Until the 1970s, there have been no accounting standards in the UK, the 21st century has therefore been driven forward with recent developments and projects. Elliott et al (2009, p.104). The question is still being asked whether to adopt the International Accounting Standards (IAS) so that global comparison can be made. According to O'Regan (2006, p.38), a conceptual framework can be described as a unified and generally accepted set of theories and principles that provide a foundation from which specific practices and methods can be deducted. There has been an introduction of the Companies Act since the mid 19th century, which the fundamental concepts of accounting are specifically referred. Alexandra and Britton (2004, p.229) Academics have therefore produced articles to further the debate, two articles by Zeff and Whittington are the focus in this essay.
Firstly Geoffrey Whittington published his article in 2008 at the University of Cambridge when there has been a significant change in the adoption of IAS, he mentions in the article that there is a demand for international accounting in the global market as the International Accounting Standards Committee (IASC) was essentially a voluntary body created by the accounting profession and its shareholders, rather than being regulated by the government or legislators. Whittington (2008). The IAS is therefore deemed to increase the comparability and reliability of the financial statements and this is where harmonisation is understood to be a key factor. Secondly, Whittington (2008) mentions that Australia has adopted the IAS for all companies, as a legal requirement. This shows that there is global success in implementing the IAS.
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Whittington (2008) mentions that the acceptance of IFRS in Europe has been spoiled by two carve-outs, the fair value option and hedge accounting. Anon (2005) would argue that the fair value option part of the standards was kept the same by some countries. Whittington (2008) also mentions that countries like Australia have restricted certain options within the standards, they implement standards which are best suited to them. In this case the comparability of IAS will be lost. Some of the arguments against the adoption of the IAS are that it is costly to change from one system to another, also the adjustment costs of adapting to using and interpreting new data. The developing countries like Brazil and Bangladesh would stick to standards they are more familiar with and would cause them to reject the IAS. (Whittington, 2008)
IAS Board (IASB) took over from the IASC in April 2001 with a responsibility for setting IAS with a mindset that this will create harmonisation within different constituencies but the culture differences means this cannot be done. It is understood that culture is the 'institutional framework of accounting including the market environment in which it operates and the specific practices and beliefs about the role of accounting that had grown up within that framework'. Whittington (2008). Whittington looks at the present situation of accounting standards and to the future and how they have changed from the past.
On the other hand, Zeff published his article in 2002 in America, therefore he will have a different view on the current situation and the development of the IAS. He points out that the only way to establish high quality International Financial Reporting Standards (IFRS) is to keep up with the eight leading national standard setting by the form of liaison. But this may be held up by the political pressures, for example the pressures from the European commission (EC). (Zeff, 2002)
In 2002 the IAS committee wanted to eliminate LIFO (Last In First Out) but the International Organisation of Securities Commission (IOSC) wanted to retain LIFO. This means that the political pressures in this case were succeeded and therefore defeated one of the objectives. (Zeff, 2002).
The ASC was concerned on how deferred taxation would be treated and therefore needed to know what standard to refer to. The SSAP 11 was reviewed and the requirements meant that it incurred relatively high charges to the profit and loss account and substantial provisions in the balance sheet. The provisions did not correspond to the amounts to be paid in the foreseeable future. Lawrence (2000). The SSAP 11 was therefore reviewed again by the standard setters and replaced by the SSAP 15 in October 1978. Zeff (2002).
Having looked at the two articles, in relation to the time and topic, they both offer relevant discussion on issues faced at respective times. Whittington (2008) published his article in 2008 and therefore takes into account the changes made since the introduction of the IAS in 2001. Whereas Zeff (2002) does not take into account the fact that the standards have developed over time as it was relevant for his time only. But Zeff (2002) does mention that the IASC seeks to establish high quality IFRS.
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Having summarised the main issues in both articles, by describing the articles in the context in which they were published. I am going to critically analyse some of the main points and expand on the current academic debates, comparing each authors style and approach.
