Question

“Implementation of a Single Set of Accounting Standards Worldwide in the Era of Globalization” Describe what you think the future of the topic will be in two to three pages with references.

Answer 1

One out of every three financial transactions worldwide happens to be across borders and volume is increasing day by day as we speak.

In the era of a globalised Economy, Financial Institutions are required to Comply to the Accounting standards of both the nations in which a single financial transaction is done.

With the Implementation of a Single Set of Accounting Standards all around the World, there will be an increased level of transparency in doing business which will in turn increase the accessibility of cross border investments. The Comparability between businesses across nations will increase as FIs won’t be required to prepare multiple reports to comply with their respective country's policies. Before this, an investor had to reconcile the reports in order to compare which investment they can go for. This will in turn reduce the time and effort invested in making these reports. The same can be said for a credit who need to compare the creditworthiness of two businesses.

With improved Comparability in single accounting system, Small businesses would also benefit if they wish to expand their business, which was difficult to do when there is an additional cost

There many Multi-National Conglomerates who face the difficulty of reconciling the financial statements of their foreign subsidiaries in order to evaluate their Global financial performance. The risk of error while using a single global Accounting Standard is reduced than operating in two parallel accounting standard system.

It reduces the ambiguity with respect to the legal assistance given to businesses while operating under different Accounting standard system. For example, when a business operates in two parallel system of accounting it might find a loophole in between and exploit it for its own profitability.

Transitioning into a single accounting standard would make it accountable to central authority. This would reduce disagreements between countries and internal regulators,and it might also reduce costs.

The SEC estimates that the total cost of transition costs for the US companies will be over $8 billion and one off transition costs for small and medium sized companies will be in average $420,000, which is quite a huge amount of money to absorb by companies. Additionally, the transition period between the implementation would be quite troublesome and cause many delays as there still might be requirement of multiple reports in some countries.

Small businesses would suffer a lot as their revenues would be impacted as they have to focus more on adhering and reconciling their financial statements to the new accounting standard than their core business line. Big Businesses won’t suffer much if they employ additional manpower to focus on this transition.

This transition would also require changes in the educational curriculum as well. Authors Teri Yohn and Messod Beneish found that there is a home bias effect still in place after adopting the International Financial Reporting Standards internationally. Investors prefer to work with companies that are closer to home, so foreign firms receive fewer direct investments even when the switch to the global system takes place.

There are many advantages and also disadvantages of having a single Set accounting standards worldwide. But, we need to analyse whether the one time cost of converting the entire financial system into a single AS is lesser than the benefits which will be reaped from it.