Standard Setting In Malaysia Learning Objectives i. Understand the development of accounting standards in Malaysia. ii. Describe the structure and objectives of Malaysian Accounting Standards Board. iii. Describe the structure and objectives of the International Accounting Standards Board. iv. Explain the issues related to convergence of accounting standards. v. Explain the relationship between Malaysian Accounting Standards Board to International Accounting Standards Board in relation to convergence of accounting standards. 1.0 Introduction Accounting standards refer to a set of standards stating how particular types of transactions and other events should be reflected in financial statements. These standards are issued by accounting standard setters. The application of accounting standards in the preparation and presentation of financial statements is generally govern by regulatory bodies and/or professional accounting bodies in a particular country. The emergence and development of multinational concerns and the growth of international financial markets, among other factors, are influencing the preparation of financial statements beyond national borders. Many countries around the world that are using their national Generally Accepted Accounting Principles (GAAP) are adopting the International Financial Reporting Standards (IFRS) in the preparation and presentation of their financial statements. The IFRSs are issued by International Accounting Standards Board (IASB) and the adoption of IFRSs is having a growing influence on national accounting requirements and practices. This chapter discusses the adoption of IFRSs and other aspects of standard setting environment in Malaysia.
2.0 Development of Financial Reporting in Malaysia The demand for corporate information by capital providers and other stakeholders, such as employees, lenders, suppliers, customers and other agents has shaped the financial reporting environment in Malaysia. These parties require corporate information in making their economic decisions. The provision of corporate information to these users has been initiated by the Ninth Schedule of the Companies Act 1965 requiring companies to disclose minimum information. Financial reporting environment has evolved since then and currently companies are disclosing more comprehensive information as a result of considerable efforts by various bodies. Figure 1 depicts the timing of significant events relative to the development of financial reporting in Malaysia. Figure 1: Timeframe Depicting Significant Events Relative To The Development Of Financial Reporting In Malaysia. Period
Financial Reporting Development
1965
Ninth Schedule of the Companies Act 1965
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Minimum disclosure of specific information
1979
Representation on the International Accounting Standards Committee (IASC) - Adoption of International Accounting Standards (IAS) - Issue of Malaysian Accounting Standards (MAS)
1997
Financial Reporting Act 1997 established Financial Reporting Foundation (FRF) and Malaysian Accounting Standards Board (MASB) - FRF, a trustee body responsible for the oversight of MASB’s operations - MASB is responsible for standard setting in Malaysia - MASB issue standards called MASB, e.g. MASB 2 Inventories
2005
MASB standards renamed as FRS, e.g. FRS 102 Inventories
2012
Full convergence of FRSs with IFRSs
The provision of corporate information in Malaysia was first mandated by the Companies Act 1965 requirements. Schedule 9 of the Companies Act 1965 requires all registered companies in Malaysia to disclose specific information in their financial statements. The format and content of financial statements are not prescribed by Schedule 9 of the Companies Act 1965. As such, only minimum disclosure requirements are prescribed by the legislation. The disclosure of corporate information beyond the minimum statutory disclosure requirements in Malaysia began in 1979 when Malaysia was represented on the International Accounting Standards Committee (IASC). The IASC was set up in 1973 and was responsible for the setting of International Accounting Standards (IAS). The guidelines issued by the IASC were called SIC. Soon after its representation on the IASC, Malaysia began adopting the IASs. While the adoption of IASs lead to more comprehensive disclosure of corporate information, it was not able to meet some local reporting requirements. Accounting and reporting requirements for transactions and events in relation to specific industries such as aquaculture and insurance were not addressed by the IASs. In meeting the local reporting requirements, accounting standards known as Malaysian Accounting Standards (MASs) were issued jointly by two professional accounting bodies in the 1980s. These bodies were represented by Malaysian Institute of Accountants (MIA), Malaysian Association of Certified Public Accountants (MACPA), now known as Malaysian Institute of Certified Public Accountants (MICPA). Examples of these standards are MAS 1 Earnings Per Share, MAS 6 Accounting for Goodwill and MAS 8 Accounting for Pre-Cropping Costs. 2.1 Malaysian Accounting Standards Board (MASB) The standard setting role by MIA and MACPA was superseded by Malaysian Accounting Standards Board (MASB) in 1997. MASB is established under the Financial Reporting Act 1997 (the Act). The Act was gazetted on 6 March 1997. In addition to MASB, the Act also created Financial Reporting Foundation (FRF). The overall responsibility of the FRF is to oversee the operating activities of the MASB. The FRF comprises of nineteen (19) members who are appointed by the Minister of Finance. -
seven members are ex-officio representing the Minister of Finance, the Central Bank, the Securities Commission, the Companies Commission of Malaysia, the Bursa Malaysia Berhad, the MIA and the MASB.