The first point that can be raised is that the Whittington (2008) mentions that the IASC was initially a voluntary body whereas Zeff (2002) says it was influenced by the government. This meant there was a high demand for IAS in the global market. The development of the IAS globally has provided an impetus for the international harmonisation of accounting as argued by Dunk and Kilgore (2000).However, Nobes and Parker (2000, p.66-67) argues that the financial markets in more regulated countries are threatened with a loss of market share because investors and financial analysts need to be able to understand the financial statements of foreign companies whose shares they might want to buy, thus be sure that the statements from different countries are reliable and comparable. Whittington is clear in his approach as to why there is a demand for IAS in the global markets. He mentions that IASC was originally a voluntary body where the demand was increasing internationally as the EC decided to use the standards in the group accounts of companies listed within the European Union (EU). Whittington (2008). So even though the IASC was voluntary it showed that some countries wanted to implement it. Whereas Zeff (2002) argues that proposal for the IASC was defeated by the political opposition when the IASC was still seen as voluntary. Hence, they choose not to implement the IAS as there was political leverage created between them.
The second point raised by Whittington (2008) is that the IAS are implemented by all companies in Australia as legal requirement, this means that there is harmonisation between constituencies from the modifications of existing standards, the Australian Accounting Standards Board (AASB), and the development of new ones. Dunk and Kilgore (2000). Also the more non- English speaking countries like Brazil, China and India are starting to recognise the IAS and in recent times the United States Securities and Exchange Commission (SEC) accepted the IFRS as opposed to US GAAP. Whittington (2008). Australia having made a decision to adopt IFRS will mean that it will be benefit in several ways; it will help to attract capital to Australia, therefore decreasing the cost of capital, and lowering the cost of auditors and users of multinational entities financial reports. However it will mean that there is less comparability because the introduction of optional accounting treatments. AASB (1995). The best example of this would be the convergence project between the US GAAP and the IFRS. Similarly in the article by Jonfilippo Fabiano (2006) it also states that compliance with the IAS will decrease the cost of capital 'through the increase in demand of securities that are more transparent', thus it would be a great success if the standards were to be implemented globally. However not all the IAS are seen to be suitable for adoption because some IAS which have not been widely scrutinized in their development are impractical or lacking the detail required for adoption as stated by (Curry, et al, no date). On the other hand, Zeff (2002) argues that in 1992 before any companies face any real regulatory pressures to adopt IAS the proposal to do so was defeated by political pressures. This would occur even if any countries were upbeat about implementing the standards. The example for this may have been the IASC'S reversal on the LIFO.
Whittington (2008) also mentions that UK is often regarded in the rest of Europe as part of an Anglo-Saxon system, meaning it is originated from an English speaking country and has a significantly stronger capital market and a greater shareholder orientation. Whittington (2008) clearly expresses the point that in the maximisation of the present values of future cash flows there needs to be an agency relationship. He also mentions that the UK differs from the USA because it attempts to regulate and improve the conduct of the board of directors in the way of corporate governance. This reinforces the relationship between directors and shareholders, and this type of relationship is defined by the agency theory. Agency theory is a theory that deals with principles and its agents, in this case the principle is the Director and its agents are the shareholders. Brian W Kulik (2005) in his article of 'Agency Theory, reasoning and culture at Enron: in search for a solution', mentions that 'in a public corporation, there exists a central problem with regards to shareholders interest', the directors of the company do not always try to maximise the shareholders return on investment and they have a remuneration at stake. As a result of the divergence between the directors interest and that of the shareholders agency cost will be generated. Agency costs are defined as those costs borne by shareholders to encourage managers to maximise shareholders wealth rather than behave in their own self -interests. Robert T. Kleiman (no date). Whereas Zeff (2002) mentions that political considerations affected the IASB'S predecessor. This is when positive accounting theory comes in and "acknowledges that accounting information and the managers of companies exist in a 'political' arena." Teviotdale (2009). In the article by Lennard (2007) it suggests that stewardship should not be characterised as information to assist an assessment of integrity of managers and directors but to provide information for a constructive dialogue between directors and shareholders, hence the agency theory relationship. It suggests the importance of historical information and that information should be complete. It look at the historical information and see what the directors have done but decision usefulness is an objective that looks more at the future of the investors, shareholders and government. Lennard (2007) argues that stewardship and decision usefulness are similar objectives which do not interlink but have different purposes, they should therefore be defined as separate objectives. 'Decision usefulness' therefore covers the information needed for the owners and directors and on top of that for the future investors and shareholders. To back this up Whittington (2008) has stated that UK statement of principles (1999) acknowledges that there is an independent role for the stewardship objective.
