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Convergence of Accounting Standards - Essay Example

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Business firms publish their company's profitability and financial condition in their various financial and economic reports annually or quarterly. Investors and creditors around the world base their investment decisions in the capital markets in these reports…
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Convergence of Accounting Standards

Download file to see previous pages... The world markets are increasingly converging due to globalization, and there is a constant flow of investments from one part of the world to another. The use of different accounting standards in a highly globalized world has hampered the flow of investment across borders, which drags the world economic growth and security valuations in its turn. As a result there has been a move among the regulatory bodies to converge the accounting standards globally, and steps have been taken towards this aim.
Sir David Tweedie, The Chairman of IASB, says that research shows that if companies are familiar with a country's accounting standards, then they would invest more there than if they are unfamiliar with it. Any company entering another country's market has to learn its accounting principles and even then they remain concerned that they may have overlooked at some points. This increases the risk premium and cost of capital, as well as the interest charged on it. This might lead to a company cutting its investment, thus cutting employment and hence cutting its growth. Hence, a common set of international accounting standards becomes very important. (Heffes, Apr 2006)
A global set of principles based accounting standards is the final goal of this international convergence in accounting standards. ...
Of these, the most important is the Financial Accounting Standards Board (FASB) of the United States.
There has been a marked difference in the accounting standards of FASB and that proposed by IASB. The latter is propagating a principles-based accounting standard, while the former has been following a rule-based accounting standard. A lot of effort has gone into bringing the FASB to the IASB's line of thinking. And a lot of progress is being made. The UK accounting standards have traditionally been principles based and so have not had much disagreement with the efforts to converge with an international accounting standard, which is based on principles. In this paper we analyze the convergence projects undertaken between the IASB and the FASB, and the UK accounting standards and the International Accounting standards.
The FASB is the private sector standard-setting body in the USA. It was established in the year 1972. The standards that FASB sets put recognition, measurement and disclosure principles to be at the heart of preparing the financial statements. The IASB was created when the erstwhile IASC was restructured. The IASB was delegated the responsibility of producing a single set of high quality, understandable and enforceable IFRS's and to encourage convergence on these standards.
The first step taken towards convergence between FASB and IASB accounting principles was the Norwalk Agreement, which discussed how the two bodies could work together to "get rid of the reconciliation between US GAAP and International standards." The second step has been the European Union adopting International Financial Reporting Standards (IFRS), which has meant a 100 or more countries adopting it. (Heffes, Apr 2006)
In 2002, the EU approved a regulation, ...Download file to see next pagesRead More
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With this rapid globalization, there has been a growing need towards convergence of accounting standards. Financial statements are becoming extremely important for investors and their comparison is becoming vital to the capital markets of the world. It is due to this reason that the financial accounting standards board (US) and International accounting standards board (UK) have taken the initiative to converge their accounting standards in order to eliminate the differences.
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