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twelve members representing a broad spectrum of interest groups - principal officers of public listed companies, senior partners of public accounting firms and persons with other relevant experience and background.
The responsibilities of the FRF as provided under the Financial Reporting Act 1997 are as follows: i. To provide views to the MASB on matters which the MASB seeks to undertake or implement with respect to the development and issue of accounting standards and conceptual framework; ii. To review the performance of MASB; iii. To be responsible for the financing arrangements and operations of the MASB; iv. To approve the MASB budget; v. To engage or to employ persons and determine the conditions of such appointments as are necessary to assist the FRF and MASB perform their functions under the Act; vi. To administer the fund established to finance the ongoing operations of FRF and MASB including management of funds not expanded on operations during any period; vii. To maintain proper accounts and prepare an annual statement of accounts of the FRF; viii. To forward annual statement of accounts and audit report to the Minister of Finance, and report on the activities of the FRF and MASB at the end of each financial year, and ix. To perform such other functions as the Minister of Finance prescribe. The functions and powers of the MASB as provided under the Act are to:
issue new accounting standards as approved accounting standards and to review, revise or adopt existing accounting standards as approved accounting standards; issue statements of principles for financial reporting; sponsor or undertake development of possible accounting standards; conduct public consultation as necessary; develop a conceptual framework for the purpose of evaluating proposed accounting standards; make such changes to proposed accounting standards as considered necessary; seek the view of the FRF in relation to new and existing standards, statement of principles, and changes to proposed standards; determine scope and application of accounting standards; and to perform such other function as the Minister of Finance may prescribe.
The functions of the MASB as formulated in its mission statement are as follows: i. to develop and promote high quality accounting and reporting standards that are consistent with international best practices for the benefit of users, preparers, auditors and the public in Malaysia. ii. to contribute directly to the international development of financial reporting for the benefit of users, preparers and auditors of financial reports. In fulfilling the above functions, MASB sets out the following objectives:
to develop high quality, clear and enforceable national accounting standards for financial reporting that benefit users;
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to bring about harmonisation of national accounting standards with international accounting standards; to promote the use and application of those standards by way of communication with and education of users, preparers, auditors and the public; to actively contribute to the development of accounting standards internationally, including, Islamic-based accounting standards; and to promote and support research in the area of financial reporting, in particular, for emerging markets and Islamic markets.
The members of MASB are appointed by the Minister of Finance and comprises of the following members: -
a chairman, the Accountant General, advisors representing the Securities Commission, Companies Commission of Malaysia and MIA, and six other members with expertise in accountancy, law, business and finance. It should be noted that the FRA 1997 specifies that at least five of these members are members of MIA.
Section 27 of the Act requires all companies incorporated under the Companies Act to comply with accounting standards issued and adopted by the MASB. Accounting standards are defined by FRF as statements of standard accounting practices used for the preparation of financial statements. The MASB established a committee called Issues Committee and Working Groups in dealing with standard setting related matters. 2.1.1 Issues Committee Issues Committee was established in May 2002, replacing its predecessor, the Interpretation Committee. The change of name reflects the expanded scope of the committee which goes beyond interpretations of approved accounting standards. In addition to reviewing accounting issues that have received or are likely to receive divergent views in interpretation, Issues Committee also deals with other accounting related issues where there is no existing accounting standard. The committee comprises representatives from the accounting profession, commerce, the academia as well as an analyst and a solicitor. Observer representatives from MIA, Securities Commission, Bank Negara Malaysia and Companies Commission of Malaysia also form part of the committee. 2.1.2 Working Group The MASB has established numerous Working Groups which are assigned with different projects. Each working group is responsible for reviewing and undertaking detailed studies of the assigned project, taking into accounts any statutory and regulatory reporting requirements as well as its practical implications. A Working Group must be chaired by a member of the MASB. Other group members include a project manager and representatives from the accounting profession, commerce, academia as well as regulatory authorities.
