Discuss whether accounting standards should be global
Introduction
The global accounting standards are known as the International Accounting
Standards (IAS). The body regulates all standards throughout the world on the advice of the
International Accounting Standards Board. The International Financial Reporting and
Interpretations Committee on the other hand oversee all the activities IFRS (International
Financial Reporting Standards) the body charged with the responsibility of implementing the
standards globally. The IAS begun its operations in 1960 when it was established and begun
its operations with the introduction of the IAS standards in 1966.
The following are the Importance and some weaknesses of the global accounting standards.
The Global Financial Reporting Standards allows comparisons across different
accounting standards internationally. Just like the International Financial Reporting Standards
(IFRS) are internationally recognized and it is easier to compare statements from different
parts of the world. For example the US prepares its statements according to the provisions of
the US GAAP (Generally Accepted Accounting Principles) as provided for by the US
Financial Accounting Standards Board (FASB). The US GAAP accounting principles on
consolidation accounting are quite different from those of the IFRS. For a foreigner to
understand the US consolidation accounting they have to be deconsolidated and prepared in
IFRS standards. Global accounting standards enable effective comparisons across the globe.
The US is currently converging its standards to IFRS. The US also prepares its accounting on
the basis of historical costs based on valuation while others have limited provision on
Discuss whether accounting standards should be global 2
valuation (Schmid, DeSmith, and Klein, 2014). However, the US considers some provisions
of the global accounting standards from other countries to be inconsistent with its own
provisions. For example, on stock inventory valuation, some countries recommends the
application of the FIFO (First In First Out) method or the weighted average cost but the US
GAAP recommends the use of LIFO (Last in First Out). The inventory is basically written
down to the stocks net realizable value when the stock is less than the current cost in other
standards while in US GAAP the inventory is usually written down to the current market
value when the stock is less than its current cost (Schmid, DeSmith, and Klein, 2014).
Preparation of accounting information on global standards would make it possible for other
people across the world to have uniform interpretation of the financial information (Holgate,
and Fuchs, 2010).
The adoption of the global accounting standards reduces the financial costs of
maintaining accounting records. For the purposes of comparisons, different sets of accounts
are usually prepared in different languages, standards and currencies. The financial cost of
preparing these statements is very costly and time consuming. Using the global accounting
standards makes it inexpensive and convenient. For example, before the adoption of the IAS,
countries like Japan had their own standards of preparing financial statements in Japanese
currency (yen). Currently the Japanese maintains only one set of accounts with columns in
yen and dollars the same accounts can then be translated in different languages.
Most of the global financial and also capital markets have made it mandatory for listed firms
to comply with the IFRS provisions. Countries that have adopted the IFRS make it easier for
their home companies to compete effectively in global markets that are internationally
recognized due to the IFRS adoption. The costs however of implementing the IFRS maybe a
little too high for small firms that are still growing.
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The use of global accounting standards improves efficiency and accuracy of
financial statements. Compliance with the global accounting standards has also aided the
expansion of some multi-national corporations to emerging markets like parts of China and
India. The continued expansion of US companies globally and the adoption of the IFRS has
contributed favourable to the expansion of the US businesses internationally as most
countries globally require the adoption of IFRS as the statutory procedures for all financial
reporting and recording purposes as well as during public fillings (International Accounting
Standards Board, 2008).
The use of global accounting allows more flexibility on its application and implementation.
Global standard uses a system that is principle based while other standards use the rules
based system. The principle based system allows the accountant other options of recording
transactions which means that possibilities of arriving at different financial results are very
high when the global standard is adopted. However companies have the option of converging
to global standards with their own standards just like the US GAAP has been reconciled with
the provisions of SEC (Securities Exchange Commission). Manipulation of accounting
records can occur as a downside of flexibility. For example the use of stock inventory
valuation, the global accounting standards recommends the application of the FIFO (First in
First Out), this system is open to manipulation as the accountants can apply the market rates
or the weighted average rate that affects the profits favourably (Doupnik, Hoyle and Schaefer,
2012). Revenue manipulation can be used to reflect positive financial information when the
company is facing difficult periods financially. While the international accounting standards
expects all financial accountants to justify any changes in the application of rules and
concepts its possible for rogue accountants to invent valid reasons for changes.
The other major reason for the use of the global accounting standards is that
the standards have been accepted in most countries globally (IFRS, n, d). Adoption of
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International Accounting Standards opens up new fronts in international trade. The adoption
of IFRS allows many people across continents to see the various multinational companies
from different parts of the globe on similar plane. The willingness to trade increases while
cross border investments and multiple integration of financial and capital markets are made
much easier as greater market liquidity takes effect with large trading blocks that also lower
the real cost of capital. IFRS provides better information which makes it possible for
companies to optimize their capital (IFRS, n, d).
To conclude the benefits that accrue to a country because of the global accounting standards
are many. Investors in most country have a common objective; to make more money from
their investments. International Accounting Standards makes it possible for such investors to
select the most profitable companies globally as rankings in profitability can be easily
achieved when the same format and system of accounting reporting standard is adopted. The
initial costs of converging to the global standards maybe expensive as the costs of
certification, preparation of the reports together with the dissemination of reports maybe
costly initially but in the long run the benefits and savings outweighs the initial costs.
However, there are other economic implications that are also associated with the global
standards. For example, the US has established that its accounting standards were much more
superior in quality and were subject to unparalleled public enforcement universally. There are
also many similarities in the US accounting standards that much the IFRS and their
transitioning costs literally outweigh the envisaged benefits. The IFRS has never before being
tested in such a rigorous environment (NYTimes, 2009). The US GAAP has over the years
proved that its application and enforcement were much more effective. The IFRS is yet to
prove that its standards are high and are applicable in the US.
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ReferencesDoupnik, T. S., Hoyle, J.B. and Schaefer, T.F., 2012, Advanced Accounting. Boston:
Holgate, P., and Fuchs, R., 2010, Similarities and Differences-A Comparison of IFRS and US
GAAP, PWC Publication October 2010.
IFRS, n, d, Technical summaries, International Financial Reporting
IFRS, n, d, International Financial Reporting Standards,
International Accounting Standards Board, 2008, International Accounting Standards
Committee Foundation. 12 March 2008.
NYTimes, 2009, “UNITED STATES: SEC adopts global accounting rules .” Business. 2009.
The New York Times,
