The IASB Convergence Programme of Accounting Standards - Coursework Example

THE IASB/FASB CONVERGENCE PROGRAMME OF ACCOUNTING STANDARDS A Discussion on the Possibilityof the Success of the IASB/FASB Convergence Programme of Accounting Standards. There has been conflicting, complexity and confusion caused by the inconsistency and lack of streamlined accounting standards in International Financial Reporting (Benston, 2008). The accounting standards convergence programme is the goal of establishing a single high-quality set of accounting standards that would be internationally used. The plan has taken decades and as of today, a number of projects whose aim is to reduce the differences between accounting standards have been initiated. It is believed that the adoption of a unitary set of accounting standards would increase comparability in various aspects. The comparison includes comparing accounting numbers between and within business entities internationally. The convergence programme has been supported by over one hundred countries around the world. These nations have made a public commitment towards the International Financial Reporting Standards. However, the success of this programme is dubious owing from the argument that it will be an uphill task to reconcile the many differences in the economic, political and business environment (Brüggemann, 2011). The history of the convergence programme dates back to the 2002 memorandum of understanding between the Financial Accounting Standards Board and the International Accounting Standards Board. What came to be known as the Norwalk Agreement made a significant step in the formalization of the convergence commitment. A number of initiatives that would further the goals of convergence have been undertaken. These actions include among others joint projects run by the International Accounting Standards Board. The standard setters agreed unanimously to conduct such projects. The projects being undertaken by FASB and IASB aim at addressing the Business Combination and Revenue Recognition principles of accounting. The four project updates include the Financial Statements Presentation, the Business Combination Project Update, the Revenue Recognition Project Update and the Conceptual Framework Project Update (Burton and Jermakowicz, 2015). The Short-term convergence project aims at generating a standard that would achieve convergence in certain areas. This active agenda is limited to the differences between the Generally Accepted Accounting Principles in the US and the International Financial Reporting Standards. The project aims at establishing a high-quality short-term solution by selecting between the GAAP and IFRS. In order to increase cooperation and enhance information exchange between IASB and FASB, the role of a liaison Board member was introduced. The presence a full-time IASB member in the residence of FASBs offices is geared to work towards the attainment of convergence. The FASB closely monitors the projects of the IASB to the extent of their interest in achieving this shared goal (Chand and Patel, 2011). The convergence research project as undertaken by the FASB’s staff seeks to establish substantive differences between the GAAP as applied in USA and the International Financial Reporting Standards. The goal here is to catalog these differences in line with the Board’s strategy for resolving them. The differences in standards in addressing disclosure, presentation, measurement and recognition make the scope of this project. Pursuant to these and many other initiatives, the FASB hopes to make a significant progress toward international convergence. However, the challenge comes with the volume of differences between standards and the complexities surrounding the issues that need to be addressed (Debreceny, Felden and Piechocki, 2007). The convergence programme aims at improving financial reporting for the benefit of the users of accounting information (Epstein and Jermakowicz, 2008). The application is expected to produce high-quality standards that ensure that the accounting information provided is useful, clear, relevant and reliable to the needs of the user. However, the benefits accruing from such information must justify the costs of providing and using it. The core mission of convergence is defined in the creation of more comparable standards of accounting, improving the quality of such standards and reducing the differences between these standards. The achievement of these objectives would reduce the costs for both the producers and users of financial statements thus promoting efficiency. The memorandum between the FASB and the IASB, none of these bodies should issue a new standard. Firstly, they would be required to consider if re-exposure would be necessary. Secondly, the feedback on the proposed final rule should be evaluated to establish if the standards were operational. The 2011 joined announcement by the two boards sought to re-expose the revenue recognition and the lease proposals. The much-needed improvements to the International Financial Reporting Standards have been hit by an unfortunate delay. IFRS can be viewed as an opportunity to give all stakeholders a chance to participate. However, a number of economic and political environment issues may bar the convergence (Feldman and Rupert, 2012). Changes in the financial reporting standards would have an impact on a number of constituents. Simple, streamlined standards, practices and rules that apply internationally in financial reporting would benefit the corporate management. The change would ensure that corporate management borrows capital at lower interest rates. The level of risk associated with the cost of establishing and doing business would decline. International capital flows increase to the advantage of the investors is expected. More reliable and credible information that would not require conversion for interpretation is an anticipated benefit to the investors. A reduction in the costs in the stock markets that accompany foreign exchanges is anticipated. Adherence to the same rules would allow markets to compete internationally for global investment opportunities. The accounting professionals are expected to realign their knowledge of accounting to the international standards when put to operation. A number of entities and boards developing the new standards have largely made the process longer due to disagreements and varying ideologies (FitzRoy, Hulbert and Ghobadian, 2011). The accounting standards convergence programme has received divided reactions all over the world from practitioners, nations and the regulatory bodies. A number of arguments supporting the convergence have been advanced highlighting the potential benefits. These are the possible simplification, renewed