International Corporate Reporting
Topic 5: Discuss the potential benefits and drawbacks
of IFRS rules. Assess the reasons for needing the “Unified” accounting standards
considering pre and post IFRS adoption periods. Propose how the global convergence
might occur and potential outcomes.
The International Financial
Reporting Standards are a set of international accounting standards stating how
particular types of transactions and other events should be reporting in
financial statements. It is issued by an independent, not for profit
organization called the International Accounting Standards (IASB). The main
agenda of IFRS is to provide a universal framework for how public companies
prepare and disclose their financial statements. The IFRS’s aim is to maintain
stability and transparency throughout the financial world, this is due to the
fact that it allows the businesses and organisations to make educated financial
decisions as it will enable them to identify what is happening with a company. For
a standard to be approved, seventy five percent of the board members must
In this essay I shall be
discussing the potential benefits and drawbacks of the IFRS Rules, and
assessing the reasons for needing the unified accounting standards, pre and post
IFRS adoption periods. For my conclusion I shall be proposing how the global
convergence might occur and published academic studies.
Between the years of 1973 and
2000 the standards were issued by the predecessor of IASB, the International
Accounting Standards Committee. The committee was established by professional
accounting bodies in many countries, such as: Australia, Canada, France,
Germany, Japan, Mexico, Netherlands, United Kingdom, Ireland and the United
States. The IASB, “Describes its rules under the label IFRS, though it
continues to recognise the prior rules IAS issued by the old standard setter
IASC.” This indicates that whilst the new board is the one who issues the
standards, 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 of
implementing IFRSs could be offset by the potential for compliance to improve
The IFRS can be affected by the
local political and economic factors, as it lies at the level of the national standard
adoption decision. This can result in firms to choose among alternative accounting
Voluntary standard are
standards developed by a non governmental entities such as businesses, not for
profit organizations or initiatives involving multiple stakeholders. Voluntary standards
include Fairtrade, Organic, Rainforest Alliance. They do vary widely between
their objectives and scope, as some of the standards address a single commodity
whilst others apply to many other products. They also have various different
objectives such as protecting social rights, conserving the environment,
promoting good agricultural practices, ensuring a minimum price. Voluntary
standards was described as, “Agreement about how important commercial
transaction are to be implemented.”(Ball, 1995:19)
“So while this means Europe’s
adoption of IFRS is a leap of faith, it also means it is a Brave New World for
commentators on IFRS.” What he is trying to depict is that whilst it works
within the EU, for it to successfully branch out to the rest of the world is
leap of faith, as many others have their own accounting standards.
Uniform Voluntary Standards
One of the advantages of uniform voluntary standards is the scale of economies
as it underlines all forms of uniform contracting. They are a type of public
good that the marginal cost of an additional user adopting them is zero.
The second advantage of
uniform standards if the protection they give auditors against managers playing
an, “Opinion shopping game”(Ryan Ball 2006). If all auditors are required to
enforce the same rules, managers cannot threaten to shop for an auditor who
will give them an unqualified opinion on a more favourable rule.
The third advantage is
eliminating informational externalities arising from lack of comparability. If
firms and/or countries use different accounting techniques, even if they re
disclosed to all the users, they can impose costs on others due to a lack of
comparability. To the extent that firms internalise these effects, it will be
advantageous for them to use the same standards as others.
All three of these advantages
imply that some degree of uniformity in accounting standars could be expected
to arise in a market.
An advantage of IFRS would be
the fact that it enables more flexibility as the IFRS use a principle based
philosophy. This means that the aim of each standard is to arrive at a reasonable
valuation, and that there would be many ways to get there, which in turn
enables the companies the freedom to adapt IFRS to their situation, which then
leads to more beneficial statements.
An advantage of a set of
single set of international accounting standard would be the reduction in the
cost of preparing consolidated financial statements for multinational firms.
Uniform Accounting Standards:
Uniform accounting standards
were 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 a
largely market based standard setter. Another example would be in the US, there
is the American Association of Public Accountants, the precursor to the
presents American Institute of Certified Public Accountants.
