After completing the assigned readings, prepare a 2-3 page, double-spaced paper to explain (1) the benefits and beneficiaries of a single set of high-quality global accounting standards; (2) the obstacles to achieving this goal; and (3) your view as to whether such a goal will ever be achieved. Support your opinion with a rational argument.
Memorandum of Understanding
“The Norwalk Agreement”
At their joint meeting in Norwalk, Connecticut, USA on September 18, 2002, the Financial
Accounting Standards Board (FASB) and the International Accounting Standards Board
(IASB) each acknowledged their commitment to the development of high-quality,
compatible accounting standards that could be used for both domestic and cross-border
financial reporting. At that meeting, both the FASB and IASB pledged to use their best
efforts to (a) make their existing financial reporting standards fully compatible as soon as
is practicable and (b) to coordinate their future work programs to ensure that once
achieved, compatibility is maintained.
To achieve compatibility, the FASB and IASB (together, the “Boards”) agree, as a matter
of high priority, to:
a) undertake a short-term project aimed at removing a variety of individual
differences between U.S. GAAP and International Financial Reporting
Standards (IFRSs, which include International Accounting Standards, IASs);
b) remove other differences between IFRSs and U.S. GAAP that will remain at
January 1, 2005, through coordination of their future work programs; that is,
through the mutual undertaking of discrete, substantial projects which both
Boards would address concurrently;
c) continue progress on the joint projects that they are currently undertaking; and,
d) encourage their respective interpretative bodies to coordinate their activities.
MEMORANDUM OF UNDERSTANDING – FASB and IASB 2
The Boards agree to commit the necessary resources to complete such a major
The Boards agree to quickly commence deliberating differences identified for resolution in
the short-term project with the objective of achieving compatibility by identifying common,
high-quality solutions. Both Boards also agree to use their best efforts to issue an
exposure draft of proposed changes to U.S. GAAP or IFRSs that reflect common
solutions to some, and perhaps all, of the differences identified for inclusion in the short-
term project during 2003.
As part of the process, the IASB will actively consult with and seek the support of other
national standard setters and will present proposals to standard setters with an official
liaison relationship with the IASB, as soon as is practical.
The Boards note that the intended implementation of IASB’s IFRSs in several jurisdictions
on or before January 1, 2005 require that attention be paid to the timing of the effective
dates of new or amended reporting requirements. The Boards’ proposed strategies will be
implemented with that timing in mind.
INT’L ACCTG STANDARD SETTING.DOC—PAGE 1
INTERNATIONAL ACCOUNTING STANDARD SETTING:
A Vision for the Future
Report of the FASB
INT’L ACCTG STANDARD SETTING.DOC—PAGE 2
For additional copies of this report and information on applicable prices and discount rates contact: Order Department Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, Connecticut 06856-5116 Please ask for our Product Code VFF. Copyright 1998 by Financial Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Standards Board.
INT’L ACCTG STANDARD SETTING.DOC—PAGE 3
INTERNATIONAL ACCOUNTING STANDARD SETTING: A VISION FOR THE FUTURE
Objective and Goals for the FASB’s Participation in the International Accounting System of the Future…………………………………………………………………………………………..X Introduction…………………………………………………………………………………………………..X Objective………………………………………………………………………………………………………X Two Related Goals: High-Quality International Standards and Increased Convergence……………………………………………………………………………X Need for Both Goals……………………………………………………………………………………….X Establishment of a Quality International Accounting Standard Setter Is Key………………………………………………………………………………………………………….. The FASB’s Commitment………………………………………………………………………………..X High-Quality Accounting Standards……………………………………………………………………X A Quality International Accounting Standard Setter……………………………………………….X
Appendix A: Vision of the International Accounting System of the Future…………………………………………………………………………………………..X
Appendix B: Quality of Accounting Standards ………………………………………………………….X
Appendix C: Functions and Characteristics of a Quality International Accounting Standard Setter………………………………………………………………………………….X
INT’L ACCTG STANDARD SETTING.DOC—PAGE 4
The principal author of this report is Carrie Bloomer, assistant project manager. E.
Raymond Simpson, senior project manager, developed the text of Appendix B. The ideas
and conclusions expressed in this report result from extensive consultation with members of the
FASB and members of the Board of Trustees of the Financial Accounting Foundation and
from their agreement on the final content of this report.
