Background of Accounting Standards
Discuss about the User of Financial Report Constructed Using Multiple.
Australian Accounting Standards Board (AASB) is a board that controls, sets and maintains accounting standards. Economic activity has grown in the last years causing it to expand drastically and reach the international market. However, the different standard-setting boards in different countries each have their policies. This poses a problem since financial information is not the same across the bodies. This issue is very significant, and the AASB believes that by the setting of a single standard for all, then the economic activity in the international market will be much more comfortable and smooth. In this report, I will address the issue by looking at the various bodies for setting standards and what are their objectives to achieve the goal of a single set of accounting standards. I will be using a descriptive approach based on data from textbooks, journal articles, IASB and AASB articles.
As mentioned earlier the financial reporting standards differ globally. International harmonization aims at making sure that the financial reports do not very much in the different countries (Joubert et al. 2017). This can be done by setting a similar set of procedures in which these reports are made so that the difference can be minimal. On the other hand, standardization aims at implementing and developing standards for financial reporting that are the same. This is almost impossible to achieve. Therefore harmonization is a better option because it can eliminate the differences in the reporting standards (Yeung et al. 2107).
This is extremely important for multi-national companies because they are unable to compare their financial statements due to the different reporting standards. The International Financial Reporting Standards (IFRS) aims at promoting harmonization for globalization. For the IFRS to set up these standards, they need cooperation from other standards-setting boards. These are Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB), Generally Accepted Accounting Principles (GAAP) and AASB.
First, they work together to implement the IFRS standards. The FASB and IASB have a short-term international convergence project. This project aims to improve GAAP and IFRS. With this convergence, they hope to achieve harmonization in globalization.
Second, they have directly adopted the IFRS standards in place of national GAAP. In the IASB’s constitution, adoption of the IFRS is a crucial objective. The IASB has also taken the indirect route where they change the national standards so that they closely relate to the IFRS.
Importance of a Single Set of Accounting Standards
The third one is the implementation of the IFRS to achieve high-quality standards. The boards implement the IFRS in the reporting of their financial statements to eliminate the differences in the reporting standards (Botzem et al. 2017).
Lastly, the boards ensure that the national standards are accepted abroad. This is also known as mutual recognition. This has been achieved already in some countries such as US and Canada and even some European countries. Having a single set of accounting standards is very important (Alexander and Nobes 2008). It enables transparency between multinational companies. When there is one set of reporting standards companies can easily compare their financial statements and make informed economic decisions. Thus clarity is achieved through the smooth comparison of financial statements. It enables economic efficiency. Since the financial reports do not differ, one can identify risks or opportunities in different countries, and this helps investors in knowing how to invest. This helps in improving the cost of capital.
One set of accounting standards ensures saving money. By having only one accounting standard money is not wasted by coming up with a set of reporting standards that match those of a particular body. Therefore multinational companies save a lot of money when making financial statements.
It has also enabled the comparability of financial statements. The different standard-setting boards all have different sets of financial reporting standards. This makes it difficult to compare financial statements especially for multi-national companies that operate in different countries. Therefore the standard enables such a company to analyze its financial records in its establishments in different countries.
Also, it has strengthened accountability. This is because the information gap between company’s financial statements has reduced. A single set of standards provide companies with information that they need to hold management to their accounts.
Lastly, a single set of accounting standards is essential since it ensures consistency. This is because the financial records are consistent in all countries and this enables a better understanding between the investors and lenders.
The IASB and FASB have a short-term international convergence that they target to make long-term to improve the reporting standards by converging national accounting standards and IFRS
Most of the Boards do their projects jointly. The AASB, IASB, FASB, and GAAP ensure that whatever plans they carry out they work together.
The AASB has set a date for its next forum to be in 2019 to see if they will have met their objectives of 2018 of use of a single set of accounting standards.
Approaches to Achieving a Single Set of Accounting Standards
FASB aims at developing high-quality standards through the use of the IFRS standards.
Developing of 33 accounting standards. The IASB has come up with 33 standards so far to encourage countries to use the IFRS to eliminate the differences.
Harmonization and standardization aim at ensuring a single set of financial records formed improve economic globalization (Carneiro et al. 2017). The goal is to provide that multi-national companies can easily compare their financial statements in the different countries that they have establishments. With harmonization and standardization, they can achieve this by eliminating the differences that exist in the accounting standards of the nations. As much as this is very important, there are several issues that it faces.
