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Solution Manual Intermediate Accounting Solution Manual Kieso Weygandt Warfield, Chapter 1-14

Alle antwoorden van het boek voor de vakken Financial Accounting en Intermediate Accounting

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    Erasmus Universiteit Rotterdam

  • Course:

    Inleiding Accounting (FEB11007)

  • Listed books:

    Accounting Principles Intermediate Accounting

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    CHAPTER 1
    Financial Reporting and Accounting Standards
    ASSIGNMENT CLASSIFICATION TABLE
    Topics

    Questions

    Cases

    1.

    Global markets.

    1

    2.

    Environment of accounting.

    2, 3, 4

    4, 5, 7

    3.

    Objective of financial reporting.

    5, 6, 7, 8, 9, 10

    2

    4.

    Standard-setting organizations.

    11, 12, 13, 14,
    15, 16, 17, 18

    1, 3, 6

    5.

    Financial reporting challenges.

    19, 20, 21, 22,
    23, 24, 25

    8, 9, 10

    6.

    Ethical issues.

    26

    11, 12, 16

    Authoritative U.S. pronouncements
    and policy-setting bodies.

    27, 28, 29, 30, 31,
    32, 33, 34, 35, 36,
    37, 38

    13, 14, 15

    *7.

    *These questions and cases address material in the appendix to the chapter.

    Copyright © 2011 John Wiley & Sons, Inc.

    Kieso, IFRS, 1/e, Solutions Manual

    (For Instructor Use Only)

    1-1

    ANSWERS TO QUESTIONS
    1. World markets are becoming increasingly intertwined. The tremendous variety and volume of both
    exported and imported goods indicates the extensive involvement in international trade. As a
    result, the move towards adoption of international financial reporting standards has and will continue
    in the future.
    2. Financial accounting measures, classifies, and summarizes in report form those activities and that
    information which relate to the enterprise as a whole for use by parties both internal and external
    to a business enterprise. Managerial accounting also measures, classifies, and summarizes in report
    form enterprise activities, but the communication is for the use of internal, managerial parties, and
    relates more to subsystems of the entity. Managerial accounting is management decision oriented
    and directed more toward product line, division, and profit center reporting.
    3. Financial statements generally refer to the four basic financial statements: statement of financial
    position, income statement, statement of cash flows, and statement of changes in equity. Financial
    reporting is a broader concept; it includes the basic financial statements and any other means of
    communicating financial and economic data to interested external parties.
    4. If a company’s financial performance is measured accurately, fairly, and on a timely basis, the right
    managers and companies are able to attract investment capital. To provide unreliable and irrelevant
    information leads to poor capital allocation which adversely affects the securities market.
    5. The objective of general purpose financial reporting is to provide financial information about the
    reporting entity that is useful to present and potential equity investors, lenders, and other creditors
    in making decisions in their capacity as capital providers.
    6. General purpose financial statements provide financial reporting information to a wide variety of
    users. To be cost effective in providing this information, general purpose financial statements provide
    at the least cost the most useful information possible.
    7. Shareholders, creditors, suppliers, employees, and regulators all use general purpose financial
    statements. The primary user group is capital providers (shareholders and creditors).
    8. The proprietary perspective is not considered appropriate because this perspective generally does
    not reflect a realistic view of the financial reporting environment. Instead the entity perspective
    is adopted which is consistent with the present business environment where most companies
    engaged in financial reporting have substance distinct from their investors.
    9. The objective of financial reporting is primarily to provide information to investors interested in
    assessing the company’s ability to generate net cash inflows and management’s ability to protect
    and enhance the capital providers’ investments. Financial reporting should help investors assess
    the amounts, timing and uncertainty of prospective cash inflows.
    10. A single set of high quality accounting standards ensures adequate comparability. Investors are
    able to make better investment decisions if they receive financial information from a U.S. company
    that is comparable to an international competitor.
    11. The two organizations involved in international standard-setting are IOSCO (International Organization of Securities Commissions) and the IASB (International Accounting Standards Board.) The
    IOSCO does not set accounting standards, but ensures that the global markets can operate in an
    efficient and effective manner. Conversely, the IASB’s mission is to develop a single set of high
    quality, understandable and international financial reporting standards (IFRSs) for general purpose
    financial statements.

