International Corporate ReportingByHamza MunirTopic 5: Discuss the potential benefits and drawbacksof IFRS rules. Assess the reasons for needing the “Unified” accounting standardsconsidering pre and post IFRS adoption periods. Propose how the global convergencemight occur and potential outcomes.
The International FinancialReporting Standards are a set of international accounting standards stating howparticular types of transactions and other events should be reporting infinancial statements. It is issued by an independent, not for profitorganization called the International Accounting Standards (IASB). The mainagenda of IFRS is to provide a universal framework for how public companiesprepare and disclose their financial statements. The IFRS’s aim is to maintainstability and transparency throughout the financial world, this is due to thefact that it allows the businesses and organisations to make educated financialdecisions as it will enable them to identify what is happening with a company. Fora standard to be approved, seventy five percent of the board members mustagree.In this essay I shall bediscussing the potential benefits and drawbacks of the IFRS Rules, andassessing the reasons for needing the unified accounting standards, pre and postIFRS adoption periods. For my conclusion I shall be proposing how the globalconvergence might occur and published academic studies.
Between the years of 1973 and2000 the standards were issued by the predecessor of IASB, the InternationalAccounting Standards Committee. The committee was established by professionalaccounting bodies in many countries, such as: Australia, Canada, France,Germany, Japan, Mexico, Netherlands, United Kingdom, Ireland and the UnitedStates. The IASB, “Describes its rules under the label IFRS, though itcontinues to recognise the prior rules IAS issued by the old standard setterIASC.” This indicates that whilst the new board is the one who issues thestandards, it still recognises all the previous standards set by its predecessors.There are over 100 countries that require or permit IFRS for public companies,.Proponents of IFRS as an international standard maintain that the cost ofimplementing IFRSs could be offset by the potential for compliance to improvecredit ratings.The IFRS can be affected by thelocal political and economic factors, as it lies at the level of the national standardadoption decision.
This can result in firms to choose among alternative accountingmethods instead. Voluntary standard arestandards developed by a non governmental entities such as businesses, not forprofit organizations or initiatives involving multiple stakeholders. Voluntary standardsinclude Fairtrade, Organic, Rainforest Alliance. They do vary widely betweentheir objectives and scope, as some of the standards address a single commoditywhilst others apply to many other products. They also have various differentobjectives such as protecting social rights, conserving the environment,promoting good agricultural practices, ensuring a minimum price.
Voluntarystandards was described as, “Agreement about how important commercialtransaction are to be implemented.”(Ball, 1995:19) “So while this means Europe’sadoption of IFRS is a leap of faith, it also means it is a Brave New World forcommentators on IFRS.” What he is trying to depict is that whilst it workswithin the EU, for it to successfully branch out to the rest of the world isleap of faith, as many others have their own accounting standards. Uniform Voluntary Standardsadvantages:One of the advantages of uniform voluntary standards is the scale of economiesas it underlines all forms of uniform contracting.
They are a type of publicgood that the marginal cost of an additional user adopting them is zero.The second advantage ofuniform standards if the protection they give auditors against managers playingan, “Opinion shopping game”(Ryan Ball 2006). If all auditors are required toenforce the same rules, managers cannot threaten to shop for an auditor whowill give them an unqualified opinion on a more favourable rule. The third advantage iseliminating informational externalities arising from lack of comparability. Iffirms and/or countries use different accounting techniques, even if they redisclosed to all the users, they can impose costs on others due to a lack ofcomparability. To the extent that firms internalise these effects, it will beadvantageous for them to use the same standards as others.
All three of these advantagesimply that some degree of uniformity in accounting standars could be expectedto arise in a market. An advantage of IFRS would bethe fact that it enables more flexibility as the IFRS use a principle basedphilosophy. This means that the aim of each standard is to arrive at a reasonablevaluation, and that there would be many ways to get there, which in turnenables the companies the freedom to adapt IFRS to their situation, which thenleads to more beneficial statements.An advantage of a set ofsingle set of international accounting standard would be the reduction in thecost of preparing consolidated financial statements for multinational firms.Uniform Accounting Standards:Uniform accounting standardswere originally developed from a market setting, before the government became involved.An example of this would be in the UK there is the ICAEW, which functioned as alargely market based standard setter. Another example would be in the US, thereis the American Association of Public Accountants, the precursor to thepresents American Institute of Certified Public Accountants.There are three reasons toexpect a less than uniform accounting methods to occur in a voluntary setting, The first reason is that it isnot clear that the uniform financial reporting quality requires uniform accountingrules .