FASB staff member Alison Miller provided valuable editorial and administrative
assistance in the preparation of this report.
INT’L ACCTG STANDARD SETTING.DOC—PAGE 5
The evolution of a global society brings many implications for what, in the past, have
been considered areas of strictly national authority or responsibility. It is increasingly difficult to
think of an aspect of business that remains untouched by some level of international influence.
As technology and the desire to tap the demands of nondomestic markets bring us closer
together, formal and informal international groups are springing up to deal with demands for
effective cooperation, for forums for national representation and input on international matters,
for efficiency of global activities, for exchanging ideas internationally, and for conflict
resolution. Existing organizations, whether national or international, are challenged to
continually assess the relevance of their objectives, structures, and processes in the context of
the international system of the future. Those that do not do so risk obsolescence in a global
Financial reporting and accounting standard setting are not immune to the changing
times. We are beginning to see the emergence of a truly international accounting system—the
emergence of international-level organizations and cooperative ventures among national
organizations in the areas of accounting standard setting and financial statement preparation,
auditing, regulation, and analysis—to deal effectively with the merging of national and
international financial reporting issues. Today’s U.S. accounting standard-setting structure and
process reflects the increasingly international dimensions of the FASB’s role as a global leader
in accounting standard setting.
This report discusses how the FASB’s role may continue to evolve and how its structure
and process may change over time in the context of the FASB’s objective and goals for
participating in the international accounting system of the future. It includes a discussion of that
INT’L ACCTG STANDARD SETTING.DOC—PAGE 6
objective and related goals, a vision of the international accounting system of the future, a
discussion of the characteristics of high-quality accounting standards, and a discussion of the
minimum functions and characteristics of a quality international accounting standard setter. It
was developed with a view to the future as it pertains to the FASB’s role in national and
international accounting standard setting.
Recognizing its need to be actively involved as the international accounting system
evolves and its potential to provide leadership in meeting market demands for high-quality
international accounting standards, the FASB and its oversight body, the Financial Accounting
Foundation (FAF), have expressed joint support for the content of this report. During many
months of discussions on international strategic policy, the FASB and the FAF reached
general agreement on a number of key points that underlie much of what is expressed in this
report, including the following:
• The FASB has a leadership role to play in the evolution of the international accounting system and is guided by the belief that, ideally, the ultimate outcome would be the worldwide use of a single set of high-quality accounting standards for both domestic and cross-border financial reporting.
• Until that ideal outcome is achieved, the FASB’s objective for participating in the international accounting standard-setting process is to increase international comparability while maintaining high-quality accounting standards in the United States. To achieve that objective, the FASB is willing to commit the required resources to the related goals of (1) ensuring that international accounting standards are of high quality and (2) increasing the convergence and quality of the accounting standards used in different nations.
• The FASB believes that the establishment of a quality international accounting standard- setting structure and process is key to the long-term success and development of international accounting standards. The FASB will participate in establishing that structure and process. The FASB accepts that an increasing and substantial level of resources might be required to support and influence the establishment of that organization.
• The FASB acknowledges that, if a quality international accounting standard-setting structure and process emerges, the FASB’s commitment and desire to participate in a meaningful way in the operations of that standard setter may ultimately lead to structural and procedural changes to the FASB as well as potential changes in its national role.
INT’L ACCTG STANDARD SETTING.DOC—PAGE 7
The vision of the international accounting system of the future set forth in Appendix A is
intended to provide a context for the discussion of the FASB’s objective and goals. It is one
of many possibilities for the future and may be a useful tool with which to envision the FASB’s
future role as a result of pursuing the objectives. The FASB recognizes that it is not possible
to predict the future. Others may or may not agree on whether the vision is an accurate one or
whether different scenarios are more likely. In any scenario, however, the FASB believes that
for an international accounting system to be successful, establishment of a quality international
accounting standard setter is imperative.