One issue that is faced is that it is difficult to obtain information from domestic accounting standards (Kulkarni and Aanand 2017). Different standard-setting boards set their rules according to the economic situation, social setting, political factors, laws, and taxation of the country. Therefore, a single set of standards that will be able to consider all these and come up with a financial reporting system that will be effective for all will prove difficult. This shows that even if the IFRS manages to achieve harmonization not all the differences in the domestic accounting standards will be eliminated.
Another issue is that there exists a different economic environment in every state. Therefore, harmonization will not do any good (Camfferman et al. 2017). For example, if a country has its standards set in place as per its economic environment then adopting one of the standards in the IFRS might bring uncertainty. This is because the element may be irrelevant and of no use to the country and this will bring complication to the reporting standards of the country.
Also, interpretation and application of a single set of standards might be difficult. The IFRS will try to eliminate differences, and by doing this, they might set general principles that are suitable. The application of general principles to the millions of transactions that happen globally will be tedious and a bit difficult. Therefore it will be difficult to interpret the set standards according to the countries financial reports and also to apply them.
In addition to this, another major issue is the difference in countries. It is difficult to apply the accounting standards of a company in German to that of one in America. This is because these two countries both have their reporting standards that are unique to their countries based on factors in their country such as law and the environment. Hence harmonization will be challenging to achieve due to the difference in countries.
Global Challenges to Achieving Harmonization and Standardization
The neglecting of developing countries is another issue when setting up this single set of accounting standards (Sharma et al. 2017). Most of the boards that are involved are Western countries such as U.S, Europe, Australia and Canada. Therefore there are no boards from the developing states thus underrepresentation of these countries. The interests of developing nations when making the standards do not fall into consideration and therefore whatever rules made will be unable to execute in this countries.
Also, the overrepresentation of the Western countries is an issue. As mentioned earlier most of the boards such as IASB, FASB and AASB are from the western states, and therefore only their interests are considered when setting the accounting standards (FASB n.d)This will cause a problem in the case where a multi-national company wants to set up in a developing country. The financial reports will be hard to make because the standards might not apply to the developing nations.
Another issue that may arise is other nations accounting standards will face neglect. The IASB, FASB, and AASB aim at converging to set up a single set of accounting standards that is the IFRS. If they do this, then the boards will be neglecting the accounting standards in all other nations and implementing the IFRS. This will cause countries that do not agree with the rules not to partake in the reporting system because they feel their standards do not fall into consideration.
From this, we see that another issue is nations not complying with the set standards. For the IFRS to work, all boards must meet and agree that the established rules are efficient and effective. If one board disagrees, then the set standards cannot be applied. The setting of a financial reporting system that every nation and their respective boards will agree to is challenging. What one country wants is not what another desires, and therefore it will be difficult to get all the boards to agree to a single set of standards.
Hence it is challenging to come up with a single set of accounting standards that everyone will accept and make changes to their old systems.
The institutional theory states that the environment of an institution is essential in the development of the structure of an organization (Greenwood et al. 2017). It involves the setting of innovative structures whose aim is to improve efficiency. These structures then become legal in the environment and whatever organization set up needs to adopt the set structures even if they do not improve efficiency in the organization. Failure to adapt to these is viewed as negligence and irrational.
Issues with Implementing a Single Set of Accounting Standards
This theory relates to harmonizing and standardizing in that the innovative structures that set are the single set of accounting standards that boards set. These standards are adopted by all organizations that are involved in the global market. The rules are made legal by the IFRS and with time are expected to be the only accounting standards that organization will use.
The IASB’s goal is to achieve one standard across the global market (Li et al. 2017). This is important because it eliminates the differences in financial reports. When one accounting standard of preparing financial statements is made, the financial reports in the different organizations will be the same. As the institutional theory suggests, the rules will be used by all organizations in that environment. The environment, in this case, is the global market. Therefore for a multi-national company, the financial reports in all its organization will be similar.
However, the IASB goal is not reasonably achievable. This is due to the following reasons:
First, because it will be impossible to come up with a standard that will apply to all countries and organization. In the institutional theory, the environment of an organization plays a huge role in coming up with a structure. Each state has their economic environment which influences their laws, taxation, and politics. To come up with one standard that will consider each country’s economic environment is impossible (Azam 2017)
Second, it is not reasonably achievable because the standards may be inefficient to an organization. If an organization has already set up accounting standards that work efficiently then adding of another accounting standard to the organization will not make any changes. Just like the institutional theory companies will be forced to adopt the accounting standards when they were already working efficiently. Thus this goal is only applicable to companies that require a new set of standards and therefore is not reasonably achievable. This is because most organizations are efficiently productive with the use of their accounting standards.
