Along with economic globalization and the global convergence of capital market, the number of international financing activities such as international listing and security issuing has increased. From objective practice, these international economic activities requires accounting, which serves as an international commercial language and require the adoption of the same or similar accounting standards with the aim of providing accurate, fair and comparable accounting information. Accounting international convergence has become an unavoidable process, in which all countries have to face. Since 2001, the IASB has incorporated formulating a set of international accounting standards with high quality which can be applied all over the world into its strategic purpose. Through constant efforts of these years, great improvement and development have been achieved in the area of accounting international convergence. In this essay, discussion and analysis will be made on some issue related to accounting international convergence.
Discussion and analysis
As far as the way to realize the internationalization of accounting standards is concerned, there are two methods. One is accounting standards standardization, which means adopting one single set of global standards all over the world. The other one is accounting standards convergence. Christopher (1996) believed that international harmonization of accounting requires making efforts to reduce differences between accounting standards of different countries and regions rather than formulating one single set of accounting standards to substitute for the accounting standards of various countries. Attention was paid to the first method of realizing accounting internationalization, which aims to formulate one single set of international accounting standards.
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Everything which appears has a reason for its existence. Accounting internationalization is not an exception. Judging from the causes of accounting internationalization, it is obvious that under current economic environment, adopting one set of global standards has many advantages.
Choi and Meek,(2005) argued that the increasingly integrated international capital market creates a urgent need for the adoption of one set of accounting standards. Different accounting standards of different countries and regions have presented many difficulties for multinational enterprises and constrained the further development of the international capital market. Accounting internationalization is advantageous for countries and regions to attract foreign investment, thus improving economic communication and development. Ray (2006) believed that for those enterprises which issue stocks, bonds and other securities abroad or carry on international trade, adopting one set of international accounting standards all over the world can reduce the cost of decision and save transaction cost greatly.
Nowadays, economic globalization has become an inevitable trend and it has brought great challenges to international capital market. As an important commercial language, accounting also has to be adapted to the current economic environment. Adopting one set of accounting standard can improve the comparability of accounting information from the enterprises in international capital market. The convergence and standardization in accounting standard and practice can greatly mitigate the exchange cost in the international capital market, thus promote its development.
However, as a result of the existing differences between different countries and regions in politics, economics, and culture and so on, adopting one set of accounting standards also has many disadvantages. Though a unified set of accounting standards can solve many problems for enterprises in international market, it may not be adapted to various countries and regions.
Accounting differences exists because of the differences in the situation of different countries. Deegan (2006) believed accounting aims to provide useful information for information users including investors, creditors, and the government and so on. Accounting information should be relevant, reliable and fair. Ray (2006) argued that a set of international accounting standard for which it is impossible to consider the situation of all countries can not provide useful information for users as it is separated from the environments in which it lies.
One set of global standards: appropriate for all countries or not
In my opinion, one set of global accounting standards is not applicable for all countries. Indeed, this is also the most difficult problem in the convergence of accounting standards.
Christopher (1996) discussed that it can be said that accounting is product of its environment as its emergency and development are substantially influenced by the environment. It will be meaningless to separate it from the environment it lies in. The environments involve political, economic, and legal aspects and so on. In practice, different countries and regions have different environments. With regards to the economic aspect, different countries operate in different stages of economic development. The level of economic development and practices of regions among different countries could be considerably variable .Some countries are currently in the stage of a self- sufficient economy; some have entered the highly developed industrialization stage while others may enter information era.
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Apart from economic aspect, the differences of accounting environments of different countries also come from the differences of political system, legal system, education level, social culture and so on. For example, in Muslim countries, religious principles prohibit the collecting of interest. In these countries, it is impossible to use accounting procedures related to interest. As stated above, when formulating a set of international accounting standards, it is hard to consider the situation of all countries. In this way, a unified accounting standard may not be appropriate for all countries. Accounting has economic consequences. If it is adapted to the economic situation of some countries, it will promote the economic development. If not, it may destroy the interest of these countries.
Judging from this, in practice, accounting standards convergence may be more applicable than standard standardization. In fact nowadays many countries have contributed to amend or revise their standards to converge with international accounting standards as far as possible. However, in the process, there are still many problems. Which approach should be adopted in standards formulating, principle-based and rules-based, is one of them which remain to be solved.
Principle-based and rules-based approaches
After the appearance of Enron Scandal and along with the publication of Sarbanes-Oxley Act, the arguments about principle-based and rules-based approaches for the regulation of financial reporting have attracted attention from the field of theory and practice.
Generally speaking, the principle-based approach requires accounting standards to pay more attention to the formulation of principle in accounting with regard to the treatment of economic events and business. Schipper (2003) discussed that the principle-based regulations which concern principle requirements are usually brief and pay significant attention to the need of investors and other financial reporting users.
Rules-based approach for accounting regulations depends on detailed accounting regulations, makes many limits on the scope of application and provides detailed explanations and applying guidance. Rules-based approach regulations concern much about the suggestions of financial reporting formulators and the CPAs.
Advantages and disadvantages
It is based on economic transaction and concerns the form of reporting events. Bratton (2003) discussed that it requires accounting regulation formulators to provide detailed accounting standards regarding to accounting practical problems. Obviously, accounting regulation formulated under rules-based approaches has stronger operability and requires less professional judgment.
However, as the rules-based approach requires the provision of detailed guidance and explanations, accounting regulation lacks of selectivity of accounting policies, and cannot account for many exceptional events. Accounting standards under rules-based approach will be more and more complicate and concrete. Consequently, the phenomenon of standards overload may appear. Standards overload may bring disadvantageous effects on accounting practice, the usefulness of financial information and management decisions. For example, the accountants and CPAs may only cater to the concrete requirements of accounting standards, ignore the essence of economic transactions and lose basic professional judgments. Besides, too complicated financial reporting and other disclosure information are hard to understand for information users and this will mitigate the usefulness of accounting information.
It concerns the essence of economic transaction and makes little limits on the scope of application. From theoretical perspectives, principle-based approach has many advantages compared with rule-based approach. It emphasizes concerning the essence of economic transactions. Compared with rule-based approach, it is briefer and can meet the requirements of information users. The purpose of principle-based approach conforms to that of financial reporting. Besides, under rule-based approach, the freedom degree of accounting policies choice increases. Bratton (2003) discussed that it can reduce the exceptions in application, thus reflecting the economic essence of transactions and events covered by standards more clearly.
However, the lack of detailed accounting regulations, principle-based approach has higher requirements on professional judgments of accountants. Enterprises of which accountants have better professional judgment and higher ethical quality can provide more relevant and comparable information. Schipper (2003) discussed that this approach may also lead to the misusage of professional judgment and leave more room for accounting manipulation. If financial reporting formulators and CPAs collaborate, it will bring greater clash to capital market than Enron scandal. Therefore, if principle approach is used to formulate accounting standards, it requires not only high quality professional accountants, but also sound corporate system and complete legal system. Otherwise, while bringing convenience; principle-based approach will also bring about many problems.
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In this easy, discussion and analysis has been made on three issues related to accounting standards formulating and its internationalization. Adopting one set of accounting standards all over the world is advantageous to improve the comparability of accounting information and reduce the exchange cost in international capital market. However, in practice, it has many operational problems. As different countries have different situations, one set of accounting standards may not be appropriate for all countries. Regarding the two approaches to accounting regulations, principle-based approach has many advantages compared with rule-based one if accountants have professional ability and good judgment.