Appendix B discusses the attributes of high-quality accounting standards, and Appendix
C of this report includes a description of the functions and characteristics that the FASB
believes are necessary to a quality international accounting standard setter in the future,
including an independent decision-making structure, adequate due process, and sufficient
technical capabilities to develop high-quality international standards. Some of the functions
and characteristics described in Appendix C differ from the functions and characteristics of the
existing structure of the International Accounting Standards Committee (IASC). Nevertheless,
the FASB believes that the objectives and vision in this report and the objectives for structure
reform of the IASC recently published in an IASC Discussion Paper, Shaping IASC for the
Future, are consistent. However, the FASB cannot predict whether an international
accounting standard-setting structure and process that meet those objectives will emerge from
the proposals to reorganize the IASC. Thus, the objectives and vision presented are also
consistent with other possible alternatives, including the possibility that the FASB might
reorganize itself to become an international standard setter or that an alternative international
structure and process could be established that meets the FASB’s fundamental objectives.
INT’L ACCTG STANDARD SETTING.DOC—PAGE 8
U.S. capital markets are the envy of the world. They are the deepest, broadest, and
most liquid anywhere. That is in no small part because of the confidence provided by the
credibility and thoroughness of our financial accounting and reporting. Financial reporting is
credible in the United States in part because of the independence of the FASB’s accounting
standard-setting process from any special interests and the thoroughness of its due process,
which works to balance the interests of all the FASB’s constituents. The mission of the FASB
is to establish and improve standards of financial accounting and reporting for the guidance and
education of the public, including issuers, auditors, and users of financial information. In
carrying out that mission, the FASB creates accounting standards that promote transparency
with the goal of providing the consumers of financial statements—principally investors and
creditors—with the best possible financial information for making economic decisions. The
FASB believes that the substance of that mission is equally valid—even essential—in the
This report has been published to convey the FASB’s intention to maintain its leadership
role in standard setting and to ensure that the standards used in U.S. capital markets, whether
developed by the FASB or an international standard-setting organization, are of the highest
possible quality. That can only be accomplished by a strong commitment to an active role in
the establishment of both international accounting standards and national accounting standards.
INT’L ACCTG STANDARD SETTING.DOC—PAGE 7
OBJECTIVE AND GOALS FOR THE FASB’S PARTICIPATION IN THE INTERNATIONAL ACCOUNTING SYSTEM OF THE FUTURE
Changes are taking place in the international accounting standard-setting environment at
a rapid pace. The FASB believes that it is important to ensure that those changes move
accounting standard setting at the national and international levels in a positive direction. To do
so, changes must be aligned with a set of shared objectives and guided by some vision of the
desired outcome of this evolution to more global capital markets.
The FASB has examined the issues in the current environment in great detail and
developed a vision of the future international accounting system and the objective and goals
for the FASB’s participation in that system. That vision is provided as Appendix A to this
report and represents only one of the possible scenarios for the future. However, the FASB
believes that using such a vision as a guide will tend to move the FASB toward a positive and
mutually beneficial outcome for all of the key participants in the international accounting system
of the future.
The objective and goals developed by the FASB are compatible with that vision as well
as with the following key considerations:
• The FASB should retain a worldwide leadership role in standard setting. • The FASB should do as much as it can to participate in the development of internationally
recognized standards to ensure that they are of the highest possible quality. • Worldwide acceptance of internationally recognized standards and a global standard-
setting process is impossible without U.S. acceptance and participation. As the largest capital market, the United States is the primary target in the drive for internationally recognized standards. U.S. support is necessary to the legitimacy of any set of international standards, and the United States has much to contribute to ensuring those standards are of high quality.
INT’L ACCTG STANDARD SETTING.DOC—PAGE 8
The objective and goals for the FASB’s participation in the international accounting
system of the future are described below.
The FASB’s commitment to the development of international accounting standards is
guided by the belief that, ideally, that process ultimately will lead to the worldwide use of a
single set of high-quality accounting standards for both domestic and cross-border financial
reporting. The demand for those standards is driven by the desire for high-quality,
internationally comparable financial information that capital providers find useful for decision
making in global public capital markets. The FASB believes that progress toward the ideal
outcome will result from pursuing the overall objective of increasing international comparability
while maintaining the highest quality accounting standards in the United States.