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The only way to establish high quality IFRS's is to keep up with the eight leading national standard settings by the form of liaison, but this is held up by political pressures. Political means 'self-interested considerations or pleading by preparers and others that may be detrimental to the interests of investors and other users'. Zeff (2002). The EC has adopted a 'do as I say' approach to the listed European companies, the EC has advised all those within the EU should adopt by 2005 endorsed IFRS's in their consolidated statements. Zeff (2002), such political pressures can hinder the effort to create harmonisation within different constituencies. This is when the term 'lobbying' is used, the act of 'trying to influence the thinking of legislators or other public officials for or against a specific cause' Anon (2007a). Zeff (2002) mentions that some European countries have considered a move from IFRS's to U.S. GAAP because lobbying is seen as a natural part of the political system in the US, outside the US it is seen as a negative thing e.g. linked with illegal attempts to influence such as bribing. Whereas Whittington (2008) states that the IAS were implemented in Australia as a legal requirement , this brings about an argument that if the IAS were implemented worldwide then international comparability would be made easier. However, Australia has restricted certain options within the standards therefore international comparability is lost. However it is argued that there is a need for the AASB to work closely with the IASB to ensure it contributes to high quality international standards because of its technical competence and experience. Once again there still remains a risk in achieving a single set of global accounting standards.
Zeff has a historical approach because he wrote his article when the IASC was formed. Also his article is focused to the audience that are involved in the financial accounting sector and other academics, not solely for the public. As he is a University professor in America and uses language that is more understandable to academics and uses accounting vocabulary, for example Zeff (2002) mentions that the 'IOSCO opposed eliminating LIFO', this phrase would only be understood by academics who know what LIFO and IOSCO is. Whereas Whittington uses simple language that could be understood by all audiences, a non-academic would get a basic idea of what the article was about. Zeff (2002) places emphasis on the failures of the IASB and doesn't really go towards the success of the IASB, and he favours the more so called American approach in relation to when his article was published. Whittington is in favour of the harmonisation because he mentions in his article the successes the IASB has had over the years and that 'since its creation, the IASB has achieved some notable successes'. (Whittington, 2008)
The joint conceptual framework project of the IASB and the Financial Accounting Standard Board (FASB) was initiated in 2002, in which they agreed to work on future standards and improve existing ones. Where the objective of the conceptual framework project was to remove the differences between the two frameworks and amend where necessary. The two frameworks had some features that were comparable. For example, they had a strong 'decision usefulness' orientation. Whittington (2008). It is argued that the converged framework should provide one objective of financial reporting by providing information that is useful to future investors. Hence, the 'decision usefulness' objective as mentioned earlier which includes providing information that is useful to assessing the managements stewardship. IASB board members argued that stewardship should be identified as a separate objective because if there is not a separate objective for stewardship then there is a danger in the future that information that is used for stewardship purposes may not be included in the financial statements. It is also mentioned that the stewardship objective is about assessing management competence and integrity. It is argued that one objective of financial reporting should provide a relationship between management and shareholders, giving shareholders relevant information to make decisions. They also state that stewardship was originally the primary objective of financial reporting, therefore it is relevant to today's accounting practices (Anon, 2007b). When a conceptual framework is put into place it needs to recognise the elements of the financial statements which are: assets, liabilities, equity, revenues and expenses. I will be placing emphasis on assets. Asset is defined as 'the rights to future economic benefits controlled by an entity as a result of past transaction or events', where if the future economic benefits are eliminated at a single point in time, it is when the loss is recognised and the expenditure is derecognised i.e. debit balance is transferred to the profit and loss account. Elliott et al (2009, p.168). It is mentioned by the ASB that historic costs are associated with stewardship, whereas current values are associated with decision usefulness. However it shows that most historical cost information does have predictive value. So for assets that generate cash flows such as property, plant and equipment the current value gives a current measure of the total resources that are invested. (ASB,1999, pp12-31).