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The work undertaken by Working Group plays an important role in the development of the MASB standards. The MASB’s due process for developing a standard is summarized in Figure 2. Figure 2: MASB Due Process 1.
MASB
Identifies IAS for review.
2.
Working Group
Prepares Discussion Paper (DP).
3.
MASB
Review DP.
4.
FRF
Review DP.
5.
MASB
Finalises DP into Exposure Draft (ED).
6.
Public
Public exposure of ED.
7.
Working Group
Prepare report on feedback received on ED.
8.
MASB
Review feedback on ED.
9.
FRF
Final review of feedback on ED.
10.
MASB
Approval of MASB standard. Subsequent issue of MASB standard.
Prior to the creation of MASB, Malaysia has already adopted the IASs issued by the IASC and MASs issued by the Council of MIA and MICPA. Upon its creation, MASB adopted most of these standards which gave these standards the status of approved accounting standards. These standards were referred to as MASB standards. With the exception of the adopted MASs, the MASB standards were in substance similar to the IASs. In April 2001, the international standard setting role of IASC was superseded by the IASB and subsequently the IASB began issuing IFRS. At this point in time, all IASs issued by the IASC remained in force until amended or withdrawn by the new IFRS issued by IASB. In line with this development, MASB standards have been renamed to Financial Reporting Standards (FRS) in 2005. The numbering of the FRSs corresponds to the IFRSs issued by the IASB. For example, FRS 1 in Malaysia is equivalent to IFRS 1. FRS with a 100 prefix corresponds to its equivalent IASs. Thus FRS 101 is equivalent to IAS 1. FRS with a 200 prefix represents locally developed Standard with no equivalent International Standard. The list of standards issued and adopted by MASB, the corresponding IFRS and MASB standards prior to convergence efforts are shown in Figure 3 below. Figure 3: List of IASB Standards and MASB Standards Standard International Financial Reporting
MASB Standards For Entities
Standards as at 1 April 2010 - Title
Other than Private Entities
Framework for the Preparation and Presentation of Financial Statements
Framework for the Preparation and Presentation of Financial Statements
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International Financial Reporting Standards (IFRSs): IFRS 1
First-time Adoption of International Financial Reporting Standards
FRS 1
IFRS 2
Share-based Payment
FRS 2
IFRS 3
Business Combinations
FRS 3
IFRS 4
Insurance Contracts
FRS4
IFRS 5
Non-current Assets Held for Sale and Discontinued Operations
FRS 5
IFRS 6
Exploration for and Evaluation of Mineral Resources
FRS 6
IFRS 7
Financial Instruments: Disclosures
FRS 7
IFRS 8
Operating Segments
FRS 8
IFRS9
Financial Instruments
International Accounting Standards (IASs): IAS 1
Presentation of Financial Statements
FRS 101
IAS 2
Inventories
FRS 102
IAS 7
Statement of Cash Flows
FRS 107
IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors
FRS 108
IAS 10
Events After the Reporting Period
FRS 110
IAS 11
Construction Contracts
FRS 111
IAS 12
Income Taxes
FRS 112
IAS 16
Property, Plant and Equipment
FRS 116
IAS 17
Leases
FRS 117
IAS 18
Revenue
FRS 118
IAS 19
Employee Benefits
FRS 119
IAS 20
Accounting for Government Grants and Disclosure of Government Assistance
FRS 120
IAS 21
The Effects of Changes in Foreign Exchange Rates
FRS 121
IAS 23
Borrowing Costs
FRS 123
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IAS 24
Related Party Disclosures
FRS 124
IAS 26
Accounting and Reporting by Retirement Benefit Plans
FRS 126
IAS 27
Consolidated and Separate Financial Statements
FRS 127
IAS 28
Investments in Associates
FRS 128
IAS 29
Financial Reporting in Hyperinflationary Economies
FRS 129
IAS 31
Interests in Joint Ventures
FRS 131
IAS 32
Financial Instruments: Presentation
FRS 132
IAS 33
Earnings per Share
FRS 133
IAS 34
Interim Financial Reporting
FRS 134
IAS 36
Impairment of Assets
FRS 136
IAS 37
Provisions, Contingent Liabilities and Contingent Assets
FRS 137
IAS 38
Intangible Assets
FRS 138
IAS 39
Financial Instruments: Recognition and Measurement
FRS 139
IAS 40
Investment Property
FRS 140
IAS 41
Agriculture
FRS 141* i-1 Presentation of Financial Statements of Islamic Financial Institutions ** FRS 201 Property Development Activities** FRS 202 General Insurance Business** FRS 203 Life Insurance Business** FRS 204 Accounting for Aquaculture**
