Global accounting standards - Essay Example

Introduction The increasing importance of a single set of global accounting standards in international market has given rise to the debate on international accounting standards. The decision on the part of the European Union to require its all the member states to adapt their local GAAPs with respect to the IAS/IFRS, proved to be a milestone in the journey of IASB towards the FASB. However most of the European countries had already embarked on their convergence towards the international standards for financial reporting. The United States' standards setting body, FASB is consistently working towards the convergence of US GAAP to the international accounting standards in response to international pressures. This essay provides an insightful study on the development of IAS in the Europe and the convergence of FASB with the accounting standards. Moreover it discusses the impact and benefits of having a single set of global standards on the users of financial statements. Development of A Single Set Of Accounting Standards In Europe In response to the financial reporting needs of the increasingly globalised markets, the European Union passed legislation in the year 2002 that required all its member states to adapt their financial statements with respect to the IAS and IFRS. Ruder (2005, p555) says that, "the European Union's 2002 decision to adopt IFRSs for all of its listed companies was a significant stride toward convergence". This stance on the part of the European Union encouraged countries like Germany, Italy and France to accelerate their process of integration with international standards some most of its member countries began to adapt their local GAAP on the basis of IFRS after the regulation. Italy happens to be the first European country to explicitly allow the companies to make use of international accounting standards for the purpose of financial reporting in the year 1998. The accounting standards in France have continued to develop over time in particular during the mid-1990s, when the government confronted with enhanced pressure from giant businesses to allow them to avail international standards instead of the French law for the preparation of companies' financial statements. Thus the government issued a law whereby the companies were required to prepare their financial statements on the basis of international standards. However significant changes only became evident after the EU regulation of convergence to IFRS (Delvailleet al., 2005). The Finnish standards started to converge with the IAS in the year 1993. The accounting standards of countries like UK, Netherlands, and Ireland are the most compatible with IAS as compared to other European countries (Haller, 2002). In Germany, on the other hand, the convergence to international accounting standards had taken place well before the EU regulation. Germany took such initiative in response to the international pressures concerning the presentation of company accounts. The German companies were required to present and report their financial accounts in accordance with either the IFRS or the US GAAP, thus the country adopted an accelerated approach towards adoption of international accounting standards. In the year 2004, the government also passed an Act that implemented the EU regulation to use the IFRS for the purpose of financial reporting for the year ended 2005. Hence, in all these European countries, the governments realised the importance of international standards and the irrelevance of their local GAAP with regard to international markets in the year 1998 (Delvailleet al., 2005). Whittington (2005) elaborates that the international accounting standards have developed considerably over the time. The IASB, ever since its creation, has been amending and revising the previous accounting standards so as to re-assure their applicability. The pre-eminent examples of this amendment are the IAS 32 and 39 that had been originally adopted by the IASB from the IASC. There were several difficulties in both the standards that made it difficult for the preparers of financial statements with respect to applicability. The board has taken several measures to amend these standards since the year 2000 when the European Union decided to adopt the IFRS. The FASB and IASB have currently been struggling to reach at a consensus on the development of accounting standards that are not only highly transparent but also globally acceptable. Ruder et al. (2005, p555) propounds that, "the FASB and the IASB are united by a common philosophy: pursuit of converged high-quality accounting standards". The FASB has realised the importance of convergence with the IFRS because of the recent surprising corporate failures that significantly debilitated the investor trust. It was even claimed that, "the Board's timidity in standard setting enabled off-balance-sheet financing, inadequate disclosure, and form-over-substance transactions to proliferate" (Herz, 2003, p248). These corporate bankruptcies played a significant role in exacerbating the need for convergence of US GAAP with the IFRS. Problems Between FASB And IASB In Harmonisation Of Accounting Standards Ever since its inception, the FASB has been consistently charged and accused of not playing its due role in the process of creating high quality accounting standards that could mitigate earnings management on the part of the corporations and enhance investors' trust in corporate reporting. FASB, albeit, has been struggling to continuously tailor the US GAAP to the specific needs of financial statement users, yet confronts with the issue of less transparent financial reporting. This issue has led the board considerably towards the convergence of accounting standards with the international standards or IFRS. The convergence of US GAAP towards the accounting standards, albeit necessary, comes to the FASB as a challenge. There happen to be significant differences between the approaches followed by the FASB and the IASB, which impedes the acceleration of the process of harmonisation. The FASB has remained a sole body to create and develop standards in the United States responding to the needs and requirements of the users. However, steps forwarded towards convergence on the part of FASB will serve to minimise its ability to develop its own standards upon its discretion. Herz (2003, p252) sheds light that, "the growth of cross-border investing and capital flows, coupled with a growing endorsement of international standards, means that the U.S cannot unilaterally develop accounting standards". The differences between the FASB and IASB accounting approaches circumvent the rules-based and principles-based concepts. The accounting standards issued by FASB follow a rules-based approach. For instance SFAS No. 13 i.e., accounting for leases that are easily subject to by the corporate personalities through application of judgments to misreport facts in the financial statements. The statements are very complex and detailed making the instructions less clear to the financial statements preparers. "Detailed standards are likely to be incomplete or even obsolete by the time they are published" (Maines et al,. 