Benefits and Limitations of the International Accounting Standards for Developing Countries - Example

Benefits and Limitations of the International Accounting Standards for Developing Countries Name Institution Professor Course Date Introduction Definition IASs International Accounting Standards (IAS) entails the principles for organisation and presentation of fiscal statements formed through the IASC (International Accounting Standards Committee) (Gibson, 2012). These standards state how certain forms of transactions should be mirrored in monetary statements. International financial reporting standards (IFRS) entails a set of global accounting principles that states how certain forms of transactions ought to be reported in fiscal statements (Gibson, 2012) . These set of standards are provided by the IASB (International Accounting Standards Board). IFRS present a set of commonly accepted accounting standards utilised by firms to prepare fiscal statements. They help firms in comprehending their financial performance. Background The International Accounting Standards were formed and implemented in 1973 in London by the International Accounting Standards Committee (IASC). IAS has been recognised and accepted by numerous nations as a base of local accounting standards. However, in the recent years, the idea of International Accounting Standards has shifted into International Financial Reporting Standards (Previts, 2008). IASs are important standards considered for triumphant international business innovation and more than a hundred nations have adopted or expressed their need to adopt the International Accounting Standards Thesis Statement The essay argues that adoption of IASs in developing nations hold more benefits compared to limitations. Although IAS/IFRS hold some limitations in developing nations in the sense that they are intricate and costly to implement besides increasing the perception of unfair securities markets, IASs benefit developing nations in the sense that they help in attracting investors, increase uniformity of financial reporting practices, improve information quality, promote the growth of capital markets and promote economic growth. Scope In this essay, I gathered information from relevant and credible academic sources to assess the benefits and limitations of IASs in developing nations. I also evaluated practical situations in some developing and developed nations that have adopted IASs based on available literature. Benefits of IAS in Developing Nations Adoption of IASs in developing nations increases uniformity of financial reporting practices. Numerous developing nations have adopted the International Accounting Standards for preparation of general purpose fiscal statements in their respect jurisdictions. Developing nations are not able to allocate their technical and financial resources required to establish high-quality, indigenous accounting standards. Even where resources can be placed to the establishment of indigenous standards, the procedure may be extensive and prone to repeating mistakes already faced by developed nations. Through adopting the International Accounting Standards, developing nations get early access to the benefits linked to high-quality financial reporting including more effective capital markets, cheaper and easier access to international capital, improved relations with establishment of agencies and improved economic development. Sale (2007) asserts that these benefits are anticipated to flow from augmented uniformity and consistency among financial reports prepared with IAS and the ensuing enhanced understability and distinguished credibility of financial disclosures. For instance, adoption of IASs in Trinidad and Tobago is linked to an augment in the extent of uniformity of financial reporting practices. Adoption of IASs in this country appears to be accountable to the observed rise in financial reporting uniformity (Sale, 2007). IASs improve information quality and promote the growth of capital markets in developing nations. Zeghal and Mhedhbi (2010) confirm that capital markets growth is significantly and positively linked to the application of International Accounting Standards. As a result, IASs improves financial information quality and the growth of developing capital markets. The International Accounting Standards also aims at improving the effectiveness of markets. Financial reporting regulators and local governments in developing nations also benefits from adoption of IASs given the lower assessment costs and increased inward international capital flows that facilitates economic growth. Rapid improvement in the perceived status and quality of financial reports, a rise in market efficiency in global and national markets, a decrease in capital costs and a rise in inflow of foreign capital are benefits linked to adoption of IAS/IFRS by developing nations (Francis, Khurana, Martin & Pereira, 2008) . In developing nations, IAS creates a more apparent reporting environment (Mande, 2014). Through restricting allowable optional accounting practices besides offering a more consistent perspective to accounting measurement, nations and firms can produce higher quality accounting numbers. Adoption of IASs in developing nations promotes economic growth. International Financial Reporting Standards improves comparability and transparency of financial reporting which is linked with improved prospect to get economic benefits such an increased inflow of FDI (Foreign Direct Investments) (Lasmin, 2011) . These standards also promote higher level of Gross Domestic Product growth rate. International Accounting Standards is viewed as a single set of high-quality, enforceable and understandable accounting standards that calls for high quality, comparable and transparent information in fiscal statements (Lasmin, 2011). International Accounting Standards helps in meeting the requirements of all nations’ financial reporting needs and firms into their national business and economic characteristics. These standards are crucially and critically important for developing nations with an active capital and financial market. Developing nations that have adopted IASs enjoy capital markets, high economic growth rates and higher education levels (Zehri and Chouaibi, 2013). International Accounting Standards helps developing nations in attracting investors. The main aim of establishing the International Accounting Standards was to offer creditors and investors with the information they need for making judgments concerning the future and making plans. Developing countries provide very attractive prospects for international and national investors who demand high quality accounting information (Zeghal & Mhedhbi, 2012). When accounting information is more transparent and reflects the economic reality of a given nation, the danger of investment is lowered. In addition, the return needed is lowered to the advantage of the company and the entire society. As a result, IASs facilitate attainment of a degree of comparability that in turn assist investors in making their choices while lowering costs of Multi-National Enterprises in preparing numerous sets of reports and accounts (Liu, Yao, & Hu, 2011). I believe that financial reporting is a crucial mechanism for addressing market imperfections. Financial reports allow outside parties to assess the performance and contractual commitments of a firm. Nevertheless, the role