Two Related Goals: High-Quality International Standards and Increased Convergence
As the world moves toward that overall objective, the FASB is a leader, sharing
influence with other standard setters, in determining the international standard-setting structure
and process of the future. In fulfilling that role, the FASB has two related goals: (1) to ensure
that international accounting standards are of the highest quality and (2) to accelerate
convergence of the accounting standards used in different nations. Those goals are pursued
within the context of the FASB’s ongoing commitment to establish and improve standards of
financial accounting and reporting in the United States. The FASB believes that developing
accounting standards that increase international comparability is a key element of that
INT’L ACCTG STANDARD SETTING.DOC—PAGE 9
The FASB has reached consensus that a set of high-quality international standards is
desirable because their use would improve international comparability; reduce costs to
financial statement users, preparers, auditors, and others; and, ultimately, optimize the
efficiency of capital markets. In the long run, the FASB believes that the global costs to
implement and maintain standards also will be lower. Further, a set of high-quality
international standards is increasingly demanded by existing market forces. The FASB
describes international standards as a set of accounting standards that are internationally
recognized as acceptable through, for example, endorsement by the relevant capital market
authorities of individual nations1 and through acceptance by financial statement users.
Convergence is both a goal and a process. The FASB describes the goal of
convergence as different standard setters arriving at high-quality national or international
standards on the same topic that are as similar as possible. The process of convergence
includes using all reasonable efforts to arrive at consensus, recognizing that it may be beneficial
to arrive at very similar higher quality national standards when consensus on a single
international standard is not possible. Convergence would result simultaneously in a reduction
of differences between existing standards and an increase in their quality. Further, in some
cases and among some standard setters, the process of convergence may
1The relevant national authority is that organization (or those organizations) that has the authority to make decisions about accounting requirements for capital markets and to enforce those requirements. The relevant national authority in a given nation may differ; for example, in the United States it would be the Securities and Exchange Commission (SEC), whereas in other countries it may be a stock exchange, a government body, or some other organization.
INT’L ACCTG STANDARD SETTING.DOC—PAGE 10
lead to identical new standards. In other cases, resulting standards may differ in some
aspects. In all cases, participating in a process to achieve convergence should result in higher
quality standards that are more similar than they otherwise would be were each of the
standard setters to develop a standard in isolation. That is, the expected result of pursuing the
goal of convergence is to minimize differences while improving the quality of accounting
standards worldwide and, thus, maximize the potential for international comparability.2
Need for Both Goals
Convergence and development of high-quality international standards are interrelated
goals. Convergence that leads to agreement on a single solution among standard setters in
different countries can result in an international standard. Conversely, participating in the
development of international standards is one way to facilitate the convergence process and to
achieve the goal of convergence among nations.3 The FASB considered stating either the goal
of increased convergence or the goal of ensuring that international standards are of high quality
as the singular goal for its international activities. In arriving at its consensus to pursue
convergence and high-quality international standards simultaneously, the FASB considered a
number of factors, such as the extent to which international standards would be used in the
future and the feasibility of uniformity in accounting requirements among all nations.
2It should be noted that the International Accounting Standards Committee (IASC) recently has begun using the term convergence. However, the IASC uses convergence to mean national standards moving toward higher quality IASC standards. As described above, the FASB uses the term convergence to mean national accounting standards moving toward each other with the objective of increasing quality. 3Perhaps the best example of the contrast between achieving convergence and agreeing on an identical standard is the FASB’s project on segment reporting. The FASB and the Canadian Institute of Chartered Accountants (CICA) worked jointly to develop a standard on that topic while the IASC worked concurrently on its own standard. Every effort was made to reach the same conclusions in both projects. As a result of those efforts, convergence was achieved with the IASC while the FASB and the CICA issued virtually identical standards. The IASC standard, while much more similar to the CICA-FASB standard than it otherwise would have been, is different in some important respects.
INT’L ACCTG STANDARD SETTING.DOC—PAGE 11
Many questions remain as to what ultimate function a set of high-quality international
accounting standards will serve. On one end of the spectrum, they might be acceptable only
for cross-border filers in some or all countries. At the other end of the spectrum, international
standards might eventually replace all national standards, resulting in a single set of standards
for all countries.4 The FASB has concluded that whatever the ultimate function of international
standards, their use will affect financial reporting in the United States, and, therefore, the
FASB must participate in the process that leads to their development. The FASB believes that
its meaningful participation in the development of international standards is necessary in order
to ensure that future international standards are of sufficient quality to be acceptable in the
However, the FASB believes that it is fruitful in the near term to pursue both high-quality
international standards and increased convergence, rather than pursuing the singular goal of
ensuring high-quality international standards. Based on the FASB’s experience working with
other standard setters, it is clear that, in some circumstances, standard setters will be unable to
agree that a single solution is appropriate for all national environments. Because achieving
either increased convergence or high-quality international standards would result in higher
quality standards and increased comparability of financial reporting worldwide, the FASB
supports both goals.