2003, p73). On the other hand, the IASB adopts a principles-based approach to the accounting standards that are much preferable around the globe as compared to that of the US GAAP. However, it cannot be claimed that principles-based approaches are always effective in meeting the need of financial reporting standards. Nobes (2005) explores that principles-based accounting standards are not always better that the rules-based ones. The FASB uses a rules-based approach because the board considers it to be helpful in clarifying instructions for financial reporting. For instance, the differences between the IAS 38 and SFAS 2 reveal that although IAS 38 is a principles-based standard, yet it fails to procure clarity to the financial statement preparers as compared to the SFAS 2 that explicates proper instructions leading to advantages in financial reporting. Hence, the argument of FASB for availing a rules-based approach to the accounting standards is that it is better to detail instructions and clarify objectives rather than to remain vague. The accounting standards of FASB, being so complex and detailed, are even manipulated on the part of managers, which is evident in recent subsequent corporate failures in the United States. Nobes (2005, p31) criticises that "the U.S. system has chosen a complex set of rules whereas IFRS has chosen a somewhat vague principle. The resulting structuring of transactions in the U.S., as evidenced by the creation of Enron's special purpose vehicles, was one of the results of the rules-based approach". . The convergence to IAS and IFRS has come to the FASB as the major challenge of this century. The challenge is that despite the differences, the United States needs to harmonise standards in response to international pressures especially when the European Union has supported the IASB. Herz (2003, p253) says that, "for the FASB, international convergence is a major strategic initiative that presents significant logistical challenges and requires increases in both our people and monetary resources. However, convergence is an imperative-we cannot avoid this effort". Impact Of Globally Accepted Accounting Standards On The Users Of Financial Statements A single set of standards that are accepted and implemented globally are significantly beneficial for the various users f financial statements. Ruder (2005, p514) puts forward that, "investors would be better able to compare the financial statements of all companies and would have the tools to make better investment decisions". The first and foremost aim of harmonisation of accounting standards is to enhance the transparency and comparability of companies' financial reports by making the corporate personalities follow the principles that are much realistic and that could prevent any effort on the part of managers to mislead the users. Hence, international accounting standards are likely to enhance investor trust and confidence in the accounting standards as well as corporate financial reports. Investors would be able to evaluate different companies conveniently and would take more prudent and informed investment decisions. Because the standards would be of high quality, the financial results provided in the annual reports would provide a true picture of the financial position and performance of any company. The international investors, in particular, would get an advantage of benchmarking a company from different countries. These international investors and shareholders could compare the financial performance of different companies leading to better investment decisions. Ruder (2005, p514) also says that, "the best method of facilitating financial statement comparability would be that the financial reports of all companies be prepared according to similar accounting principles". However, a single set of global accounting standards would only reap benefits if the standard setters remain independent and free from any political pressures. If the international accounting standards are affected with the political pressures and lobbying on the part of influential personalities, the accounting standards are supposed to take a biased view. Ruder (2005, p518) expounds that, "if the world's standard setters fail to adhere to the concept of independence, high quality converged standards will not emerge". The author is of the view that the harmonisation of accounting standards will only be effective for the users of financial statements if the standard setters are given a full opportunity of developing standards that are able to enhance transparency and comparability of the standards. However, the structural setting of the IASB suggests that the board will be able to give autonomy to its standard setters in creating and developing the accounting standards that are accepted globally. Ruder et al. (2005, p586) illuminates that, "the IASB's refusal to succumb to political pressure from business interests to change its derivatives standard bodes well for the functioning of international standard setting in the future". Hence, the convergence and harmonisation of accounting standards will be having a significant impact on how the financial accounts are prepared and presented around the globe. This will instigate a feeling of trust among the investors in the corporate accounting and regulatory framework towards the enhancement of their trust. The harmonisation of global accounting standards will undoubtedly ameliorate the levels of comparability and transparency of the companies' financial statements. However, significant concerns are there over the independence of standard setters in developing globally authentic standards. The threats of lobbying and political pressures are likely to minimise the standards are fairly created. The attitude of the board towards political pressures, on the other hand, well indicates that it will not succumb to these pressures. Conclusion This essay discusses the development of accounting standards in the European Union and the difference of conceptual approaches between the FASB and IASB that hamper a speedy process of harmonising the accounting standards. The European adoption of IFRS played a significant role in endorsing the efforts of IASB towards a global acceptance of international accounting standards. Increasing international and domestic pressures on FASB has also led the board to begin the convergence of US GAAP to the IAS/IFRS. However the conceptual differences of approaches in accounting standards development is impeding the convergence process. Furthermore, the development of a single set of accounting standards that are acceptable around the globe will be effective in enhancing investors' trust in accounting standards by means of improving the comparability and transparency of these standards, which can only be ensured by providing full autonomy to the standard setters in their way to develop internationally acceptable accounting standards. References Delvaille P., Ebbers, G. And Saccon, C. (2005), "International Financial Reporting Convergence: Evidence from Three Continental European Countries", Accounting in Europe, 2, pp. 137-164 Haller, A. (2002) "Financial Accounting Developments In The European Union: Past Events And Future Prospects, The European Accounting Review, 11(1), 153-190 Herz, R.H. (2003), "A Year of Challenge and Change for the FASB", Accounting Horizons, 17(3), September, pp. 247-255 Maines, L.A. et al. (2003), "Evaluating Concepts-Based vs. Rules-Based Approaches to Standard Setting" Accounting Horizons, 17(1), March, pp. 73-89 Nobes, C.W. (2005), "Rules-Based Standards And The Lack Of Principles In Accounting", Accounting Horizons, 19(1), March, pp. 25-34 Ruder, D., Canfield, C.T. and Hollister, H.T. (2005) "Creation of World Wide Accounting Standards: Convergence and Independence", Northwestern Journal of International Law & Business, 25(513), pp. 513-588 Whittington, G. (2005), "The Adoption of International Accounting Standards in the European Union", European Accounting Review, 14(1), 127-153 Read More