    Copyright © 2011 John Wiley & Sons, Inc.

    Kieso, IFRS, 1/e, Solutions Manual

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    1-3

    Questions Chapter 1 (Continued)
    12. The Financial Accounting standards Board (FASB) is an independent organization whose mission
    is to establish and improve standards of financial accounting and reporting for U.S. companies.
    13. The purpose of the IOSCO is to facilitate cross-border cooperation, reduce global systemic risk,
    protect investors, and ensure fair and efficient securities markets.
    14. The mission of the IASB is to develop, in the public interest, a single set of high quality, understandable and international financial reporting standards (IFRSs) for general purpose financial
    statements.
    15. The IASB preliminary views are based on research and analysis conducted by the IASB staff.
    IASB exposure drafts are issued after the Board evaluates research and public response to
    preliminary views. IASB standards are issued after the Board evaluates responses to the exposure
    draft.
    16. IASB standards are financial accounting standards issued by the IASB and are referred to as
    International Financial Reporting Standards (IFRS). The IASB Framework for financial reporting
    sets forth fundamental objectives and concepts that the Board uses in developing future standards
    of financial reporting. The intent of the Framework is to form a cohesive set of interrelated concepts that will serve as tools for solving existing and emerging problems in a consistent manner.
    17. International Financial Reporting Standards are the most authoritative, followed by International
    Financial Reporting Interpretations then the IASB framework.
    18. The International Financial Reporting Interpretations Committee (IFRIC) applies a principles-based
    approach in providing interpretative guidance. The IFRIC issues interpretations that cover newly
    identified financial reporting issues not specifically dealt with in IFRS, and issues where conflicting
    interpretations have developed, or seem likely to develop in the absence of authoritative guidance.
    19. Some major challenges facing the accounting profession relate to the following items:
    Nonfinancial measurement—how to report significant key performance measurements such as
    customer satisfaction indexes, backlog information and reject rates on goods purchased.
    Forward-looking information—how to report more future oriented information.
    Soft assets—how to report on intangible assets, such as market know-how, market dominance,
    and well-trained employees.
    Timeliness—how to report more real-time information.
    20. The sources of pressure are innumerable, but the most intense and continuous pressure to change
    or influence the development of IFRS come from individual companies, industry associations,
    governmental agencies, practicing accountants, academicians, professional accounting organizations,
    and investing public.

    1-4

    Copyright © 2011 John Wiley & Sons, Inc.

    Kieso, IFRS, 1/e, Solutions Manual

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    Questions Chapter 1 (Continued)
    *29. Accounting Research Bulletins were pronouncements on accounting practice issued by the
    Committee on Accounting Procedure between 1939 and 1959; since 1964 they have been
    recognized as accepted accounting practice unless superseded in part or in whole by an opinion of
    the APB or an FASB standard. APB Opinions were issued by the Accounting Principles Board
    during the years 1959 through 1973 and, unless superseded by FASB Statements, are recognized
    as accepted practice and constitute the requirements to be followed by all business enterprises.
    FASB Statements are pronouncements of the Financial Accounting Standards Board and currently
    represent the accounting profession’s authoritative pronouncements on financial accounting and
    reporting practices.
    *30. The explanation should note that generally accepted accounting principles or standards have
    “substantial authoritative support.” They consist of accounting practices, procedures, theories,
    concepts, and methods which are recognized by a large majority of practicing accountants as well
    as other members of the business and financial community. Bulletins issued by the Committee on
    Accounting Procedure, opinions rendered by the Accounting Principles Board, and statements
    issued by the Financial Accounting Standards Board constitute “substantial authoritative support.”
    *31. It was believed that FASB Statements would carry greater weight than APB Opinions because of
    significant differences between the FASB and the APB, namely: (1) The FASB has a smaller membership of full-time compensated members; (2) the FASB has greater autonomy and increased
    independence; and (3) the FASB has broader representation than the APB.
    *32. The technical staff of the FASB conducts research on an identified accounting topic and prepares
    a “preliminary views” that is released by the Board for public reaction. The Board analyzes and
    evaluates the public response to the preliminary views, deliberates on the issues, and issues an
    “exposure draft” for public comment. The preliminary views merely presents all facts and alternatives
    related to a specific topic or problem, whereas the exposure draft is a tentative “statement.” After
    studying the public’s reaction to the exposure draft, the Board may reevaluate its position, revise
    the draft, and vote on the issuance of a final statement.
    *33. Statements of financial accounting standards constitute generally accepted accounting principles
    and dictate acceptable financial accounting and reporting practices as promulgated by the FASB.
    The first standards statement was issued by the FASB in 1973.
    Statements of financial accounting concepts do not establish generally accepted accounting
    principles. Rather, the concepts statements set forth fundamental objectives and concepts that the
    FASB intends to use as a basis for developing future standards. The concepts serve as guidelines
    in solving existing and emerging accounting problems in a consistent, sound manner. Both the
    standards statements and the concepts statements may develop through the same process from
    discussion memorandum, to exposure draft, to a final approved statement.
    *34. Rule 203 of the Code of Professional Conduct prohibits a member of the AICPA from expressing
    an opinion that financial statements conform with GAAP if those statements contain a material
    departure from an accounting principle promulgated by the FASB, or its predecessors, the APB
    and the CAP, unless the member can demonstrate that because of unusual circumstances the
    financial statements would otherwise have been misleading. Failure to follow Rule 203 can lead to
    a loss of a CPA’s license to practice. This rule is extremely important because it requires auditors
    to follow FASB standards.