Thirdly one set of accounting standards is not reasonably achievable because it is impossible to come up with one set of rules that nation board setters will agree on. The different accounting standards set in each country are based on the economic factors in each state. The IASB will find it difficult to come up with rules that cater to all the economic factors. Therefore most of the boards will not agree. Finding a standard that will address all issues under one umbrella is difficult. Hence the board setters in different countries are more likely not going to agree to a range of the policies (Parvathy 2018).
Also setting one standard is not practical. As much as IASB wants to come up with a single set of accounting standards, it is unable to put into practice. As seen in the institutional theory the structures can be set, but they will be inefficient for some organization when they cannot practice the structures. In the same way, the standards set can be impossible to put into practice. Especially if the principles established are generalized. Then the organization will find it difficult to apply the generalized principle to their financial reporting systems. Therefore it is correct to say that one accounting standard is only theoretical and impossible to put into practice.
Lastly, it is not reasonably achievable for the IASB to set up one standard because it will only cater to Western countries and neglect developing countries (Sharma et al. 2017). The IASB standards are solely based on countries such as US, Canada, Australia and Europe. Therefore when they set one standard of financial reporting, it may be inapplicable in developing countries. Thus the IASB will be unable to achieve this goal unless they include boards from developing countries in the setting up of the accounting standards.
As much as setting a single set of standards to follow is highly significant it is not reasonably achievable to come up with one that will include all account setting standards around the globe. Therefore it is accurate to say that the IASB goals are not feasible. (IASB n.d)
Conclusion
Harmonization and standardization are essential to come up with a single set of accounting standards that can be used in eliminating the differences in financial reporting. It will be efficient for multi-national companies that have the organization in different countries. The single set of standards will allow for comparability of financial records, therefore, making organizations in the global market have a better accounting standard. The IASB and FASB convergence aim at incorporating the IFRS standards with the national standards to achieve harmonization and standardization. Other boards such as AASB also are implementing the IFRS standards to accomplish this.
References
Alexander, D. and Nobes, C. 2008. “International Financial Reporting Standards: Context, Analysis, and Comment”, Routladge, London.
Azam, M.R., 2017. Challenges to the Users of Financial Reports Constructed Using Multiple Measurement Bases: A Review of the IASB’s Conceptual Framework for Financial Reporting. International Journal of Accounting and Financial Reporting, 7(2), pp.172-177.
Botzem, S., Quack, S. and Zori, S., 2017. International Accounting Standards in Africa: Selective Recursivity for the ‘Happy Few’?. Global Policy, 8(4), pp.553-562.
Camfferman, K. and Zeff, S.A., 2018. The Challenge of Setting Standards for a Worldwide Constituency: Research Implications from the IASB’s Early History. European Accounting Review, 27(2), pp.289-312.
Carneiro, J., Rodrigues, L.L., and Craig, R., 2017, September. Assessing international accounting harmonization in Latin America. In Accounting Forum (Vol. 41, No. 3, pp. 172-184). Elsevier.
Financial Accounting Standards Board FASB. (n.d). Available from https://www.fasb.org/jsp/FASB/Page/LandingPage&cid=1175805317350
Greenwood, R., Oliver, C., Lawrence, T.B. and Meyer, R.E. eds., 2017. The Sage handbook of organizational institutionalism. Sage.
International Accounting Standards Board IASB (n.d). Available from https://www.iasplus.com/en/resources/ifrsf/iasb-ifrs-ic/iasb
International Financial Reporting System IFRS (n.d). Available from https://www.ifrs.org/use-around-the-world/why-global-accounting-standards/
Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. The Journal of New Business Ideas & Trends, 15(2), pp.1-11.
Kulkarni, P. and Aanand, S., 2017. Conceptual Issues and Challenges in IFRS Research: Towards a Comprehensive Research Framework. Indian Journal of Finance, 11(8), pp.7-25.
Li, S., Sougiannis, T. and Wang, I., 2017. Mandatory IFRS Adoption and the Usefulness of Accounting Information in Predicting Future Earnings and Cash Flows.
Parvathy, P.R., 2017. IFRS CONVERGENCE: OPPORTUNITIES AND CHALLENGES IN INDIA.
Sharma, S., Joshi, M. and Kansal, M., 2017. IFRS adoption challenges in developing economies: an Indian perspective. Managerial Auditing Journal, 32(4/5), pp.406-426.
Yeung, M.T., Kerr, W.A., Coomber, B., Lantz, M. and McConnell, A., 2017. The Economics of International Harmonization of MRLs. In Declining International Cooperation on Pesticide Regulation (pp. 27-43). Palgrave Macmillan, Cham.
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