International Accounting Standards Board's Importance All Across the Globe - Term Paper Example

Who has been more successful at harmonising financial reporting the EU or the IASB? Table of Contents Introduction 2 Why was IFRS chosen over GAAP? 3 Efforts Made by IASB 5 Weaknesses of IASB 6 Challenges and Road Ahead 6 Market Reaction 7 Conclusion 8 References 9 Bibliography 10 Introduction It was from February 2005 that all listed companies of European Union Stock Exchange were to present their financial reports as per the standards promulgated by the International Accounting Standards Board (IASB). The question is why did European Union decided to launch this harmonization process, why was it required? The answer lies in the external environment both political and economical. Formation of European Union was for economical and political integration of the region but it could not be achieved unless the reporting standards are made comparable. Why? Because if an investor is interested in trading and putting his money which cumulatively accumulates as the region’s capital cannot invest in the member state which has different accounting standards as compared to his state, thus forcing him to invest in his state as he is not able to compare the financials of the other state leading to a non optimal distribution of capital. So for smooth and optimal distribution of capital across the European Union, it decided to go for an all out conversion of accounting standards, making the region more investor friendly and helping its political cause as well (Susanne & Christina, 2003). Why was IFRS chosen over GAAP? Even though standardisation of accounts was a welcome change for investors and industry as a whole, the reason behind the selection of International Financial Reporting Standard (IFRS) promulgated by IASB was questioned. It could be answered in two steps, one which was politically motivated and other which was more accounting standard oriented. In 1990s there were an increased mergers and acquisitions involving European companies within European Union and out of it, which increased the pressure of having a unified and standardised form of reporting system. Globalisation of capital market and international fund movement was mounting throughout the 90s. EU securities exchange allowed companies to list themselves if they were reported according to GAAP or IAS, the only possible way to remain in the global securities market which was constantly dominated by the United States. The European Union governments feared that this way US GAAP would become the international standard for financial reporting. Therefore, a need for a competing set of standard for reporting financials was deeply felt to counter the US dominance and their dictatorship over the rules of accounts to be followed worldwide. Thus, the option boiled down to two accounting standards: “European” standard or IASB accounting standard. Historical unsuccessful combination of accounting standard of different European nations due to their varied approach left European Union with no option but to take up IASB accounting standard as the most viable opponent to US GAAP. IASB was also preferred due to following accounting superiority over GAAP. The major differences of the two standards are as follows: IFRS GAAP It is principle based accounting standard. It is industry based accounting standard. The objective of general purpose financial statements is to provide information about the financial position, financial performance and cash flows of an entity so that users can make informed economic decisions. Financial statements also show the results of management's stewardship of the resources entrusted to it (IAS1). The overall objective of financial statements, including financial highlights, of investment funds is to present net assets, results of operations, changes in net assets, and financial highlights resulting from investment activities and, if applicable, from capital transactions (AAG-Inv 7.01). Largely understood and well accepted worldwide. As it is more transparent and well disclosed. Accepted largely due to US domination in the international economic circuit. IFRS is more vividly presented as compared to country specific GAAP. IFRS makes reconciliation a statutory part of the financial report which was optional in case of GAAP. IFRS does not permit LIFO (Last In First Out) methodology of cost, it also consider many instrument as debt which were previously considered as equity under GAAP. The consolidation criteria and disclosure of related party transaction makes it more investor friendly than GAAP (PwC, 2007). Efforts Made by IASB IASB has done well in establishing itself as a prudent accounting standard. Its efforts and achievements are worth mentioning. IASB developed 33 accounting standards. Its co-operation with national standard setters; it has national standard setters in its board and also call for participation from interested groups and various individuals and organisations such as financial analysts, stock exchanges and financial instrument users. The ideas was simple, IASB as a private body cannot enforce its standards on different nations, therefore it needs the support of national standard setters and for its implementation and more so, if these individuals and