The Harmonisation of International Reporting Standards - Essay Example

The Harmonisation Of International Reporting Standards Introduction Accounting standards are the legal requirements imposed on financial reporting. The standards vary from region to region and can therefore create problems for countries that conduct business in more than one region. At present, most Irish public and private sector businesses adhere to the UK GAAP (Generally Accepted Accounting Standards of the United Kingdom). There are substantial differences between the UK GAAP and the US GAAP, for example. There are also differences between the UK GAAP system and the International Accounting Standards (IAS) and the International Financial Reporting Standards to which thousands of companies, including many Irish companies, will convert within the next few years. Background of International Standards In the United Kingdom, the International Accounting Standards Body, has replaced the International Accounting Standards Committee. The replacement occurred in 2001. The International Accounting Standard Committee was developed in 1973 by representatives of accounting bodies in Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland and the United States. The aim is to develop International Accounting Standards and to implement those standards (IASCF, 2005). The IASC originally comprises of representatives of 106 professional accounting bodies in 79 countries. (Mckee, 2000) A 14-member board having representatives from 13 countries plus the International Federation of Financial analyst governs it. If was formed with a view to bring out in the interest of people accounting standard to be used in presentation of financial statements. Since 2001, the IASB has amended many of the accounting standards and with new International Financial Reporting Standards (IFRS) (Houston, 2001). The board also intends to issue new reporting topics. IASB has been making constant efforts to deliver to the economy an environment, which has the tendency to attract foreign investment. IASB is trying its level best to promote International Accounting Standards (IASs) to the world and ultimately bring harmonisation. The European Union and many other individual countries have started considering IAS. United Kingdom and US are the notable exceptions in this regard. Background of Local Standards The local accounting standards for Ireland and the United Kingdom is the Accounting Standards Board (ASB). Its role was first recognized under the Companies Act of 1985 and it finally took over the role of setting accounting standards in 1990. Before 1990, the accounting standards for the United Kingdom and Ireland were set by the Accounting Standards Committee (ASC). Like the International Accounting Standards Board (IASB) of the United Kingdom, the ASB collaborated with the accounting standards governors from other countries to provide some harmonization. The ASB is allowed up to ten board members. Of these, the Chairman and the Technical Director of the Board work on the board full-time. The ASB typically consults an array of authorities when reviewing proposals for new accounting standards or revisions to old accounting standards, but the Board is ultimately autonomous. All accounting standards that the ASB develops are published as “Financial Reporting Standards” (FRSs) and “Statements of Standard Accounting Practices” (SSAPs). The first Financial Reporting Standard was the revision of Statement of Standard Accounting 10, concerning cash flow statements, revised in October 1996 (Dunn, 2002). Prior to the establishment of either the ASB or the ASC, accounting standards were established according to recommendations made by the Institute of Chartered Accountants of England and Wales (ICAEW). The formation of the ASC took place in the 1970s. Reasons for Moving to International Standards Despite the ease with which Irish businesses transact with UK businesses using the UK GAAP standard, there are a number of practical reasons for Irish businesses to support the harmonization of reporting standards internationally, and to move from the UK GAAP standards to the International Accounting Standards at this time. The harmonisation of accounting standards refers to the global standardization of accounting methods and principles (Collett, 2001). At present Ireland uses the UK GAAP standards of reporting, in common with the United Kingdom. The United States, for example, supports a different method for financial reporting, the US GAAP. In reality, there is now a global economy; international economic activity has increased an a rapid rate following the introduction of new and the improvement of old technologies. The internet, for example, has done much to facilitate the globalization of capital markets by allowing almost instant communication and information exchange. The most successful businesses operate in an international context and therefore have an interest, not only in being able to function in different countries, but also to secure international investors and clients. The competition for investors and clients in a global market economy is intense; non-standard accounting standards become an adherence to businesses that want to participate internationally. Potential investors and clients, even other businesses, are unlikely to invest or trade where there are accounting standards used that are different to their own. This would require the implementation of a method of converting the reports, which demands both time and resources on the part of the investor, client, or trading business. As the harmonization of standards tends to facilitate the globalization of capital markets, it is financially prudent and ergonomic that Ireland move from the UK GAAP to the International Accounting Standards. Comparability of international financial information facilitates global trading and investment. Dissimilarity in US GAAP and Ireland GAAP (UK GAAP) often give rise to misleading ratio analysis, and thus false perceptions of financial history and accounts. Misleading to