    1-6

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    Questions Chapter 1 (Continued)
    *35. The accounting Standards Codification (or more simply, (the Codification) provides in one place all
    the authoritative literature related to a particular topic. The Codification does not include nonessential
    information such as redundant document summaries, basis for conclusions sections, and historical
    content. It comprises all literature that is considered authoritative; all other accounting literature is
    considered non-authoritative.
    *36. The chairman of the FASB was indicating that too much attention is put on the bottom line and not
    enough on the development of quality products. Managers should be less concerned with shortterm results and be more concerned with the long-term results. In addition, short-term tax benefits
    often lead to long-term problems.
    The second part of his comment relates to accountants being overly concerned with following a set
    of rules, so that if litigation ensues, they will be able to argue that they followed the rules exactly.
    The problem with this approach is that accountants want more and more rules with less reliance
    on professional judgment. Less professional judgment leads to inappropriate use of accounting
    procedures in difficult situations.
    In the accountants’ defense, recent legal decisions have imposed vast new liability on accountants.
    The concept of accountant’s liability that has emerged in these cases is broad and expansive; the
    number of classes of people to whom the accountant is held responsible are almost limitless.
    *37. FASB Staff Positions (FSP) are used to provide interpretive guidance and to make minor amendments to existing standards. The due process used to issue a FSP is the same used to issue a
    new standard.
    *38. The Emerging Issues Task Force often arrives at consensus conclusions on certain financial reporting issues. These consensus conclusions are then looked upon as GAAP by practitioners because
    the SEC has indicated that it will view consensus solutions as preferred accounting and will require
    persuasive justification for departing from them. Thus, at least for public companies which are subject to SEC oversight, consensus solutions developed by the Emerging Issues Task Force are
    followed unless subsequently overturned by the FASB. It should be noted that the FASB took
    greater direct ownership of GAAP established by the EITF by requiring that consensus positions be
    ratified by the FASB.

    Copyright © 2011 John Wiley & Sons, Inc.

    Kieso, IFRS, 1/e, Solutions Manual

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    1-7

    Time and Purpose of Concepts for Analysis (Continued)
    *CA 1-13 (Time 20–30 minutes)
    Purpose—to provide the student with an opportunity to identify and define acronyms appearing in the
    first chapter. Some are self-evident, others are not so.
    *CA 1-14 (Time 3–5 minutes)
    Purpose—to provide the student with an opportunity to identify the various documents issued by different
    accounting organizations. This CA should help the student to better focus on the more important documents
    issued in the financial reporting area.
    *CA 1-15 (Time 5–7 minutes)
    Purpose—to provide the student with an opportunity to match the descriptions of a number of authoritative pronouncements issued by rule-making bodies to the pronouncements.
    CA 1-16 (Time 25–35 minutes)
    Purpose—to provide the student with an opportunity to comment on a letter sent by business executives to the FASB and Congress on the accounting for derivatives.

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    1-9

    SOLUTIONS TO CONCEPTS FOR ANALYSIS
    CA 1-1
    1.