*IAS 41/FRS 141 is not adopted in Malaysia but an exposure draft has been issued by MASB. ** These standards were issued by MASB in order to meet local reporting requirements and they do not have the corresponding IFRSs issued by IASB. Note: - FRS 202 is not equivalent to IFRS 4 Insurance Contract as this standard applies to insurance contract as defined in IFRS 4. FRS 202 is applicable to entities conducting general insurance business in Malaysia. Roshayani Arshad/Accounting Theory
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FRS 203 is not equivalent to IFRS 4 Insurance Contract as this standard applies to insurance contract as defined in IFRS 4. FRS 203 is applicable to entities conducting life insurance business in Malaysia. FRS 204 prescribes the accounting method for aquaculture operations where the products from such operations are used mainly for food consumption. Under IFRS, IAS 41 applies but to the wider definition of agriculture activity.
2.1.3 Technical Pronouncements In addition to issuing standards, the MASB may also issue technical pronouncements such as Statement of Principles, Technical Releases and Interpretation Bulletin. The purpose of a technical pronouncement is to provide guidance on the application of generally accepted accounting principles. In some instances, the issue of a pronouncement represents an interim measure prior to the issue of a particular standard. It should be noted that the technical pronouncements do not amend or overide MASB Standards or other statements issued by the MASB. Examples of technical pronouncements that have been issued are as follows: TR 1
Share Buybacks - Financial Assistance
Superseded
MASB Share Buybacks - Accounting and TR 1 Disclosure (revised)
Presentation of Financial Statements of Islamic Financial Institutions
1 Jan 2010
TR i - 4
Shariah Compliant Sale Contracts
1 Jan 2011
SOP 1 (2004)
Exempt Entities
SOP 2
Interim Financial Reporting
SOP i 1
Financial Reporting from an Islamic Perspective
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3.0 International Accounting Standards On 1 August 2008, MASB issued a statement with regards to its plan of full convergence of FRSs with IFRSs by the year 2012 for all entities other than private entities. Full convergence refers to full compliance with IFRS as a basis for financial reporting system in Malaysia. In moving towards full convergence, MASB participates actively in the IASB’s due process at an early stage of standard development. This is important in ensuring that the standards adopted are consistent with international best practice as well as regulatory requirements in Malaysia. Active participation by MASB started since IASB started its international due process in 2001. 3.1.1 The International Accounting Standards Board (IASB) The IASB is an independent and privately-funded accounting standard-setting body. The standard setting responsibilities was assumed from its predecessor the IASC in 2001, following the restructuring of the IASC. The IASC oversees the operations of the IASB. The IASB is responsible for the development and publication of IFRSs, including the IFRS for SMEs and for approving Interpretations of IFRSs as developed by the IFRS Interpretations Committee (formerly called the IFRIC). To bring about convergence of national accounting standards and IFRSs, the IASB engages closely with stakeholders around the world. The various stakeholders include investors, analysts, regulators, business leaders, accounting standard-setters and the accountancy profession. The objectives of the IASB as set out in its constitution: 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; to promote the use and rigorous application of those standards; 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 to bring about convergence of national accounting standards and IFRSs to high quality solutions. The main features of the IASB structure are as follows: i. The IASC Foundation has two main bodies, the Trustees and the IASB. ii. The IASB is responsible for setting accounting standards. iii. Standards Advisory Council and IFRS Interpretations Committee are two other bodies within the IASB structure. The structure of the IASB is as shown in Figure 4.