clients, investors, and traders, dissimilarities will be eradicated by the implementation of IAS and IFRS standards globally. As comparability makes the consolidation of reports easier, less time, money, and energy will be spent consolidating divergent financial information. The expenditure for appraising financial statements by international fund managers and others will also be minimized. Investors will be in a position to understand the financial statements of a foreign company. They will be able to compare the investment opportunities. Harmonization will allow investors to make reasonable and meaningful comparisons between the investment portfolios of businesses from countries around the world. As a result of harmonisation it would become easier for MNC to enter into mergers or to take over business foreign countries. Accounting standards will afford a clear impression of the financial position of any given company. It will also be easier for the MNC to transfer its accounting staff internationally. There will be no need to train the staff to use different accounting standards. This ultimately will also make it less expensive to provide training to the staff as the required training and skills will be similar in all the countries throughout the world. Businesses will save time and money by adopting international accounting standards. The international standards will help governments to raise foreign capital, attracting more international investors. It will assist national tax authorities around the world in levying taxes on total global income of organization; harmonisation determines that the net income will derive from common accounting principles and practices. Another group that will benefit from the harmonisation of accounting standards are the international accounting firms. These firms function to provide auditing and consulting services in many countries. To perform this task these firms require complete knowledge of domestic firm financial accounting principles, which will be more easily developed with internationally standardized accounting protocols in place. International intergovernmental organization such as the United Nation, European Union and Organization for Economic Cooperation and Development will benefit from harmonization of accounting standards as well. Evaluating projects, extending credit and making other important decisions about different countries of the world are the basic task of these organizations. Harmonisation will provide these organizations, comparable financial information that is an essential requirement for carrying out their task effectively, making the best decision and thus achieving the best results. Differences between International and Local Standards At present the conversion of accounting standards is underway. It is clear that many of the local standards are similar to the international standards currently being introduced. Both the UK standard, FRS 2, ‘Accounting for Subsidiary Undertakings’, and the international standard, IAS 27, ‘Consolidated Financial Statements and Accounting for Investments in Subsidiaries’, are based on the EU 7th directive and therefore contain very similar requirements for the consolidation of subsidiaries (Lawrence, 2002). Many other international standards differ from the local standards considerably; IAS 27, for example, relates to subsidiaries and does not allow exclusion of subsidiaries based on dissimilar activities. Under FRS 2 the exclusion of subsidiaries is permitted, even though the circumstances of exclusion are required to be extreme (Lawrence, 2002). Lawrence (2002) also identifies other differences between the IAS and FRS requirements that cause problems. The IAS, for example, measures the excluded subsidiary at a fair value, whereas FRS 2 applies the current asset rule of lower cost and net realisable value to the excluded subsidiary. There are also differences is the ways that IAS and FRS standards address the concept of fair value: IAS 22 contains the international requirements and FRS 7, “Fair Value in Acquisition Accounting”. Whereas IAS 22 does not require that the fair value of the purchase consideration include an estimate of contingent elements, FRS 7 does maintain such a requirement (Lawrence 2002). Likewise IAS 22 permits the recognition of a provision relating to reorganization and reconstruction as an acquired liability “even where it was not a liability in the books of the acquiree”, whereas FRS 7 does not allow such a recognition (Lawrence, 2002). A further problem is that IAS 22 does not require that the fair value of assets and liabilities reflect the conditions at the date of acquisition, whereas FRS 7 does (Lawrence, 2002). A third element of difference is identifiable between FRS 15 and IAS 16, which discuss the initial measurements of tangible fixed assets, “their valuation and subsequent deprecation” (Lawrence, 2002). Both clauses identify directly attributable cost, including estimated cost of dismantling and removing assets and restoring the site, as the base initial measurements for accounting. Both clauses also allow both the capitalization of finance costs. The regulations of the FRS are, however, more extensive than the IAS requirements, and therefore the IAS 16 requires to be extended. The differences between the IAS and the FRS tend to be subtle, but they are nonetheless significant. Referring to the examples cited, IAS 27 and FRS 2, IAS 22 and FRS 7, IAS 16 and FRS 15, it becomes clear in each of these cases that there has been some prior collaboration between the international and local boards for setting accounting standards. As a rule, the international standards appear to be less conclusive than the local standards. As mentioned, the FRS regulations regarding tangible fixed assets, covered by FRS 15, are more extensive than the IAS requirements. The FRS’s stipulations regarding the definition of the term “valuation” are, for example, quite extensive, which allows for the various different types of valuation, from the basic, which refers to the value of existing