Do you believe that it is appropriate that we have a single, global set of accounting standards as well as one conceptual framework that has global applicability? Does the ‘one size fits’ approach work? Explain your answer
Convergence with International financial reporting standards by various countries – Example Australia
The adoption was made for all the profit-making entities, reporting entities and the entities whose stocks are traded on the stock exchange. Later, the adoption was extended to not for profit entities both public and private i.e. government entities as well (Australian Accounting Standard Board, 2009).
Convergence approach by Australia
Need for single accounting reporting standards around the world
There are several reasons due to which the countries across the globe are readily adopting the international accounting framework. Some of the reasons are discussed as under-
I. Capital Market
a. Capital markets have gone international
It was in the 1970s or 1980s that the capital markets were a topic of national concern. However, for the past two decades, there has been a sea change in the way companies operate. Most of the companies have gone global (Ian Mackintosh, 1974). The business of the company in various countries makes it important that accounting professionals are able to interpret the financial results of any company set at the global level. The trade barriers in today’s economy have been lifted and all the countries have companies that operate on the international level. This shift from the 1980s has been significant for the creation of international financial reporting standards. Again, in the global financial crisis of 2008, it was further revealed that the economies of large scale are totally dependent on each other to function healthily. The global financial crisis further revealed that a single reporting structure is important so that the management accountants or the practicing professionals are able to interpret the results. This is only possible with a single set of reporting structure.
b.Listing at the foreign country stock exchange
There are several countries which are listed in various countries’ stock exchanges. Before the listing process, the company prepares the financial statements according to the reporting framework of that country. This is a tedious exercise done to get the company listed. Now, this would have been fine has it been a case with few companies but with so many companies getting list at cross border stock exchanges.
From the economic point of view, according to certain researches, the value of adopting International Financial reporting standards could be described as follows (Ramanna & Sletten, 2009)-
II. Part B
it is expected that after the adoption of international financial reporting standards, the countries are expected to have a lower cost of information processing and lower cost of auditing. Since the makers of the financial statements will be using a single set of accounting principles, the overall cost of making the single set of the financial statements shall be lower. These costs are believed to be passed on to the investment destination country if no single accounting principle is adopted. From the above points in part A, it is clear that the companies which are adopting the IFRS as their reporting framework are expected to have an increase in the shares when getting listed in the foreign county.
b. Quality of local institutions of governance-
The local governance institutions that have developed their own accounting standards are very complex. The cost of training the accountants and the auditors is very high. Consequently, the preparation of financial statements also becomes a very high cost incurring thing. However, the change in the reporting standards is likely to reduce the cost of these activities and result in a better capital market approach for the company.
There are also several reasons why a company adopts the international financial reporting standards like political. For example- to gain prominence in international power politics.
There are several advantages to adopting International financial reporting standards. Some of them are discussed as under (Jordan, 2013) -
a. Focus on investors- international financial reporting standards focus on a more comprehensive and timely approach to the financial statements of the company. The information provided in the statements is based on the international format giving detailed disclosures.
b. This helps the new time investors by simplifying the process of reading financial statements.
c. The investors also do not need to pay for the processing and interpretation fees because the reporting criteria are the same
d. Immediate recognition of loss under International financial reporting standards is one of the key benefits of adopting international financial reporting standards.
e. Comparability as mentioned above also is one of the key benefits which are the reason for the adoption of IFRS. Financial statements of all the companies across all the countries can be compared to the single table. The inconsistencies which normally occur when the financial statements are prepared using different laws are all removed once the company and country adopt international financial reporting standards (Mohr, (n.d.)).
f. Transparency is improved when the country and the company adopt international financial reporting standards. For example- a company of a certain sector has disclosed certain expenses for $20. Now, a similar company in a similar economy working in a similar industry disclosed the expense of such nature to the amount of $10. The investor or the auditor alike can compare and target an investigative approach to look at why there is such a huge difference when everything essentially remains the same.
g. Comparability with the global players is also improved once the company adopts similar reporting standards.
Now the question arises whether the international financial reporting standards fit all the requirements of the country. Let us understand this with the help of comparative analysis (Deloitte Touche Tohmatsu, 2003).
In the case of Australian Generally Accepted Accounting Principles, there were several differences in relation to disclosure items like disclosure of extraordinary items. Extraordinary items that are clearly distinct from the normal operating cycle of the company are to be not disclosed separately in the financial statements. The basis behind this fact is that when the business is being run by the company, then there is no activity of the company that could be termed as extraordinary. Under international financial reporting standards, the disclosure of such items with such names is prohibited.
