The Issue of Differences in Financial Reporting Standards
Discuss about the Modernizing and Harmonizing Public Sector.
Companies have continued to expand into the global market over the recent years. This is because the demand for the products and services that these companies offer has increased globally and thus it is correct for the companies to answer to the demands. However, each country in the globe has their standards of accounting and reporting that are set by their standard-setting bodies. The difference in financial reporting standards has thus created a problem for the industries in the international market. The Australian Accounting Standards Board aims at eliminating these differences by the setting a single set of accounting standards that can be used globally.
In the report below, I have addressed the issue by evaluating the various boards for setting standards and their strategies to achieve a single set of accounting standards. I have used a descriptive approach in my research which is data from IASB and AASB articles.
The financial reporting standards differ in the international market which causes the differences that exist in the financial statements. The AASB aims at working in conjunction with other international standard-setting boards to come up with a single set of accounting standards that can be used in the international market. This process is known as international harmonization. In this process, the AASB aims at making the standards compatible with those of others in the global market so that financial reporting can be useful as possible (Walker 2010).
International standardization, on the other hand, is when the accounting standards for financial reporting are the same in the global market. This is however not possible to achieve because the standards cannot be the same due to economic, social and environmental factors in a given country. Harmonization is more logical because it will minimize the differences that exist in financial reporting.
Harmonization is very important to companies in the international market. This is because it will allow them to make comparisons of their financial statements. Some of the standard-setting boards that have come together to achieve this goal are the International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB), the AASB and the Generally Accepted Accounting Principles (GAAP). The standards that these boards came up with are the International Financial Reporting Standards (IFRS). These standards are aimed at eliminating the differences that exist between financial reporting (Joshi, Bremser and Al-Ajmi 2008).
International Harmonization and Standardization
These boards have managed to come together to achieve the objective of a single set of accounting standards. Some of the processes they use to accomplish this are listed below:
They decided to work together to come up with the IFRS standards that can be used globally. FASB and IASB, for instance, have an international convergence project, but it is short-term (Wang 2014). The two boards want to improve the GAAP so it can complement the IFRS.
The boards have also implemented the use of the IFRS standards in place of the GAAP. They decided to do this so that other standard-setting boards can be motivated to do away with their standards and use the IFRS as well. Some of them however like the IASB have changed the GAAP in a way that they are based on the IFRS.
The boards have also adopted the use of the IFRS directly. In this instance, they have put the IFRS standards as their key objectives and directly used it in financial reporting and accounting.
The boards have strived for mutual recognition where they ensure that the IFRS are accepted globally. So far countries like the US, Canada, and other European countries have managed to allow the national standards and also adopt them as well (Chen, Ding and Xu 2014).
These boards believe that having a single set of accounting standards is essential in the international market. They want to achieve high-quality standards that will ensure smooth sailing in accounting. Therefore a single set of accounting standards is necessary because
The standards allow for comparability between financial records. The primary objective of the IFRS is to ensure that industries in the global market can compare their financial records. This is because each country has their standard-setting boards and this causes a difference in the reporting (Albu, Albu and Alexander 2014). Therefore with one standard, the differences are eliminated thus comparability achieved.
The standards allow for understandability. Many at times, a company in the global market is unable to read and interpret its financial statements in another country. This is because the way the financial reporting was done is not one the company knows. Therefore with a single set of standards analysts will be able to understand all their financial records (Christensen, Lee, Walker and Zeng 2015).
The standards allow for transparency. This is because the single set of standards will allow companies to be able to compare their financial statements and also interpret.
Importance of International Harmonization and Standardization of Accounting Standards
The standards also allow for consistency. With one accounting standards then the way financial reporting is done globally will be similar therefore there will be consistency.
The standards allow for economic efficiency in that one can look at the records and identify risks and offer a solution (Bloomfield et al. 2017).
The boards have made some developments in IFRS, and these are:
- FASB has implemented the use of IFRS to get high-quality standards.
- The FASB and IASB came up with international convergence project that they hope to make long-term.
- The boards do all their projects together to ensure they are using the IFRS.
- The IASB has come up with 33 standards that can be used in the international market.
International harmonization and standardization are objectives that want to achieve economic efficiency in the global market. With harmonization, the way financial reporting is done in the world can be made similar, and therefore companies can be able to compare their financial records (Camfferman and Zeff 2015). Standardization also aims at achieving the same standards in reporting in the world which will enable companies to be able to make comparisons and make informed decisions as well. However international harmonization and standardization are not as easy as it seems and it faces some challenges. These are:
One major problem is that it is difficult to come up with a single set of standards that will apply to all countries. When a country sets their accounting standards, their board does so on the basis of their environment. The standard setting board will look at the economic situation in the country, the social setting, the political setting, the laws and the tax rate of the country. Therefore the standards that the board comes up with will be suitable for the country due to the factors given. It is difficult to set up a single set of standards that will include all the factors of all the different countries (Yu and Wahid 2014).
