Question

Compare and contrast the effort of International Accounting Standard Board's for international harmonization of financial reporting standards

Answer 1

In order to achieve comparable financial reporting across countries, the International Accounting Standards Board (IASB) develops international financial reporting standards (IFRSs). In order to achieve comparability in financial reporting, countries must adopt IFRSs (1) in a similar way and (2) be interpreted and applied consistently in different

These two aspects of comparability in financial reporting have been defined by international accounting literature as de jure (consistency in form or rules) and de facto (consistency in actual application,countries). If countries make drastic changes to IFRSs, or if professional accountants are unable to interpret and apply the standards consistently, the comparability of financial reporting can not be achieved in the adoption of IFRSs.

The convergence of accounting standards refers to the objective of establishing a single set of accounting standards to be used internationally.  Convergence has taken place in some form for several decades, and today's efforts include projects aimed at reducing the differences between accounting standards.

Convergence is driven by several factors, including the belief that having a single set of accounting requirements would increase the comparability of different entities' accounting numbers, which will contribute to the flow of international investment and benefit a variety of stakeholders. Criticisms of convergence include its cost and pace, and the idea that the link between convergence and comparability may not be strong.

The goal of and various proposed steps to achieve convergence of accounting standards has been criticised by various individuals and organizations. For example, in 2006 senior partners at PricewaterhouseCoopers (PwC) called for convergence to be "shelved indefinitely" in a draft paper, calling for the IASB to focus instead on improving its own set of standards.

In particular, Shyam Sunder of the Yale School of Management has called the link between convergence and comparability "overblown", while the cost and pace of adoption have been cited as the most common criticism of the SEC's 2008 convergence roadmap, which set milestones that potentially lead to mandatory adoption of IFRS in 2014.

Nature of standards

Other criticisms center around the nature of the converged standards. For example, some critics are concerned that convergence will increase the use of fair value accounting.

Other critics have also respectively cited shortcomings with rules-based and principles-based standards as reasons. Principles-based standards allow for "different interpretations for similar transactions", and have also been described as "less precise", while rules-based standards contain more exceptions and use bright-line rules and specific details to deal with "as many potential contingencies as possible".The above-mentioned PwC senior partners expressed that convergence will lead to an accounting system that is too rules-based for non-US listed companies,while other critics conversely criticize the principles-based nature of the IFRS as making it difficult for preparers of financial statements to defend against litigation.

The challenge, which the IASB has to overcome in the convergence process, is to eliminate both the de jure and de facto differences in accounting practices between nations. The differences in international accounting practices are based not only on the specific environmental factors that have shaped them at the macro institutional level, but also those other micro level factors that are related to how the accounting standards are applied. This second aspect of harmonisation (de facto) has received less attention from accounting researchers. Few studies have examined harmonisation of accounting practices by comparing whether different countries are able to interpret and apply accounting standards in a similar manner . For example, uniform international accounting standards are not likely to result in de facto uniformity among nations, when the standards allow for significant discretion in application. Further, variability in meaning as a result of differences in culture or nationally-based expectations may cause divergence in applying standards. This divergence has important implications for the international communication of accounting information.

The main difference between the GAAP and the IFRS is one of approach: The GAAP is rules-based while the IFRS is a principles-based methodology. The GAAP consists of a complex set of guidelines attempting to establish rules and criteria for any contingency, while the IFRS begins with the objectives of good reporting and then provides guidance on how the specific objective relates to a given situation.

Initiatives on Worldwide Accounting Convergence

The convergence and subsequent change of accounting and reporting standards at the international level impact a number of constituents. The International Accounting Standards Board (IASB) seeks a workable solution to alleviate the existing complexity, conflict and confusion created by inconsistency and the lack of streamlined accounting standards in financial reporting.

Impact on Corporate Management

Corporate management will benefit from simpler, streamlined standards, rules and practices that apply to all countries and are followed worldwide. The change will afford corporate management the opportunity to raise capital via lower interest rates while lowering risk and the cost of doing business.

Impact on Investors

Investors will have to re-educate themselves in reading and understanding accounting reports and financial statements following the new internationally accepted standards. At the same time, the process will provide for more credible information and will be simplified without the need for conversion to the standards of the country. Further, the new standards will increase the international flow of capital.

Impact on Stock Markets

Stock markets will see a reduction in the costs that accompany entering foreign exchanges, and all markets adhering to the same rules and standards will further allow markets to compete internationally for global investment opportunities.

Impact on Accounting Professionals

The shift and convergence of the current standards to internationally accepted ones will force accounting professionals to learn the new standard, and will lead to consistency in accounting practices.

Impact on Accounting Standards Setters

The development of standards involves a number of boards and entities that make the process longer, more time consuming and frustrating for all parties involved. Once standards have converged, the actual process of developing and implementing new international standards will be simpler and will eliminate the reliance on agencies to develop and ratify a decision on any specific standard.

Convergence Pros and Cons

Arguments for the convergence are (a) renewed clarity, (b) possible simplification, (c) transparency and (d) comparability between different countries on accounting and financial reporting. This will result in an increase of capital flow and international investments, which will further reduce interest rates and lead to economic growth for a specific nation and the firms with which the country conducts business.

Timeliness and the availability of uniform information to all concerned stakeholderswill also conceptually make for a smoother and more efficient process. Additionally, new safeguards will be in place to prevent another national or international economic and financial meltdown.

Arguments against accounting standards convergence are (a) the unwillingness of the different nations involved in the process to collaborate based on different cultures, ethics, standards, beliefs, types of economies, political systems, and preconceived notions for specific countries, systems and religions; and (b) the time it will take to implement a new system of accounting rules and standards across the board.

The Quality of International Accounting Standards

The Securities and Exchange Commission's goals and efforts both domestically and internationally have been to consistently pursue the achievement of fair, liquid and efficient capital markets, thus providing investors with information that is accurate, timely, comparable and reliable. One of the ways the SEC has pursued these goals is by upholding the domestic quality of financial reporting as well as encouraging the convergence of the U.S. and IFRS standards.

Research indicates that firms that apply the international standards show the following: a higher variance of net income changes, a higher change in cash flows, a significantly lower negative correlation between accruals and cash flows, a lower frequency of small positive income, a higher frequency of large negative income and a higher value relevance in accounting amounts.

Additionally, these firms have less earnings management, more timely loss recognition and more value relevance in accounting amounts compared to domestic (U.S.) firms following the GAAP. Therefore, firms adhering to the IFRS generally exhibit higher accounting quality than when they previously followed the GAAP.

The Financial Accounting Standards Board's (FASB) original mission has always been to establish the U.S. GAAP (which it oversees) and standards for accounting and financial reporting; however, the mission has been enhanced to include the convergence and harmonization of U.S. standards with international ones (IFRS).

There is some opposition to the convergence from all stakeholders involved, including accounting professionals (CPAs, auditors etc.) and corporations' top management (CFOs, CEOs). There are various reasons for such resistance to change, and some are pertinent to the accounting profession, some to corporate management and some are shared by both. The new set of standards that will be adapted will need to provide transparency and full disclosure similar to the U.S. standards, and it should also ensure broad acceptance.