clarity, transparency and comparability between countries in accounting and financial reporting. The increase in capital flow for international investments and timeliness in financial reporting added to the foreseen benefits. It is believed that new safeguards would be put in place to prevent another global economic meltdown. However, groups that hold the belief that it is not achievable also have advanced arguments that criticize the convergence in accounting standards. The groups addressed the unwillingness of different countries to collaborate based on the disparity in ethics, standards, cultures, beliefs, the types of economies and political systems (Heidhues and Patel, 2012). It is normal that people and organizations resist change. Cultural differences between nations have significantly challenged the success of the convergence programme. Firms in the different countries are already familiar with the existing national reporting standards. There is, therefore, a little ability to relate culturally to the accounting systems used in various countries. According to FASB, culture is defined as the collective programming of the mind that distinguishes the members of one human group from another. Every nation shares its societal norms that consist of common characteristics. There is, therefore, a tendency to prefer certain states of affairs to others (Jamilov and Akbar, 2015). Various accounting value dimensions define a country’s accounting system. These value dimensions are based on the culture adopted by a state. The professionalism versus statutory control aspect coupled with the uniformity versus conformity dimension address the authority and enforcement of the accounting practice. The conservatism versus optimism dimension and the secrecy versus transparency dimension address the measurement and disclosure of the accounting information at the country level. A critical examination of these dimensions and other factors that affect the accounting systems would reveal that cultural differences significantly affect the accounting standards of other nations. It brings about a complexity in standards convergence (Lang and Maffett, 2011). Professionals are known to resist the adoption of new methods, processes and measurements that would require them to learn (Kieso, Weygandt and Warfield, 2011). They instead prefer sticking to what they are familiar with. For example, professionals in the United States are quite familiar with the requirements of the Accepted Accounting Standards which have been used for years. There has been a common view among the companies in the United States that the International Financial Reporting Standards lack guidance. It is because the US GAAPs are rules-based as opposed to the principle-based IFRS. The opposition by professionals and corporate management in different countries to the IFRS has limited the chances of success of the convergence programme. A research has indicated that firms that have adopted the IFRS have attained a high quality in reporting the accounting information. However, these firms have insisted that particular standards of the countries in which they operate should be included in the IFRS to accommodate the specific needs of those firms. The difference in the approaches used by various countries has been a challenge to the convergence effort on financial performance reporting. The IFRS is more dynamic and is regularly being reviewed to respond to the ever-changing economic environment. Different countries face different economic situation changes at different times. They experience different changes in economic cycles that dictate the adoption of various measures to address. Various firms across the world run in different legal environments and are a different level technological advancement. Some political factors under which different companies operate affect them differently. These conditions and demographics affect the performance of a company. The comparability agenda is thus hard to attain under the convergence programme. It would require that the economic, social, political, technological and legal environments be made uniform across the nations where these reporting standards are used. Such a task is unachievable (McGee, 2008). The Securities Exchange Commission (SEC) in its multi-year evaluation of the International Financial Reporting Standards has made a significant in fostering a global transition to IFRS. It has played a historical leadership position in this regard. The Commission supported the involvement of the American Institute of Certified Public Accountants (AICPA) in creating the International Accounting Standards Committee (IASC). The IASC was a predecessor of the IASB. Despite the efforts made by the Securities Exchange Commission to have a framework for financial reporting in cross-border offerings, the Commission has identified critical challenges toward this goal. Part of the steps taken by the Commission includes the reforms made to the International Accounting Standards Committee that transformed it to the International Accounting Standards Board in 1999 (Moloney, 2014). According to Nobes and Parker (2006), many elements should be taken into account before the harmonization of the international reporting standards can be met. The two have analyzed the differences in economic systems between the Developing and already developed countries. The disparity in economic systems also affects countries that share similar characteristics. The differences in these systems have been a barrier in the harmonization process. The IASB majorly considers the needs of European countries. It should be understood that developing countries have particular economic needs that the IASB should take into account. There has been a lack of unanimity between professional bodies in the application of reporting standards (Wu and Patel, 2015). Pursuant to IASs 40 and 41, the IASB uses the fair value method of evaluating assets and liabilities. The aim of the fair value method is to enable users make prudent decisions about the assets and liabilities. However, it is hard for developing countries to obtain the fair value due to lack of asset market valuation. In effect, the reliability of comparing the fair value as used in developed countries and the historical cost valuation in developing countries declines. The accounting needs of a country are the key drive that shapes the accounting and reporting standards of that nation. The emerging economies have a wider range of economic needs of financial reporting compared to established economies. The accounting education systems adopted in the developing countries are those used in developed economies like the USA and UK. In essence, the emerging economies are incapable of producing the accounting