Regarding the recognition of the elements of the financial statements there are many implications to be considered. Firstly the capitalisation of acquisition costs, under the stewardship approach managers would be accountable for all the costs relating to an acquisition. Where the user would want to seek a return on the total cost of the acquisition, in the year of the acquisition, and in the future. It is important for the investors to know the assets present value and to see if it has appreciated and by how much. Similarly stewardship is relevant to asset valuation, it would mean that ''entities provide current entity-specific valuation for operational assets''. Anon (2007b). Whereas the resource allocation approach sees that the investors are only interested in how different companies would value an asset rather than the benefits a company would receive from the use of the particular asset. Another implication of having decision usefulness as a single objective in financial reporting would be that financial reports would not meet the needs of investors, so they would need to keep the stewardship objective in the framework if the investors are to gain useful information regarding management of a business. Global constituencies realised if the stewardship objective was to be taken out, major parts of the framework would be removed (Anon, 2007b)
Having looked at the views of different authors I would argue that the joint conceptual framework project of the IASB and the FASB gives a more harmonized approach to standard setting globally, and Sir David Tweedie suggests that 'we all need to account the same way' (O'Regan, 2006, p.432)
- ASB (1999), Statement of Principles for Financial Reporting. Accounting Standards Board.
- AASB (1995), Definition and Recognition of the Elements of Financial Statements, [online] Available at: <http://www.aasb.com.au/admin/file/content102/c3/SAC4_3-95.pdf> [Accessed 25th November 2009]
- Alexandra, D. & Britton, A. (2004) Financial Reporting. 7th ed. London: Thomas Learning.
- Anon (2009). IFRS Adoption in Australia [online] Available at: <http://www.aasb.gov.au/admin/file/content102/c3/IFRS_adoption_in_Australia_Sept_2009_1255413986963.pdf > [Accessed 13th November 2009]
- Anon (2005). Accounting Standards: Commission endorses "IAS 39 Fair Value Option" [online] Available at: <http://europa.eu/rapid/pressReleasesAction.do?reference=IP/05/1423&format=HTML&aged=0&language=EN&guiLanguage=en> [Accessed 18th November 2009]
- Anon (2007a). Political Lobbying [online] Available at: <http://www.indonesiamatters.com/1493/lobbying/> [Accessed 19th November 2009]
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- Dunk, A. and Kilgore, A. (2000) The Reintroduction of the True and Fair Override and Harmonization with IASC Standards in Australia: Lessons from the EU and Implications for Financial Reporting and International Trade, The International Journal of Accounting. July 2000, 35 (2), pp. 213-226 [online] Available from: Science Direct <http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6W4P-41C2V14-3&_user=495973&_rdoc=1&_fmt=&_orig=search&_sort=d&_docanchor=&view=c&_searchStrId=1095765787&_rerunOrigin=google&_acct=C000024198&_version=1&_urlVersion=0&_userid=495973&md5=b7babb93f61d7cef129e5a98fcf3bbe8> [Accessed 20th November 2009]
- Elliott, B. and Elliott, J. (2009) Financial Accounting and Reporting. 13th ed. Pearson Education Limited.
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- Kulik, W, B. (2005) Agency Theory, Reasoning and Culture at Enron: In a search of a Solution, Journal of Business Ethics. 2005, 59, pp. 347- 360 [online] Available from: Springer <http://www.springerlink.com/content/nr40x067450hr684/fulltext.pdf> [Accessed 22nd November 2009 ]
- Lennard, A. (2007) Stewardship and the Objectives of Financial Statements: A Comment on IASB's Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information, Accounting in Europe. June, 4 (1), pp. 51-66 [online] Available from: Informaworld <http://www.informaworld.com/smpp/content~content=a781255956~db=all~jumptype=rss> [Accessed 23rd November 2009]
- Lawrence, S. (2000), The Historical Development of Accounting Standards [online] Available from: ACCA <http://www.accaglobal.com/archive/2888864/31025> [Accessed 19th November 2009]
- Nobes, C. and Parker, R.H. (2000) Comparative International Accounting. 6th ed. Prentice Hall: London.
- O'regan, P. (2006) Financial Information Analysis. 2nd ed. John Wiley and Sons, Ltd.
- Teviotdale, W. (2009) Lecture Notes [Acknowledges that accounting information and the managers of companies exist in a political arena, Thursday 8th October 2009]
- Whittington, G.(2008) Harmonisation or Discord? The critical role of the IASB conceptual framework review, J. Account. Public Policy 27: Pages 495-502.
- Zeff, S.A. (2002) "Political" Lobbying on Proposed Standards: A Challenge to the IASB, American Accounting Association, Accounting Horizons, Vol.16, No 1: Pages 43-54.