There are three reasons to
expect a less than uniform accounting methods to occur in a voluntary setting,
The first reason is that it is
not clear that the uniform financial reporting quality requires uniform accounting
rules . Uniformity would require accounting rules that vary across firms,
location and time. Firms differ to each other based on, “Strategy, investment
policy, financing policy, industry, technology, capital intensity, growth,
size, political scrutiny and geographical location. Countries differ to each
other 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 it
costly to develop a fully detailed set of accounting standards that will be
able to cover ,”Every feasible contingency, so standards are not the only way
of solving accounting method choices. An example
The third reason is that the
firms/countries using different accounting methods might not fully internalise
the total costs imposed on others due to lack of comparability. It provides a
rationale for mandating uniformity.
Mandatory uniform standards
could be a solution to the problem of informational externalities. If their use
of different accounting methods imposes costs on others that firms and/or
countries do not take into account in their decisions, then it is feasible that
the state can improve aggregate welfare by implementing uniformity.
We need a unified accounting standards
as companies that are now following the proper standards will result in them being
in the situation where they wont know the sum that they owe/owed which can result
in violating specific rules. Before the IFRS the quality of the statements was at
a poor level compared to the current level that it has set, it has become easier
for the IFRS due to the fact that the IASB is better funded, better staffed and
more independent than its predecessor the IASC. .
If all countries were to use
the IFRS label then it would discard the information in accounting standards,
regarding the reporting quality differences, then the available quality signal
would become the quality of the enforcement of standards. The reason to expect
enforcement is that it is more costly for low quality countries to adopt high
enforcement standards, because this would run counter to local political and
Convergence is a theory that
states that the developing countries, as known as low per capita income, tend
to 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 feel
that if more countries were to adapt to the IFRS then it would lead to a global
comparability, as the users would reap the benefits of comparing the financial
statements from a company in one country to another. By being under the same
committee 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 one
another and or if it gets lost. Failure to specify accounting methods would
create uncertainty to both of the contracting parties, “Failure to agree in
advance whether unfunded health care commitments to employees are to be counted
as debt leaves both the borrower and the lender unsure as to how much debt the
borrower can have without violating a leverage covenant.”(Accounting and
Business Research, International Accounting policy forum pp 5-27.2006 Ray
Ball). From this example it would indicate that if they were not able to make
an agreement then it would put them in the position where they do not want to
violate the leverage as they would have to pay fines which could be costly.
IFRS have been making attempts
to globalise the accounting standards by converging with Japan and working
systematically toward the convergence of IFRS and US GAAP.
Despite the fact that due to
the differences in financial reporting quality among different countries, it
has been pushed down to a level that has resulted it in being ,”Concealed by a
veneer of uniformity.” (Ray Ball, p.g 5). However with over one hundred
countries it has proven to have been very successful as its overall agenda is to
provide, “A comprehensive set of high quality standards.”(Ray Ball, Accounting
and Business Research p.g 5)
There are many advantages of a
global convergence, an example of one would be that by eliminating
international differences in accounting standards and the standardising
reporting formats, IFRS could eliminate many adjustments analysts have made in
order to make the companies financials more comparable internationally.
Another example of global
convergence would be the reducing the cost of processing financial information,
as it will increase the efficiency with which the stock market incorporates its
Inconclusion despite the
drawbacks of the IFRS I feel that for it to branch out even more it would have
to be to comply more with the other countries and display a consistent high
quality set of standards, as there have been times where the quality was
lesser. The IFRS has many benefits to it that make it suitable for it to go
more global, as the IFRS will be able to save money due to not requiring two
sets of books, it being principle based with how it allows more freedom in how
companies portray their financial performance and how it will make cross border
investments easier. Also that due to the higher information quality it reduces both
the risk to all investors from owning shares and the risk to less informed investors
due to unfavourable selection, which in turn would result in the reduction in the
businesses costs of equity capital, which would then result in an increase in share
prices and would make new investments by firms more attractive.
Accounting and Business Research,
International Accounting Policy Forum. Pp 5-27,2006 Ray Ball
Fourth Edition Accounting An Introduction by Eddie McLaney and Peter