organisations are in process of standard building they would probably will not oppose its implementation. This could be considered a smart move by the ISAB. Recommendation by IOSCO to its member states to allow its companies to use IAS for international offerings was a major milestone for IASB, because US Security Exchange Commission is a key member of IOSCO, this endorsement by IOSCO would mean acceptance of IASB by the United States. It also paved the future path for IASB to be accepted world wide. European Union’s anti US strategy gave IASB a much required boost, as it made compulsory for its member states companies to present their consolidated financial statements in accordance with IASB. Last but not the least, co-operation between FASB and IASB, in order to design a single global accounting framework was another cornerstone achievement for IASB. But it was actually a compromise on the American part, because IASB was now accepted by EU, the second biggest economic powerhouse forced its companies to prepare statements as per the IASB format would gives IFRS a strong backing for global acceptance and more domestically, failure of Enrons and Worldcoms of the US led to less belief in the US GAAP and strong backing by EU led to this co-operation between the two. Weaknesses of IASB IASB was formed by joint initiatives by Canada, United States of America and United Kingdom. Majority of its members are from US and UK, thus contradicting its selection of members to make sure it is not dominated by any country or specific region. Acceptance by IOSCO which is dominated by SEC of US also adds weight to the argument that IASB compromised its position for global acceptance and knowingly or unknowingly it actually acknowledged American Accounting Principles. The board is majorly represented by western nations and developing nations were neglected. Challenges and Road Ahead Firstly, the major challenge ahead of IASB is to overcome (if not possible, at least to minimise) the accounting differences between nations which have shaped them so far. Secondly, developing an accounting standard is not the entire thing and implementing and supervising it is a different game altogether. It’s a hefty task to monitor the implementation of IFRS and its proper interpretation in so many countries when there is so less knowledge about the standard monitoring, it would be tough and which cannot be achieved without joined co-operation of industry, standard setters, government and the public. Thirdly, the influential angel to this matter may add to the complexities of implementation of IFRS, i.e. lobbying for IASB, in order to serve their purpose many players will try to influence IASB. The challenge lies in being impartial. The challenge is that many countries in Asia, South America and Africa are yet to recognise IASB and the deadline for convergence tends to be delayed for one reason or the other. IASB should try and bring all countries and accounting policies followed over there, into a point of acceptance (Leblond, 2005). Market Reaction Ultimately it is the market and the end users who decide the credibility and user friendliness of a new norm or system. Thus market reaction cannot be ignored. European Union is the region where IFRS has in force since 2005, where the reactions are favorable as the market presumed that the new system would infuse transparency and cost of learning would be superseded by the benefits and increased information quality provided by the new system. Conclusion It can be said that through much of rough weather IASB has emerged as a global answer to accounting policy discrepancies and it played an important role in international harmonisation. Its success lies in the fact that EU had already accepted it as their standard; SEC has asked its listed companies to shift to IFRS by 2016 and even developing countries like India is all set to adapt IFRS by 2011. The challenge lies ahead is of uniform implementation and proper monitoring and interpretation. This can be achieved by synchronised efforts of the actors involved in it (government, standard setters, auditors, companies, regulators). In brief it can be said that the IFRS has been attaining increasing importance all across the globe. References Leblond, P., 2005. The International Harmonisation of Accounting Standards in the EU. [Online] Available at: http://www.allacademic.com//meta/p_mla_apa_research_citation/0/4/0/5/6/pages40567/p40567-1.php [Accessed 21 November, 2009]. PwC, 2007. A comparison of International Financial Reporting Standards and US GAAP for Investment Funds. Summary of Similarities and Differences. [Online] Available at: http://www.pwc.com/en_GX/gx/investment-management-real-estate/pdf/0607ifrscomparisons.pdf [Accessed 21 November, 2009]. Susanne, F & Christina, L., 2003. The International harmonisation process of Accounting Standards. Linkoping University. [Online] Available at: http://liu.diva-portal.org/smash/record.jsf?pid=diva2:18878 [Accessed 21 November, 2009]. Bibliography Alexander, D., Britton, A. & Jorissen, A. International Financial Reporting and Analysis. Cengage Learning EMEA, 2007. Thorell, P. & Whittington, G., The harmonization of accounting within the EU Problems, perspectives and strategies. The European Accounting Review, 1994. Read More