needs of those systems. The information provided by the developed countries accounting standards cannot be useful in making decisions that affect the developing countries (Moloney, 2014). Developing countries are said to collectivist with a low level of accounting professionalism (McGee, 2008). They possess a strong degree of uncertainty avoidance and power distance significance compared to the developed countries. These factors influence the level of information disclosure in emerging economies. It would, therefore, prove difficult for external auditors to obtain relevant information, and this may harm the firms in the long-term. Accounting standards in developing countries are affected by economic growth. There is a positive relationship between the accounting information and economic growth in these countries. Governments in these countries intervene in financial matters given the political structures used in such countries. In effect, government involvement affects the accounting standards. For example, where the government is a key user of the accounting information, it will most likely interfere with the reporting standards used. Comparing the information produced under such conditions against that produced by exclusively independent bodies would not be prudent. Countries of the world have been ranked into the high-income and the low-income economies (Kieso, Weygandt and Warfield, 2011). Low-income economies have economically inefficient stock markets that only strive to achieve the government needs. Countries that have stable and efficient securities exchange markets have found it necessary to adopt IFRS as opposed to those facing inefficiencies. With stability and efficiency, there is need to satisfy foreign investors who have invested in such economies in order to maximize the shareholders wealth. This aspect makes it difficult to adopt a single set of accounting standards to analyse the financial performances of countries that experience varied economic situations. The legal system in use affects the accounting systems as applied to the various nations of the world. These legal systems differ in scope and approach from one country to another. In the Arab countries, for example, the legal system is highly influenced by the Islamic religion. Therefore, their accounting systems require specific needs different from those of other countries where religion does not directly affect the accounting systems. The source of finance also determines the accounting systems to be adopted in a particular country. Nobes (1998), points out that the difference in finance providers can lead to differences in the accounting systems of countries. The source of funding could be external from shareholders or the International Monetary Fund or internal sources such as banks and family. Most developing countries are based on internal finance providers while the developed countries majorly use the external sources. There would be a difference in the requirements of disclosure, frequency and timeliness of accounting information in these two different economies (Jamilov and Akbar, 2015). Transition to IFRS would limit the ability of regulators other than the SEC to present their views and concerns throughout the standard-setting process. The regulated entities prefer the presently available FASB to the global body. The loss of industry-specific standards would impair regulatory regime. It has been observed that the transition to IFRS has an impact on the local jurisdiction’s environment and presents challenges to the regulatory bodies affected. In Brazil, for example, the transition to IFRS in 2010 by all the publicly listed companies, and financial institutions affected many agencies. The development process required several changes to the regulatory environment. In 2005, the transition to IFRS affected regulators across Europe. The European Commission thus issued a publication that summarised the challenges and implications of its regulatory environment (Heidhues and Patel, 2012). Accounting standards are the product of political actions. They represent a state of temporary equilibrium that is anchored in scientific logic and practice. The levels of civil and economic freedom are critical factors in the development of the accounting practice. Countries with low levels of political freedom lack democracy. Their citizens have no freedom to elect governments. Consequently, the deprival of such privileges limits the peoples ability to act on accounting standards. The government and monetary stabilities significantly affect the economic environment and the development of accounting. The weight of the public authorities and states in developing countries is wanting. The majority of these countries are characterised by unstable political environments described by totalitarianism and states of anarchy. The establishment of the internationally recognised body of accounting practices in such countries has not been without challenges. Many countries of the world face a similar state of the political environments, which bars the adoption of IFRS. These political conditions are highly volatile, and their ever-changing nature is a major challenge to the implementation of the International Accounting Standards. The disparities between the various political conditions under which different economies operate undermines the universal application of the comparability principle (FitzRoy, Hulbert and Ghobadian, 2011). The legal system greatly depends on the political structures and the prevailing political climate (Feldman and Rupert, 2012). It should be remembered that the legal systems in a country significantly influence the formulation, adoption and regulation of the accounting practices. The legal system is the predictor of the differences in accounting standards internationally between countries. Despite the international duality regarding the international legal systems, the Anglo-Saxon legal system dominates the accounting culture. Therefore, the convergence programme has received resistance from countries whose legal practices do not match those of the dominating systems. This dominance has been protested and to date remains a challenge in the IFRS implementation process. The political environment further determines the level of an economy’s openness to the outside world. The higher the degree of economic openness, the more the exposure to external pressures. This openness engenders the risks of the scale of the international force and security. In return, the economic affairs of the country are affected. Many nations of the world lack this openness and hence make it difficult for the adoption of the internationally recognised accounting practices. The financial markets in many countries in the world lack openness for