    True.

    2.

    False. Any company claiming compliance with IFRS must comply with all standards and interpretations, including disclosure requirements.

    3.

    False. The SEC is the governmental body that has influence over the FASB, not the IASB.

    4.

    True.

    5.

    False. The IASB has no government mandate and does follow a due process in issuing IFRS.

    CA 1-2
    1.

    False. In general, the IASB uses a principles-based approach to standard setting while the FASB
    uses rules-based approach.

    2.

    False. The objective emphasizes an entity perspective.

    3.

    False. The objective of financial reporting is to provide financial information about the reporting
    entity that is useful to present and potential equity investors, lenders, and other creditors in making
    decisions in their capacity as capital providers.

    4.

    False. International Accounting Standards were issued by the International Accounting Standards
    Committee while International Financial Reporting Standards are issued by the IASB.

    5.

    True.

    CA 1-3
    1. (c); 2. (d); 3. (b); 4. (d); 5. (b); 6. (a); 7. (a); 8. (b); 9. (d); 10. (b).

    CA 1-4
    (a) Financial accounting is the process that culminates in the preparation of financial reports relative to
    the enterprise as a whole for use by parties both internal and external to the enterprise. In contrast,
    managerial accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by the management to plan,
    evaluate, and control within an organization and to assure appropriate use of, and accountability for,
    its resources.
    (b) The financial statements most frequently provided are the statement of financial position, the
    income statement, the statement of cash flows, and the statement of changes in equity.

    1-10

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    CA 1-6 (Continued)
    The International Accounting Standards Committee (IASB predecessor) issued a document
    entitled “Framework for the Preparation and Presentation of Financial Statements.” This framework
    sets forth fundamental objectives and concepts that the Board uses in developing future standards
    of financial reporting. The intent of the document is to form a cohesive set of interrelated concepts,
    a conceptual framework, that will serve as tools for solving existing and emerging problems in a
    consistent manner.
    Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) are
    also considered authoritative and cover (1) newly identified financial reporting issues not specifically
    dealt with in IFRS, and (2) issues where unsatisfactory or conflicting interpretations have developed,
    or seem likely to develop in the absence of authoritative guidance.
    IFRIC can address controversial accounting problems as they arise. It determines whether it can
    quickly resolve them, or whether to involve the IASB in solving them. The IASB will hopefully work on
    more pervasive long-term problems, while the IFRIC deals with short-term emerging issues.

    CA 1-7
    Accounting numbers affect investing decisions. Investors, for example, use the financial statements of
    different companies to enhance their understanding of each company’s financial strength and operating
    results. Because these statements follow international accounting standards, investors can make
    meaningful comparisons of different financial statements to assist their investment decisions.
    Accounting numbers also influence creditors’ decisions. A commercial bank usually looks into a company’s
    financial statements and past credit history before deciding whether to grant a loan and in what amount.
    The financial statements provide a fair picture of the company’s financial strength (for example, shortterm liquidity and long-term solvency) and operating performance for the current period and over a
    period of time. The information is essential for the bank to ensure that the loan is safe and sound.

    CA 1-8
    (a) Arguments for politicalization of the accounting standard-setting process:
    1. Accounting depends in large part on public confidence for its success. Consequently, the
    critical issues are not solely technical, so all those having a bona fide interest in the output of
    accounting should have some influence on that output.
    2. There are numerous conflicts between the various interest groups. In the face of this, compromise is necessary, particularly since the critical issues in accounting are value judgments, not
    the type which are solvable, as we have traditionally assumed, using deterministic models. Only
    in this way (reasonable compromise) will the financial community have confidence in the fairness
    and objectivity of accounting standard-setting.
    3. Over the years, accountants have been unable to establish, on the basis of technical accounting elements, standards which would bring about the desired uniformity and acceptability. This
    inability itself indicates standard-setting is primarily consensual in nature.
    4. The public accounting profession made rules which business enterprises and individuals “had”
    to follow. For many years, these businesses and individuals had little say as to what the
    standards would be, in spite of the fact that their economic well-being was influenced to a
    substantial degree by those standards. It is only natural that they would try to influence or
    control the factors that determine their economic well-being.