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Figure 4: Structure of IASB IASC Foundation
IASB Standard Advisory Council
Working Group
Interpretation Committee Key Appoints Reports to Advises
Trustees The trustees are responsible for safeguarding the independence of the IASB and ensuring the financing of the organisation. The trustees are also responsible for the appointment of the IASB members. Members of the IASB comprise of experts with an appropriate mix of recent practical experience of standard-setting, or of the user, accounting, academic or preparer communities. The IFRS Interpretations Committee The IFRS Interpretations Committee (formerly called the IFRIC) is the interpretative body of the IASB. The members are appointed by the Trustees and drawn from a variety of countries and professional backgrounds. The Committee provides timely guidance on accounting issues that have arisen within the context of current IFRSs and to provide authoritative guidance (IFRICs) on those issues. Standards Advisory Council Members of the Council comprise groups and individuals with diverse geographic and functional backgrounds. They advise the Trustees and IASB on all major projects. IASB Due Process The due process, which involves interested individuals and organisations from around the world comprises of six stages. These stages are: 1. 2. 3. 4. 5. 6.
Setting the agenda Planning the project Developing and publishing the discussion paper Developing and publishing the exposure draft Developing and publishing the standard After the standard is issued
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4.0 Private Entities Private entities in Malaysia are exempted from applying FRS in starting from the 2006. These companies may continue to apply the MASB standards referred to as Private Entity Reporting Standards (PERS). These standards were issued subsequent to the establishment of MASB in 1997 and they are called MASB. The list of PERS is shown in Figure 4. Private entity is a private company incorporated under the Companies Act 1965. This company:
is not required to prepare or lodge any financial statements under any law administered by the Securities Commission or the Bank Negara Malaysia; and is not a subsidiary or associate of, or jointly controlled by, an entity which is required to prepare or lodge any financial statements under any law administered by the Securities Commission or the Bank Negara Malaysia.
A private company is defined in Section 15(1) of Companies Act 1965 as a company having a share capital and incorporated as a private company if its memorandum or articles: i. ii.
iii. iv.
restricts the right to transfer its shares; limits to not more than fifty the number of its members (counting joint holders of shares as one person and not counting any person in the employment of the company or of its subsidiary or any person who while previously in the employment of the company or of its subsidiary was and thereafter has continued to be a member of the company); prohibits any invitation to the public to subscribe for any shares in or debentures of the company; and prohibits any invitation to the public to deposit money with the company for fixed periods or payable at call, whether bearing or not bearing interest.
In preparing its financial statements, an entity may only be treated as a private entity in relation to such annual periods or annual periods through out which it is a private entity. Private entities shall apply either PERS in their entirety or FRS in their entirety in the preparation and presentation of their financial statements. Figure 5: List of PERS Standard
Title
Effective Date
MASB 1
Presentation of Financial Statements
1 July 1999
MASB 2
Inventories
1 July 1999
MASB 3
Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies
1 July 1999
MASB 4
Research and Development Costs
1 July 1999
MASB 5
Cash Flow Statements
1 July 1999
MASB 6
The Effects of Changes in Foreign Exchange Rates
1 July 1999
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MASB 7
Construction Contracts
1 July 1999
MASB 9
Revenue
1 Jan 2000
MASB 10
Leases
1 Jan 2000
MASB 11
Consolidated Financial Statements and Investments in Subsidiaries
Accounting and Reporting by Retirement Benefit Plans
1 Jan 2003
MASB 31
Accounting for Government Grants and Disclosure of Government Assistance
1 Jan 2004
MASB 32
Property Development Activities
1 Jan 2004
IAS 25
Accounting for Investments
1 Sept 1998
IAS 29
Financial Reporting in Hyperinflationary Economies
1 Jan 2003
MAS 5
Accounting for Aquaculture
1 Sept 1998
IB-1
Preliminary and Pre-operating Expenditure
1 Jan 2001
5.0 Convergence of Accounting Standards Currently, the top global capital markets that require or permit the use of IFRS are: (a) (b) (c) (d) (e) (f) (g)
United Kingdom; France; Germany; Hong Kong; Spain; Switzerland; Australia.