Also, the economic environment in a country is a challenge when wanting to achieve harmonization and standardization. One cannot achieve harmonization if the financial situation is different in the countries. For instance, a country sets its standards according to the state of their economy. If they adopt the IFRS, it may bring a lot of confusion because it does not cater to their economy (Braun et al. 2015).
The IFRS at most times is set on general principles so that they can easily be applied. However, this might be a challenge because the standards will be challenging to interpret and refer to accounting practice. With general principles, using them in a global company that has millions of transactions will be difficult and also tedious. The interpretation of these principles may also be different among people, which cause them not to have an understanding.
Developments in IFRS
Another challenge that harmonization and standardization faces are the differences that exist between countries. Harmonization aims at eliminating these differences, but this is not even possible. One cannot use the standards used in a country like Kenya in another country like the US. This is because both Kenya and the US are unique in their way and each has different policies that govern them. Therefore harmonization will be challenging to achieve.
The lack of involvement from the developing countries in the standard-setting process is another challenge that exists. Majority of the boards that have come together to achieve harmonization and standardization are from western states such as Australia and the US (Botzem, Quack and Zori 2017). This causes the developing countries not to be represented in the standard setting, and this affects the harmonization. The standards that will be adopted will not apply to the developing countries because the factors in the country will not be considered.
Also, the involvement of the western states is an issue. This is because their representation in harmonization and standardization is more than enough. Majority of the boards such as the AASB and the IASB are from the western states. Therefore when coming up with the standards they will only be applicable in the western countries and in an instance where one wants to set up a company in a developing country, they will not be able to use the standards.
Harmonization and standardization aim at using a single set of accounting standards. This means that all other standards will have to be ignored and the IFRS adopted. This is a challenge to many standard-setting boards because they feel like their standards are being neglected (Chapple 2016). The standard setting boards may not agree to the IFRS standards because their standards were dismissed and if the other boards do not agree, then harmonization and standardization cannot be achieved.
The standard setting boards not agreeing to harmonization and standardization is another challenge. For the IFRS standards to be adopted and implemented for use, all the standard-setting boards in the globe have to agree with the set standards (Bamber and McMeeking 2016). This, however, will be difficult to achieve because coming up with standards that everyone can agree to will be tedious and also difficult. The needs of the countries differ depending on the economic situation and other factors affecting the states.
In conclusion, we see that achieving global harmonization and standardization will be difficult because of the many challenges that are present.
Challenges Facing International Harmonization and Standardization of Accounting Standards
The institutional theory focuses on the environment of an organization. The environment is an important aspect and is used to develop the structure of an organization. Structures that are innovative are set in a given environment, and after some time the structures are made legal. The primary objective of these structures is to improve the efficiency of the organization. Therefore any organization that is set in that environment will have to adapt to the structures because it is the law. The structures may not even improve the efficiency of the organization because failure will be looked at as negligence (Oulasvirta 2014).
The institutional theory can be applied to harmonization and standardization. The structures that are set are the standards (IFRS) set to ensure harmonization. The structures are aimed at improving efficiency which is also in harmonization and standardization where the standards are aimed at eliminating the differences that exist in financial reporting to enhance the effectiveness of reporting. These standards are to be adopted by all industries in the international market as well. With time they will be made legal, and all companies will be expected to use the standards.
The IASB’s primary objective is to come up with a single set of reporting standards that can be used internationally. The IASB wants to ensure that the way industries in the global market carry out their financial reporting is similar. This way the differences that will exist in the financial records will be eliminated allowing one to be able to make comparisons. Just like in the institutional theory, the global market is the environment, and the standards will be adopted by the globe (Brusca and Martínez 2016).
In the instance where a company has several branches around the world, then the reports will be consistent. However, the IASB objective is not feasible. This is due to the following reasons.
It is impossible to come up with a single set of standards that can be used globally. This is because the environment differs in different countries. The IASB cannot assume that what is suitable for one environment can work for another environment. Just like in the institutional theory the structures are set according to the environment. Therefore the standards in one environment cannot be applied to another. It is thus not feasible to come up with a single set of accounting standards (Henderson, Peirson, Herbohn and Howieson 2015).
The standards are also not feasible because they may not be efficient to a company. In the institutional theory, the structures are adopted by the organization regardless of them being useful to it. If the single set of accounting standards are made legal, then all organizations will have to adopt them. An organization may already be working efficiently with their standards and adopting the standards of the IASB will not make any changes or might only cause confusion. The IASB objective can only be applied to organizations that are not working efficiently and need the new standards to boost them (Bryce, Ali and Mather 2015).