use, to the variation, arguably more complicated to determine, which is the potential value use of an asset. As the IAS requirement does not offer such extensive interpretation of the term, ‘value’, it is clear that there may be potential problems with the determination of the value of fixed assets, including property. Another example worth considering in this regard is the difference between IAS 27 and FRS 22 regarding subsidiary undertaking; as mentioned, the local regulation for Ireland and the United Kingdom is more explicit on the subject of determining the relationship between parent and subsidiary. Both the local and international terms base the relationship between parent and subsidiary on “control of operating and financial policies” (Lawrence, 2002). However, FRS 22 is far clearer in defining that which constitutes control, principally with reference to the ability to appoint directors, shareholding, and controlling majority voting rights within a business (Lawrence, 2002). Because of the complexity of the issue, the relationship between parent and subsidiary, it is essential that the international regulations for accounting at the very least, include what are the current stipulations of the local regulations. If the local regulations are not thus accommodated, and a means of defining control in this context is not thus provided in such detail, then what is now a substantial difference between local and international accounting standards may prove an extremely problematic oversight when the international standards are adopted in place of the local standards as well. There are numerous advantages to the conclusive harmonization of accounting standards via IAS and IFRS regulations; various groups will benefit from the ability to review accounting information in a globally standardized way. Problems with Moving from Local to International Standards One of the most importance obstacles for companies in the way of harmonisation of accounting standards is Nationalism. It is considered as a major threat to harmonisation as it creates a reluctance to follow the accounting practices of some other country. The countries are not ready to give away the control of their accounting regulation to another country. It is supposed as replacing a country’s own accounting regulation with some other country. Also many developing and underdeveloped countries see harmonisation as an imposition of standards by economically sound countries and no country wants to admit that another country’s principles are superior to its own. (Mckee, 2002) Cultural and economical difference is also an important obstacle for companies in this regard. The accounting standard of a country is a product of its need and environment which may definitely vary from country to country as every country has its own cultural and economic situation which may be different from another. Under such circumstances harmonisation of accounting standards becomes a difficult task. Thirdly the size or the number of differences between the accounting standards of different countries is so much that it becomes difficult to harmonize them into one system while keeping all the differences in view. Coordination of a country’s owns accounting policies with those prevailing in other countries is also difficult. Another concern is that the degree of governmental involvement in standard setting varies from country to country. For example in Britain the professional organization sets the standards while in France it is done by the government, on the other hand US is a combination of two as in US it is set by the professional organization but the ultimate enforcer is the government. In case of Ireland, standards set in United Kingdom are followed. (West, 2003) Regulators in countries with major capital market like USA and United Kingdom are not prepared to replace their standards with some other. Let us consider the example of United Kingdom in this regard. Majority of the countries, which are involved into trade activity with United Kingdom, are maintaining their statements according to the United Kingdom GAAP (Generally accepted accounting principles). As a result of which United Kingdom GAAP is followed by many other countries (Chen, 2002). The United Kingdom, the United States of America, Japan, and Germany are the countries that possess the ability to control a large part of capital market. Conclusion At this stage in the world economic growth, a single, uniform, internationally-accepted set of standards of financial accounting and reporting are very much required to facilitate international investment and financial decisions. Harmonisation in turn will bring number of benefits for variety of groups as discussed above. With the enormous increase in investing and lending activities around the world, harmonisation is very much required. References Chen Shimin, Sun Zheng, Wang Yuetang; (2002). Evidence from China on Whether Harmonized Accounting Standards Harmonize Accounting Practices, Accounting Horizons, Vol. 16. Collett H. Peter, Godfrey M. Jayne, Hrasky L. Sue; (2001). International Harmonization: Cautions from the Australian Experience, Accounting Horizons, Vol. 15. Houston Melvin, Reinstein Alan; (2001). International Accounting Standards and Their Implications for Accountants and U.S. Financial Statement Users, Review of Business, Vol. 22. International Accounting Standards Committee Foundation; (2005). History. International Accounting Standards Board Website (http://www.iasb.org/about/history.asp). Lawrence, S.; Convergence of UK GAAP to IAS: Group Accounting. Student Accountant, ACCA Website. 27 September, 2005. (http://www.accaglobal.com/publications/studentaccountant/661068). Mckee L. David, Garner E. Don, Mckee A. Yosra; (2000). Offshore Financial Centers, Accounting Services, and the Global Economy, Quorum Books. Mckee L. David, Garner E. Don, Mckee A. Yosra; (2002). Crisis, Recovery, and the Role of Accounting Firms in the Pacific Basin, Quorum Books. West P. Brian; Professionalism and Accounting Rules, Routledge, 2003. Read More