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United States of America and Japan are considering converging with IFRS while Korea, Canada and India have announced their plans for convergence by 2011. In Malaysia, all entities that are required to comply with approved accounting standards under the Financial Reporting Act 1997 will be required to prepare and present their financial statements in accordance to the IFRSs, except for private entities. Full compliance begins on or after January 1, 2012. In relation to private entities that apply PERS, it will continue to do so until such time as the MASB decides otherwise. In addition, local technical pronouncements, FRS 201 to FRS 204, FRS i-1, SOP and technical releases will likely to be reviewed by the MASB.
5.1 Benefits of Convergence The benefits of convergence based on the benefits to various users of financial statements are as follows: i. Investors - Increase comparability of financial information across borders as well as among companies nationally in making investment decisions. - Increase transparency. - Greater understandabiliy.
ii. Multinational companies - Better access to foreign capital markets. - Increase credibility of domestic capital markets to foreign capital providers. - Facilitate compliance with reporting requirements of foreign stock exchanges, - Facilitate preparation and presentation of financial statements as companies are only required to maintain one set of books prepared in compliance with IFRSs. - Lower cost of capital to companies. iii. Regulatory bodies - Ease of regulation of securities market as convergence increases regulatory acceptability of financial information provided by market participants. - Reduced costs of national standard setters. - Facilitate calculation of tax liability for companies receiving income from international sources. - Transfer of accounting staffs across borders as similar accounting practices existed worldwide. - Promote economic growth within region practicing common accounting practices.
5.2 Challenges of Convergence The challenges of convergence are as follows: - Application of similar IFRSs may not be appropriate as the purpose of financial reporting differs across countries. For example, in countries where the legal system is based on Roman Law, the financial statements are prepared for tax assessment while in other countries the information is for investor decision-making. Roshayani Arshad/Accounting Theory
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Different legal system can hinder development of certain accounting practices. Different in culture may affect variations in objectives of accounting systems. Lack of professional expertise due to lack of strong accountancy bodies in certain countries. Different emphasis on user groups. For instance, investors and creditors are important in the USA, employees are important in Europe while in many East Asian countries where corporate ownerships are more concentrated, there are lower investor protection. Development of standards and principles in developing countries are not at par with the developed countries. This could slower the rate of full convergence in some countries. National standards in some countries are not based on a conceptual framework of accounting while IFRSs are.
6.0 Summary Reliable and transparent financial reporting is paramount to support the decision-making by investors, lenders and regulatory authorities. In meeting the needs of various users, there is a need to develop and issue accounting standards that are of high quality, transparent and comparable in the preparation of financial statements. The current move is through the adoption of IFRSs by countries around the world. The IASB is responsible for setting and issuing the IFRSs. In ensuring the success of full convergence, the work of national standard setters and the IASB should be integrated. In Malaysia, the MASB actively participates in the IASB’s due process at an early stage of standard development. The standard setting process in Malaysia has also developed in line with the plan of full convergence by 2012.
Questions 1. Explain the development of accounting standards in Malaysia. 2. Describe the structure and objectives of Malaysian Accounting Standards Board. 3. What is the difference between International Accounting Standards and International Financial Reporting Standards? 4. List some of the benefits and challenges to convergence. 5. In some countries, income reported to investors differ from income prepared for tax calculations. Discuss whether these income should be identically determined through the application of International Financial Reporting Standards. 6. Standard setting approaches in countries may differ. Discuss how these difference affect the acceptance of compliance with International Financial Reporting Standards.