    1-12

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    CA 1-8 (Continued)
    (b) Arguments against the politicalization of the accounting standard-setting process:
    1. Many accountants feel that accounting is primarily technical in nature. Consequently, they feel
    that substantive, basic research by objective, independent and fair-minded researchers ultimately
    will result in the best solutions to critical issues, such as the concepts of income and capital,
    even if it is accepted that there isn’t necessarily a single “right” solution.
    2. Even if it is accepted that there are no “absolute truths” as far as critical issues are concerned,
    many feel that professional accountants, taking into account the diverse interests of the various
    groups using accounting information, are in the best position, because of their independence,
    education, training, and objectivity, to decide what international financial reporting standards
    ought to be.
    3. The complex situations that arise in the business world require that trained accountants develop
    the appropriate reporting standards.
    4. The use of consensus to develop reporting standards would decrease the professional status
    of the accountant.
    5. This approach would lead to “lobbying” by various parties to influence the establishment of
    reporting standards.

    CA 1-9
    (a) In many respects, the IASB is a quasi-governmental agency in that its pronouncements are required
    to be followed in some jurisdictions. For example, all public european companies are required to use
    IASB standards when preparing financial statements. In fact, both the FASB and the IASB believe that
    the IFRS have the best potential to provide a common platform on which companies can report and
    investors can compare financial information. The purely political approach is used in France and West
    Germany. The private, professional approach is employed in Australia, Canada, and the United
    Kingdom.
    (b) Publicly reported accounting numbers influence the distribution of scarce resources. Resources are
    channeled where needed at returns commensurate with perceived risk. Thus, reported accounting
    numbers have economic effects in that resources are transferred among entities and individuals as a
    consequence of these numbers. It is not surprising then that individuals affected by these numbers
    will be extremely interested in any proposed changes in the financial reporting environment.

    CA 1-10
    (a) President Sarkozy is putting pressure on the IASB to craft fair value standards that favor banks.
    However, by introducing politics into the standard-setting process will likely lead to the following
    consequences:
    1.
    2.
    3.
    4.

    Too many alternatives.
    Lack of clarity that will lead to inconsistent application.
    Lack of disclosure that reduces transparency.
    Not comprehensive in scope.

    Copyright © 2011 John Wiley & Sons, Inc.

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    1-13

    CA 1-12 (Continued)
    (b) Given that Normand has pleaded guilty, he certainly acted improperly. Doing the right thing, making
    the right decision, is not always easy. Right is not always obvious, and the pressures to “bend the
    rules,” “to play the game,” “to just ignore it” can be considerable.
    (c)

    No doubt, Normand was in a difficult position. I am sure that he was concerned that if he failed to
    go along, it would affect his job performance negatively or that he might be terminated. These job
    pressures, time pressures, peer pressures often lead individuals astray. Can it happen to you?
    One individual noted that at a seminar on ethics sponsored by the CMA Society of Southern
    California, attendees were asked if they had ever been pressured to make questionable entries.
    This individual noted that to the best of his recollection, everybody raised a hand, and more than
    one had eventually chosen to resign.

    (d) Major stakeholders are: (1) Troy Normand, (2) present and potential stockholders and creditors of
    WorldCom, (3) employees, and (4) family. Recognize that WorldCom is one of the largest
    bankruptcy in United States history, so many individuals are affected.

    CA 1-13
    (a) AICPA. American Institute of Certified Public Accountants. The national organization of practicing
    certified public accountants.
    (b) APB. Accounting Principles Board. A committee of public accountants, industry accountants and
    academicians which issued 31 Opinions between 1959 and 1973. The APB replaced the CAP
    and was itself replaced by the FASB. Its opinions, unless superseded, remain a primary source
    of GAAP.
    (c)

    FAF. Financial Accounting Foundation. An organization whose purpose is to select members of
    the FASB and its Advisory Councils, fund their activities, and exercise general oversight.

    (d) FASAC. Financial Accounting Standards Advisory Council. An organization whose purpose is to
    consult with the FASB on issues, project priorities, and select task forces.
    (e) GAAP. Generally accepted accounting principles. A common set of standards, principles, and
    procedures which have substantial authoritative support and have been accepted as appropriate
    because of universal application.
    (f)

    CPA. Certified public accountant. An accountant who has fulfilled certain education and experience
    requirements and passed a rigorous examination. Most CPAs offer auditing, tax, and management
    consulting services to the general public.