of financial reporting relies on the basic quality of accounting principles. IASs are acknowledged as being of improved quality compared to domestic standards in most nations. Limitations IASs are difficult to implement in developing nations. Adopting IAS may not automatically enhance national accounting systems unless nations also execute profound changes in economic growth policy, financial market function and governance mechanism (Ding, Hope, Jeanjean & Stolowy, 2007). While International Financial Reporting Standards and International Accounting Standards instigates higher annual returns besides other benefits such economic growth and improvement of financial reporting information, these standards are difficult to implement in developing nations. Adopting IASs increase risks linked to financial reporting because of technical complexities of these standards (Mande, 2014). In addition, adopting IASs by developing nations instigates information overloads and extra costs of unnecessarily intricacy (Liu, Yao & Hu, 2011). Although divergence amid international accounting standards and domestic accounting standards is positively linked to the economic growth and accounting profession strength, these meters are less applicable for developing nations compared to developed nations. While IASs instigates improvement in the quality and global comparability of financial report, these objectives are less probable attainable in absence of regulatory oversight that promotes consistent and meticulous application of IFRS. Adopting IAS/IFRS in developing nations incurs increased costs of altering one set of principles. These nations experiences hard times in understanding the reporting and interpreting the enacted principles. This is because implementing IAS generates comparability in appearance while concealing actual disparities in commercial activities. They also lower economic transaction recording precision through prompting numerous alternatives. Adoption of IAS by developing nations increases the perception of unfair securities markets. This occurs when where the information asymmetry level seems to be greater compared to developed nations. Developing nations are often concerned about the competitive danger of increase in financial transparency. Disclosure and good accounting add burdens to developing nations. These rules make developing nations to run up to huge losses off balanced sheet. In addition, the accounting data produced with respect to developed economies is not pertinent to decision models of emerging economies. While IAS/IFRS appears practical for developed economies, developing economies may not exercise akin anticipated economic advantages because of certain differences in their business and accounting infrastructure (Palacios, Mercedes & Isabel, 2007). For example, inadequate skills of their accounting professionals, investors and firms, smaller developed capital markets, restrained numbers of global business participants and lower governance level hinders the benefits of IAS in developing nations. Adopting these standards incurs higher costs for developing nations. For instance, the United Technologies of the U.S took between 2and 3 years of effort and five percent revenue to switch to IFRS (Mala & Chand, 2012). Altering policies to match IFRS affect tax liability. A firm’s tax liability may change when balance sheet or income statement changes. More so, in event of financial crisis, developing nations are more affected compared to developed nations (Mala & Chand, 2012). According to Liu, Yao and Hu (2011), IAS/IFRS are not relevant and are harmful to developing nations that radically shifts from capitalistic to communistic economies with dominant and huge public sectors. In this regard, IAS generated by developed economies may not be in a position to induce akin results in developing nations given the different political-economy and socio-economy environments. In this view, while developed nations might enjoy the IASs benefits, developing nations may not experience major growth in their GDP growth and Foreign Direct Investment inflow. Conclusion The application of International Accounting Standards is inspiring in diverse factors and can be an opportune choice for developing nations that seeks to enhance the full functioning of their capital markets. IASs helps companies in developing nations to satisfactorily accomplish their role in financing and assessment of companies and in the growth of diverse sector of economic activities through communicating transparent and good financial information. Communication of financial information assist in limiting problems link to information asymmetry besides establishing an atmosphere of trust concerning capital markets mechanisms. However, regulation of accounting through an independent authoritative body requires critical consideration in developing nations. This is because developing economies may not exercise akin anticipated economic advantages experienced by developed nation because of certain differences in their business and accounting infrastructure. However, application of IAS/IFRS holds more positive upshots than limitations in developing nations. These standards benefit the investors, accounting professionals and economy. IASs promote quality fiscal statements, motivate investors, and promote capital markets and economic growth. From this perspective, IAS/IFRS helps improve the economic conditions of emerging economies References Ding, Y., Hope, O., Jeanjean, T., & Stolowy, H.(2007). Differences between domestic accounting standards and IAS: Measurement, determinants and Implications. Journal of Accounting and Public Policy, 26 (1), 1-38. Francis, J.R., Khurana, I.K., Martin., & Pereira, R.(2008). The role of firm-specific incentives and country factors in explaining voluntary IAS adoption: Evidence from private firms. European Accounting Review, 17 (2), 331-360. Gibson, C.(2012). Financial reporting and analysis. USA: Cengage Learning. Lasmin .(2011). Accounting standards internalisation revisit: Managing responsible diffusion. Procedia-Social and Behavioural Sciences, 25, 363-374. Liu, C, Yao, L.,& Hu, N.(2011). The impact of IFRS on accounting quality in a regulated market: An empirical study of China. Journal of Accounting, Auditing & Finance, 26 (4), 659-676. Mala, R., Chand, P.(2012). Effect of the global financial crisis in accounting convergence. Accounting & Finance, 52 (1), 21-46. Mande, B. (2014). Emerging nations and financial reporting complex: A case for IFRS adoption in Nigeria. Journal of Finance, Accounting and Management, 5 (2), 1-23. Palacios, M., Mercedes, M.C., Isabel, M.H.(2007). A comparative international analysis of the impact of accounting standards on fundamental accounting variables: The USA versus Latin America. Journal of Latin America Economy, 38(149), 138-157. Previts, G.(2008). Research in accounting regulation, Volume 20. UK: Elsevier. Sale, T.J.(2007). Advances in international accounting, Volume 20. UK: Elsevier. Zeghal, D., & Mhedhbi, K.(2012). Analyzing the effect of using international accounting standards on the development of emerging capital markets. International Journal of Accounting & Information Management, 20 (3), 220 – 237. Zehri, F., & Chouaibi, J.(2013). Adoption determinants of the international accounting standards IAS/IFRS by developing nations. Journal of Economics, Finance and Administrative Science, 18, 56-62. Read More