4The IASC, for example, has recently completed a set of core standards, which, at the moment, are intended to be used as a basis for financial reporting by cross-border filers in any and all capital markets. However, it is not clear that financial statements based on those standards will be acceptable for cross- border filings in the United States. While the FASB recognizes that use of IASC standards results in an improvement in financial reporting in some countries, the FASB is not convinced that their use in their present form would improve financial reporting in the United States relative to what U.S. investors presently receive. At least within the FASB’s current planning horizon, it seems unlikely that the IASC’s co
USEFUL NOTES FOR:
Explain the benefits of a single set of high-quality global accounting standards.
A single set of high-quality global accounting standards would be an important benefit for foreign investors because all companies would follow the same set of standards. High-quality global accounting standards would also make it easier for investors to understand how well business are doing in other countries. Mutual funds and other institutional investors often buy stocks in firms around the world, so any benefits they see from a common set of international standards would be felt by them as well.
A single set of high-quality global accounting standards would give investors a common language with which to compare financial statement information from different countries.
A single set of high-quality global accounting standards would make it easier for investors and companies to compare financial statement information from different countries.
This is important because investors buy stocks in firms around the world, and they need a common language with which to compare financial statement information from different countries. It would also be helpful for companies who want to expand their business globally—they can use this standard as a guide when choosing where they should open up new offices or factories.
High-quality global accounting standards would be an important benefit for foreign investors because all companies would follow the same set of standards.
It would make it easier for investors to compare financial statements from different countries.
It would make it easier for investors to understand the financial health of companies in other countries.
It would make it easier for investors to understand how well business are doing in other countries
Foreign investment is an important part of the U.S economy, so the benefits of a single set of high-quality global accounting standards would be felt in many parts of the business world.
Foreign investment is an important part of the U.S economy, so the benefits of a single set of high-quality global accounting standards would be felt in many parts of the business world.
Foreign investment is one source of capital that can play an important role in driving economic growth and creating jobs. It also provides access to technology and know-how from other countries, which can help companies grow faster than they might otherwise be able to do without foreign investors’ help (and vice versa).
Foreign investment has contributed greatly toward America’s technological dominance over decades: Apple Computer Inc., Hewlett-Packard Co., Google Inc., Microsoft Corp., Facebook Inc., Intel Corp.—these companies all began as start-ups backed by venture capital firms or private equity firms that provided funding for research & development projects along with early stage financing at reduced interest rates because they expected them to go public someday soon enough; but those original ideas never materialized into products until after years later when someone came along who had figured out how much profit could be made from selling these new technologies overseas first before bringing them back home again where everyone else could use them too!
Mutual funds and other institutional investors often buy stocks in firms around the world, and would benefit from a common set of global accounting standards for those firms.
If you are an institutional investor, like a mutual fund or other large hedge fund, you may be interested in purchasing stocks in companies around the world. A common set of global accounting standards would make it easier for investors to understand how well business are doing in other countries. For example, if a Chinese company has high growth but low profit margins, then its stock price would be lower than if its profits were higher with similar growth rates as those seen by U.S.-based firms.
Mutual funds and other institutional investors often buy stocks in firms around the world; therefore they should benefit from having access to all of these different sets of standards so that they can analyze them accurately without having to do complex calculations themselves (which could take hours).
Global accounting standards make it easier for investors to understand how well business are doing in other countries.
Global accounting standards make it easier for investors to understand how well business are doing in other countries. It’s a simple concept: if investors can compare the performance of various businesses, they’ll be able to make better investment decisions.
It’s not just about knowing that one company has done better than another; it’s also about understanding why one company might have done better than another. For example, say there are two companies competing in the same market: Company A is selling widgets at $100 each and making a profit of $10 per widget; while Company B charges customers $110 per widget but still makes a loss on each unit sold—$10 more than Company A does!
A common set of high-quality global accounting standards would have many benefits for investors, businesses and the economy as a whole. It would improve transparency so that all investors could trust their information and make more informed decisions. It could also help to promote international trade by making it easier for companies around the world to compete against each other in global markets.
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