Uniformity would require accounting rules that vary across firms,location and time. Firms differ to each other based on, “Strategy, investmentpolicy, financing policy, industry, technology, capital intensity, growth,size, political scrutiny and geographical location. Countries differ to eachother due to how they operate their capital, labour and product markets,inaddition the extent and nature of governmental and political involvement.Second reason is that is itcostly to develop a fully detailed set of accounting standards that will beable to cover ,”Every feasible contingency, so standards are not the only wayof solving accounting method choices. An example The third reason is that thefirms/countries using different accounting methods might not fully internalisethe total costs imposed on others due to lack of comparability. It provides arationale for mandating uniformity.Mandatory uniform standardscould be a solution to the problem of informational externalities.
If their useof different accounting methods imposes costs on others that firms and/orcountries do not take into account in their decisions, then it is feasible thatthe state can improve aggregate welfare by implementing uniformity.We need a unified accounting standardsas companies that are now following the proper standards will result in them beingin the situation where they wont know the sum that they owe/owed which can resultin violating specific rules. Before the IFRS the quality of the statements was ata poor level compared to the current level that it has set, it has become easierfor the IFRS due to the fact that the IASB is better funded, better staffed andmore independent than its predecessor the IASC. . Global ConvergenceIf all countries were to usethe IFRS label then it would discard the information in accounting standards,regarding the reporting quality differences, then the available quality signalwould become the quality of the enforcement of standards. The reason to expectenforcement is that it is more costly for low quality countries to adopt highenforcement standards, because this would run counter to local political andeconomic interests.
Convergence is a theory thatstates that the developing countries, as known as low per capita income, tendto grow father than developed countries and eventually can catch up to them.Global convergence is countries trying to adapt to the same set of IFRS. I feelthat if more countries were to adapt to the IFRS then it would lead to a globalcomparability, as the users would reap the benefits of comparing the financialstatements from a company in one country to another. By being under the samecommittee it would also result in only one book being needed rather than two,by having two is could confuse people if calculations are different to oneanother and or if it gets lost. Failure to specify accounting methods wouldcreate uncertainty to both of the contracting parties, “Failure to agree inadvance whether unfunded health care commitments to employees are to be countedas debt leaves both the borrower and the lender unsure as to how much debt theborrower can have without violating a leverage covenant.”(Accounting andBusiness Research, International Accounting policy forum pp 5-27.2006 RayBall).
From this example it would indicate that if they were not able to makean agreement then it would put them in the position where they do not want toviolate the leverage as they would have to pay fines which could be costly. IFRS have been making attemptsto globalise the accounting standards by converging with Japan and workingsystematically toward the convergence of IFRS and US GAAP.Despite the fact that due tothe differences in financial reporting quality among different countries, ithas been pushed down to a level that has resulted it in being ,”Concealed by aveneer of uniformity.” (Ray Ball, p.g 5).
However with over one hundredcountries it has proven to have been very successful as its overall agenda is toprovide, “A comprehensive set of high quality standards.”(Ray Ball, Accountingand Business Research p.g 5) There are many advantages of aglobal convergence, an example of one would be that by eliminatinginternational differences in accounting standards and the standardisingreporting formats, IFRS could eliminate many adjustments analysts have made inorder to make the companies financials more comparable internationally. Another example of globalconvergence would be the reducing the cost of processing financial information,as it will increase the efficiency with which the stock market incorporates itsprices. Inconclusion despite thedrawbacks of the IFRS I feel that for it to branch out even more it would haveto be to comply more with the other countries and display a consistent highquality set of standards, as there have been times where the quality waslesser. The IFRS has many benefits to it that make it suitable for it to gomore global, as the IFRS will be able to save money due to not requiring twosets of books, it being principle based with how it allows more freedom in howcompanies portray their financial performance and how it will make cross borderinvestments easier.
Also that due to the higher information quality it reduces boththe risk to all investors from owning shares and the risk to less informed investorsdue to unfavourable selection, which in turn would result in the reduction in thebusinesses costs of equity capital, which would then result in an increase in shareprices and would make new investments by firms more attractive. Bibliography:Accounting and Business Research,International Accounting Policy Forum. Pp 5-27,2006 Ray Ballhttp://www.tradeforum.org/Voluntary-Standards-in-Developing-Countries-The-Potential-of-Voluntary-Standards-and-their-Role-in-International-Trade/http://smallbusiness.chron.com/international-financial-reporting-standards—advantages-disadvantages-2167.htmlhttp://www.accaglobal.com/content/dam/acca/global/PDF-technical/financial-reporting/rr-124-001.pdfFourth Edition Accounting An Introduction by Eddie McLaney and PeterAtrill