In another example, in case of events occurring after the balance sheet dates, under IFRS, the company is required to adjust for the serious events where the concept of going concern is threatened. However, under GAAP, this was not done. Now, after the adoption of IFRS, this has become mandatory to test for events that entail that the going concern concept of the company is threatened in relation to the events occurring after the balance sheet date.
One size fits all approach
However, as it is said that every coin has two sides, there are also several factors due to which international financial reporting standards could become a disadvantage instead of an advantage. Some of them are discussed as under-
a. Local laws are defeated
There are lots of local laws that are made over several decades by the country. In accordance with such laws was the accounting of the company done till now. However, with the onset of international financial reporting standards, there are several laws that have been changed or dropped altogether to comply with the requirements of international financial reporting standards.
b. The cost associated with the transition
There are several arguments that the costs of professionals who are converging from their local accounting framework to international financial reporting standards have to incur the huge professional costs to get their accounts in line with the new accounting principles (Johnston, A., 2014).
c. International financial reporting standards have resulted in the adoption of accounting policies that may not be suitable for all the companies (UNW, (n.d.)).
d. One of the major drawbacks of the international financial reporting framework is that the managers are actually given the leverage of judging what information is to be separately disclosed in the financial statements. This gives a lot of power to the manager who may decide to go in favor of the organization to not show any negativity in the financial statements (EY, (n.d.)).
e. It may be practically difficult to compare the financial statements under international accounting framework because the countries may never get to fully converge to international standards as many countries are still adopting IFRS only after converging them to their own reporting standards (Albrecht, 2008).
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Australian Accounting Standard Board, 2009. IFRS Adoption in Australia. [Online] http://www.aasb.gov.au/admin/file/content102/c3/IFRS_adoption_in_Australia_Sept_2009.pdf [Accessed Date 12th May 2016]
Accounting Major Tips, (n.d.). Why is IFRS Becoming So Important? [Online] Available at http://www.accountingmajortips.com/why-is-ifrs-becoming-so-important/ [Accessed Date 12th May 2016]
Mackintosh, I (1974). The Importance and Challenges of Establishing Standards for Global Finance. [Online] Available at http://www.ifrs.org/Alerts/Conference/Documents/2014/Ian-Mackintosh-speech-MBS-May-2014.pdf [Accessed Date 12th May 2016]
Ramanna, K., Sletten, E., (2009). Why Do Countries Adopt International Financial Reporting Standards?. [Online] Available at http://www.hbs.edu/faculty/Publication%20Files/09-102.pdf [Accessed Date 12th May 2016]
Jordan, A., (2013). Advantages and Disadvantages of IFRS Compared to GAAP. [Online] Available at http://research-methodology.net/advantages-and-disadvantages-of-ifrs-compared-to-gaap/ [Accessed Date 12th May 2016]
Mohr, A., (n.d.). International Financial Reporting Standards - Advantages & Disadvantages. [Online] Available at http://smallbusiness.chron.com/international-financial-reporting-standards---advantages-disadvantages-2167.html [Accessed Date 12th May 2016]
Deloitte Touche Tohmatsu, (2003). Differences Between Australian GAAP and IFRS
And The Future Direction of Accounting Standards. Australia, Deloitte.
Johnston, A., (2014). Advantages and Disadvantages of U.S. Convergence Between GAAP and IFRS. [Online] Available at http://ezinearticles.com/?Advantages-and-Disadvantages-of-U.S.-Convergence-Between-GAAP-and-IFRS&id=8754446 [Accessed Date 12th May, 2016]
UNW, (n.d.). International Financial Reporting Standards for SMEs. [Online] Available at http://www.unw.co.uk/international-financial-reporting-standards-for-smes/ [Accessed Date 12th May, 2016]
Albrecht, D., (2008). Why Switch to IFRS From GAAP?. [Online] Available at https://profalbrecht.wordpress.com/2008/12/20/why-switch-to-ifrs-from-gaap/ [Accessed Date 12th May, 2016]
EY, (n.d.). Financial Statements in An IFRS World: Are They Really Comparable?. [Online] http://www.ey.com/GL/en/Industries/Financial-Services/Banking---Capital-Markets/Banking_and_Capital_Markets_changing_appearance_of_financial_reporting [Accessed Date 12th May, 2016]