foreign investors (Epstein and Jermakowicz, 2008). A significant challenge in the convergence of the International Financial Reporting Standards has been the facilitation of the financial markets functionality and operations. There is thus the need to protect the investors interests in the worlds exchange markets. The investors regularly require sophisticated market information for analyzing the available investment opportunities and make optimal choices. The International Accounting Standards Board has faced a challenge in the integration of the poor local financial markets in the chain of global exchanges. The relationship between the IFRS and economic growth is controversial. Many Asian countries have demonstrated that there is no significant difference between those applying IFRS and those that use the local standards. There has been resentment based on the claim that these international standards are nothing more than a manifestation of dominant economies, which have little or no meaning to developing nations. The accounting expertise possessed by the preparers of financial statements and the users are inadequate.The knowledge of regulators and auditors, and the managerial incentive has widely challenged the phase of IFRS adoption (Debreceny, Felden and Piechocki, 2007). There is a vacuum of the knowledge possessed by the parties and the required expertise to correctly interpret, apply and implement the IFRS. The cause of this inadequacy and mostly for the developing countries is the historical difference in the context, ethos, the accounting thought and practice internationally. The disparity in the knowledge and application of the accounting practice in the Anglo-Saxon, Southern America and the Continental Europe divides has made the harmonisation difficult. The question of timely interpretation of standards and the continuous improvements and changes of the rules add up to the challenges. IFRS have conferred a number of benefits to the users. However, Armstrong et al. (2007) explains that the political, cultural and business differences have imposed a significant obstacle toward the attainment of a single financial communication system around the globe. The argument advanced is that a single set of accounting standards cannot reflect the many differences in national business practices. The different practices arise from varied cultures and institutional differences. McEnroe (2011) established that the individual investors in the US preferred the GAAPs to the IFRS (Chand and Patel, 2011). The adopters of International Accounting Standards have expressed concerns with relation to the IASB’s staffing, funding and governance structures. There has been a demand for an assurance by the board of absolute independence that would ensure that standard setting is free from undue politicisation makeovers. The adopting nations of the world and market participants require the legitimacy of the board. The depiction in this context is an expression of dissatisfaction by adopters and potential adopters. The attainment of the required level of independence by the IASB might be a nightmare. Adopters have the belief that the body faces undue influence and may thus choose to withdraw from the globally used accounting standards (Brüggemann, 2011). There are various versions and labels of the International Financial Reporting Standards. These standards have been inconsistent with the prescriptions of the International Accounting Standards Board. Uneven applications have bred different IFRS versions creating an opportunity for varying IFRS to continue. Adopters have urged that an enforcement mechanism and a coordinated regulatory review be done to facilitate uniform application. The complexity of the tax orientations of most nations and that of IFRS have become an impediment to convergence. Likewise, compliance with IFRS has had varying levels. The auditors have been unable to express their opinions concerning IFRS compliance and non-compliance. The issue is equally disturbing. The challenge lays with the IFRS enforcement mechanisms. The enforcement agencies and institutions are weak to deliver quality jurisdictions (Benston, 2008). The challenge of frequently changing and the development of regulation systems are enormous. Many language-based, regulatory, cultural and professional challenges have been experienced. The demand for wider political participation, greater accountability and the institution of necessary political reforms remains a major challenge. These are faced by the countries adopting IFRS. Proper implementation requires alterations of the economic, legal, cultural and political structures to match those of the dominating divides. There are needed changes in the accounting training and education systems of many countries to incorporate IFRS. The change implicates a very costly exercise that few would commit themselves to implement. The application of tax and other related laws in IFRS require that the legal system should be adjusted to match IFRS requirements (Wu and Patel, 2015). In conclusion, the adoption of the IFRS around the globe has been a significant accounting regulatory change in the world (Lang and Maffett, 2011). The use of these accounting standards is gaining momentum as more nations are aligning their local standards with IFRS. The International Financial Reporting Standards are a product with vast positive network effects. The motivating factors for IFRS adoption include increased border listing, globalization, the attraction of foreign investments, and other institutional factors. However, although IFRS adoption promises these benefits to adopters, there are many obstacles and challenges, which must be overcome for a successful convergence. The many differences in the institutional framework, accounting training and education, economic, political, cultural and legal environments between and within countries must be harmonised. An efficient capacity-building programme is thus necessary for convergence between the International Accounting Standards Board and the Financial Accounting Standards Board (Heidhues and Patel, 2012). References Benston, G. (2008). Worldwide financial reporting. Oxford: Oxford University Press. Brüggemann, U. (2011). Essays on the economic consequences of mandatory IFRS reporting around the world. Wiesbaden: Gabler Verlag. Burton, G. and Jermakowicz, E. (2015). 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McGee, R. (2008). Accounting Reform in Transition and Developing Economies. New York: Springe. Moloney, N. (2014). EU securities and financial markets regulation. Oxford: Oxford University Press. Wu, H. and Patel, C. (2015). Adoption of Anglo-American models of corporate governance and financial Reporting in China. Bingley, U.K.: Eme Read More