Coming up with a single set of accounting standards that every country will agree to is impossible. Each state as mentioned earlier has their economic environment and coming up with standards that cater to each economic environment will be difficult and if possible will take an extended period. Therefore the different standard-setting boards will not agree to most of the standards set unless they meet each one’s needs. Consequently, the objective of the IASB, in this case, is not feasible (Osei 2017).
In the institutional theory, the structures set may not apply to an organization in the environment causing them not to put the structures to practice. In the same way, the standards set may not be exercised by a company in the global market because they are not of use to them. Therefore, in this case, the standards are not practical. This is mainly because the principles set are general and an organization finds it difficult to interpret them and apply them to their financial reporting. In this instance, the IASB objective of a single set of standards is not feasible because it cannot be put into practice (Cascino and Gassen 2016).
Finally, the standards set are not feasible because they will only apply to western states and cannot be used in developing countries. The objective is for the standards to be used globally but this is not possible because the IASB is from a western country. Therefore the economic factors of the developing nations are not considered in the standards and thus cannot be used.
Conclusion
A single set of accounting standards are significant to companies in the global market, and it will allow for the financial reporting in these companies to be consistent. This will allow for international harmonization and standardization that will eliminate the differences that exist in financial reporting. Also, a single set of standards will allow for companies to compare their financial reports and therefore can be able to make informed financial conclusions. The rules will also allow for understandability and create transparency between branches of an organization in the different countries. Therefore harmonization and standardization are essential to the international market because they will promote efficiency.
References
Albu, C.N., Albu, N. and Alexander, D., 2014. When global accounting standards meet the local context—Insights from an emerging economy. Critical Perspectives on Accounting, 25(6), pp.489-510.
Bamber, M. and McMeeking, K., 2016. An examination of international accounting standard-setting due process and the implications for legitimacy. The British Accounting Review, 48(1), pp.59-73.
Bloomfield, M.J., Brüggemann, U., Christensen, H.B. and Leuz, C., 2017. The Effect of Regulatory Harmonization on Cross?Border Labor Migration: Evidence from the Accounting Profession. Journal of Accounting Research, 55(1), pp.35-78.
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.
Braun, G.P., Haynes, C.M., Lewis, T.D. and Taylor, M.H., 2015. Principles-based vs. rules-based accounting standards: The effects of auditee proposed accounting treatment and regulatory enforcement on auditor judgments and confidence. Research in Accounting Regulation, 27(1), pp.45-50.
Brusca, I. and Martínez, J.C., 2016. Adopting International Public Sector Accounting Standards: a challenge for modernizing and harmonizing public sector accounting. International Review of Administrative Sciences, 82(4), pp.724-744.
Bryce, M., Ali, M.J. and Mather, P.R., 2015. Accounting quality in the pre-/post-IFRS adoption periods and the impact on audit committee effectiveness—Evidence from Australia. Pacific-Basin Finance Journal, 35, pp.163-181.
Camfferman, K. and Zeff, S.A., 2015. Aiming for global accounting standards: the International Accounting Standards Board, 2001-2011. Oxford University Press, USA.
Cascino, S. and Gassen, J., 2016. Have unified standards made financial reporting more comparable?. LSE Business Review.
Chapple, S., 2016. Book review: Aiming for Global Accounting Standards: The International Accounting Standards Board, 2001-2011. Accounting History, 21(2-3), p.364.
Chen, C.J., Ding, Y. and Xu, B., 2014. Convergence of accounting standards and foreign direct investment. The International Journal of Accounting, 49(1), pp.53-86.
Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), pp.31-61.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Joshi, P.L., Bremser, W.G. and Al-Ajmi, J., 2008. Perceptions of accounting professionals in the adoption and implementation of a single set of global accounting standards: Evidence from Bahrain. Advances in Accounting, 24(1), pp.41-48.
Osei, E., 2017. The Financial Accounting Standards Board (Fasb), And The International Accounting Standards Board (Iasb) Sings Similar Tune: Comparing The Accounting Treatment Of New Ifrs 16 With The Ias 17, And The New Fasb Model On Leases. Journal of Theoretical Accounting Research, 13(1).
Oulasvirta, L., 2014. The reluctance of a developed country to choose International Public Sector Accounting Standards of the IFAC. A critical case study. Critical Perspectives on Accounting, 25(3), pp.272-285.
Walker, M., 2010. Accounting for varieties of capitalism: The case against a single set of global accounting standards. The British accounting review, 42(3), pp.137-152.
Wang, C., 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), pp.955-992.
Yu, G. and Wahid, A.S., 2014. Accounting standards and international portfolio holdings. The Accounting Review, 89(5), pp.1895-1930.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