    (g) FASB. Financial Accounting Standards Board. The primary body which currently establishes and
    improves financial accounting and reporting standards for the guidance of issuers, auditors, users,
    and others.
    (h) SEC. Securities and Exchange Commission. An independent regulatory agency of the United
    States government which administers the Securities Acts of 1933 and 1934 and other acts.
    (i)

    IASB. International Accounting Standards Board. An international group, formed in 2001, that is
    actively developing and issuing accounting standards that will have international appeal and support.

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    1-15

    CA 1-14
    1.
    2.
    3.

    (a), (d)
    (b)
    (c)

    CA 1-15
    1.
    2.
    3.
    4.
    5.

    (c)
    (e)
    (b)
    (d)
    (a)

    CA 1-16
    (a) The “due process” system involves the following:
    1. Identifying topics and placing them on the Board’s agenda.
    2. Research and analysis is conducted and preliminary views of pros and cons issued.
    3. A public hearing is often held.
    4. Board evaluates research and public responses and issues exposure draft.
    5. Board evaluates responses and changes exposure draft, if necessary. Final statement is then
    issued.
    (b) Economic consequences mean the impact of accounting reports on the wealth positions of issuers
    and users of financial information and the decision-making behavior resulting from that impact.
    (c)

    Economic consequences indicated in the letter are: (1) concerns related to the potential impact on
    the capital markets, (2) the weakening of companies’ ability to manage risk, and (3) the adverse
    control implications of implementing costly and complex new rules imposed at the same time as
    other major initiatives, including the Year 2000 issues and a single European currency.

    (d)

    The principal point of this letter is to delay the finalization of the derivatives standard. As indicated in
    the letter, the authors of this letter urge the FASB to expose its new proposal for public comment,
    following the established due process procedures that are essential to acceptance of its standards
    and providing sufficient time for affected parties to understand and assess the new approach.
    (Authors note: The FASB indicated in a follow-up letter that all due process procedures had been
    followed and all affected parties had more than ample time to comment. In addition, the FASB issued
    a follow-up standard, which delayed the effective date of the standard, in part to give companies more
    time to develop the information systems needed for implementation of the standard.)

    (e) The reason why the letter was sent to Congress was to put additional pressure on the FASB to delay
    or drop the issuance of a rule on derivatives. Unfortunately, in too many cases, when the business
    community does not like the answer proposed by the FASB, it resorts to lobbying members of
    Congress. The lobbying efforts usually involve developing some type of legislation that will negate
    the rule. In some cases, efforts involve challenging the FASB’s authority to develop rules in certain
    areas with additional Congressional oversight.

    1-16

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    INTERNATIONAL REPORTING CASE

    (a) The International Accounting Standards Board is an independent, privately funded accounting standards setter based in London, UK. The
    Board is committed to developing, in the public interest, a single set of
    high quality, understandable and enforceable global accounting standards
    that require transparent and comparable information in general purpose
    financial statements. In addition, the Board cooperates with national
    accounting standards setters to achieve convergence in accounting
    standards around the world.
    (b) In summary, the following groups might benefit from the use of International Accounting Standards:
    • Investors, investment analysts and stockbrokers: to facilitate international comparisons for investment decisions.
    • Credit grantors: for similar reasons to bullet point above.
    • Multinational companies: as preparers, investors, appraisers of products or staff, and as movers of staff around the globe; also, as raisers
    of finance on international markets (this also applies to some companies that are not multinationals).
    • Governments: as tax collectors and hosts of multinationals; also interested are securities markets regulators and governmental and nongovernmental rule makers.
    (c) The fundamental argument against convergence is that, to the extent
    that international differences in accounting practices result from underlying economic, legal, social, and other environmental factors, convergence
    may not be justified. Different accounting has grown up to serve the
    different needs of different users; this might suggest that the existing accounting practice is “correct” for a given nation and should not be changed
    merely to simplify the work of multinational companies or auditors.
    There does seem to be strength in this point particularly for smaller companies with no significant multinational activities or connections. To foist
    upon a small private family company in Luxembourg lavish disclosure
    requirements and the need to report a “true and fair” view may be an
    expensive and unnecessary piece of convergence.

    1-18

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