and RecommendationsThe intention to adopt IFRS or converge with IFRS, as notedby most of the survey respondents, is highly admirable and tobe applauded. However, all participants in the convergenceprocess must appreciate the challenges that lie ahead.GA A P C O N V E RG E N C E 2 0 0 28We recommend that all countries begin to eliminate important differences with IFRS if they have not done so, and prepare to eventually replace national GAAP with IFRS. As weexplained in GAAP 2001, the adoption of IFRS in a countrywhere numerous differences exist between national and international standards might be effective if initially applied to alimited number of companies (for example, only to listedcompanies in a country with a manageable level of suchcompanies) and in the context of a highly trained accountingprofession. However, without sufficient lead time, a “bigbang” approach to convergence poses a greater threat to theshort-term quality of the application of new standards whencompared with a phased approach, in which change occursover time.We encourage the government and/or the national standardsetter in each country to develop a formal convergence strategy that includes target dates for achieving various stages ofthe plan. Considering the process followed by countries suchas Australia, Denmark, Singapore, and South Africa, as outlined in Figure 4 on page 9, may assist other countries indeveloping such a plan. These examples suggest that mostcountries need a transition period to remove existing differences with IFRS gradually, or to give companies sufficientlead-time to prepare for the full adoption of IFRS. However,given the interrelationships among accounting standards,basic conceptual differences between IFRS and national standards should be removed as rapidly as possible to pave theway for convergence. Otherwise, the gap between nationalrequirements and IFRS will increase significantly as newIFRS are issued.The ultimate goal of each country’s convergence planshould be to adopt IFRS, supplemented only in rareinstances for national issues. If a country elects a convergence strategy other than eventually replacing their nationalGAAP with IFRS, companies domiciled within its bordersare unlikely to be able to comply with international standards without exception.

Figure 4: Illustrations of National Convergence Strategies 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 AustraliaPolicy of harmonising on a standard-by-standard basisOne of seven national liaison standard setters, working with IASBFinancial Reporting Council, from 2005 onward, companiesshould use IFRSAccounting Standards Board decides to issue IASBexposure drafts at same time as IASBAdoption of IFRS, Australian standard

GAAP Convergence 2002represents the third in a series of surveys conducted by the large accounting firms to encour-age convergence of national accounting standards with IFRS. In the past two years, we provided a “status report ” of the extent to which national accounting standards in various countries differed from international standards.

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