Examining the need for a single framework of financial accounting

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A single framework of financial accounting standard for whole over the world is an issue which has been widely debated and assessed over the past forty years, with many discussions taking place between the governing bodies of national jurisdictions in order to improve the standards, which have led to vast changes being made. All of these governing bodies are looking to harmonise the frameworks into a single framework for financial reporting in order to improve the current system. To achieve this target, the world's accounting standards-setters have been working on "converging" local and global accounting standards. The International Accounting Standards Board (IASB), formerly the International Accounting Standards Committee, began developing a conceptual framework of accounting principles and financial management reporting constructs that will effectively harmonize the practice of accounting throughout the world (International accounting Standards Board, 2006) Central to these efforts has been the work of the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to converge U.S. generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (IFRS).

GAAP, once the gold standard of accounting and financial management transactions throughout the world, is increasingly being applied in conjunction with newly emerging international accounting standards. Many accounting professionals from the entire world argued that this is an unwanted problem and these efforts may end up with various critical issues in the financial accounting standards and statements. But in the other hand, some of the professional accounting critics against that, financial statements are all denominated in monetary terms and tend to have similar categories across countries. Further, users of financial statements may believe that the statements reflect the same financial language; however, the "words" always have different meanings depending on the country from which the statements originated. Devon, E. (2009). Also the rules used to arrive the categories and numbers often differ by country. Because national environments have different characteristics, standard setters and accounting bodies have chosen different alternatives for recognition, measurement and presentation of assets, liabilities, equity, revenue and expenses. They have chosen that recognition, measurement, consolidation and presentation policies that best fitted their national environments. Although the general target is same in most countries many difference between countries occur. This report will aim to critically analyse following sub headings

History about IASB & IFRS, its activities over the convergence of ifrs, standard setting process, advantages & disadvantages of the IFRS ,Example of countries recently adopted ifrs, whether this convergence to ifrs beneficial for modern business world and the likelihood of such changes occurring in the current system.

History of International Accounting standards board (IASB) and International financial reporting standards (IFRS).

The FASB (2006, p. iv) defines the framework as 'The Conceptual Framework for Financial Reporting establishes the concepts that underlie financial reporting. The framework is a coherent system of concepts that flow from an objective. The objective identifies the purpose of financial reporting. The other concepts provide guidance on identifying the boundaries of financial reporting, selecting the transactions, other events, and circumstances to be represented, how they should be recognized and measured (or disclosed), and how they should be summarised and reported'. This identifies the importance of these standards to companies who wish to report within the jurisdiction of the standard setting committee.

The International Accounting Standards Committee (IASC) was established in 1973 by the professional accounting bodies of Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the UK and Ireland, and the USA, with the aim to harmonise international financial reporting. This was a principles based approach to financial reporting, which are not mandatory unless and until they are adopted by the accounting profession in the country concerned. During the next twenty years, the IASC developed their framework of financial reporting and disclosed International Accounting Standards (IAS) which came into effect as of 1st January 1995 which covered seventeen topics and now it has been increased to 41 (Please refer appendices 1).

In 1988, the US Securities and Exchange Commission (SEC), which is responsible for the control of listed companies, began to encourage the IFRC's efforts to develop a single framework for financial reporting which is used by all. The SEC again reiterated its stance in 1997 and stated that for issuers wishing to raise capital in more than one country, preparing multiple sets of financial statements to comply with different jurisdictional accounting requirements increased compliance costs and created inefficiencies.

In 2001, the IASC was comprehensively reorganised and became the International Accounting Standards Board (IASB), meaning that all new standards would become International Financial Reporting Standards (IFRS) and not as they have previously been named International Accounting Standards (IAS). (Please refer appendices -2 for IASB's Structure.)

Following this, the IASB and the FASB met to discuss the possibility of convergence between the two sets of standards and as a result of this, the Norwalk Agreement was issued. The Norwalk Agreement pledges that both parties will make their best efforts to '(a) make their existing financial reporting standards fully compatible as soon as is practicable and (b) to coordinate their future work programs to ensure that once achieved, compatibility is maintained.' (The Norwalk Agreement, 2002), and aims to move the US GAAP (Generally Accepted Accounting Principles) and IFRS more in alignment with each other. The SEC has for many years been a strong supporter of development of a single framework for financial reporting, and announced its support of the Norwalk Agreement. Nobes.C and Parker.R (2008)

IASB's activities to establish the IFRS as Local Accounting standard of the world.

The IASB (2009) defines its role and objectives as the standard setter as:

"a) to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions;

(b) to promote the use and rigorous application of those standards; and

(c) in fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies; and

(d) to bring about convergence of national accounting standards and International Accounting Standards and International Financial Reporting Standards to high quality solutions."

The above objectives highlights the fact that the IASB also accept that they have a responsibility to the users of the financial reports to develop reliable framework, and to fulfill the ambition to converge national accounting standards, the FASB's IAS's with the IFRS's.

In practice, the main aim of international accounting standards is to a good comparability that will make easy for investors to make their decisions while reducing the costs of multinational companies in preparing the various types of accounts and reports. ( Eg: IFRS, UK GAAP and US GAAP ect ) . It's been clearly understandable that IASB having a global role to play in coordinating and harmonizing the activities of the many national agencies involved in setting accounting and reporting standards. Further it has been suggested, that the IASB's standards provide a useful model for developing countries wishing to establish accounting standards for the first time. As per the Appendices -01 current IASB's standards, it's published 41 International accounting standards with its inception and has since completed 5 entirely new standards and revised 15 existing standards. As mentioned earlier in this report the new and revised standards are designated as International financial reporting standards ( IFRS ) , but the inherited standards still hold their original designation of IAS. These cover a wide range of Accounting issues, including the methods of accounting policy disclosure, consolidated financial statements , funds statements, segmental reporting for multinational companies, accounting for leases , related party disclosures, accounting for the effects of changes in foreign exchange rates and financial instruments. The most recent IFRS's explaining how to disclose share based payment, insurance contracts, and first time adoption of International financial reporting standards.

In terms of achievements, early days the IASC made good progress towards its goal of achieving worldwide agreement on accounting standards since its formation in 1973. As the newly started IASB entered 2001, it embarked on a new stage of worldwide standard setting as a restructured , independent standard setter that has unrestricted support from governments, standard setting agencies , security commissions , and professional accounting associations worldwide. Further ,In 1995 IASB successfully signed an agreement and received an endorsement from the international organization of securities commissions(IOSCO), as a result of the agreement followed growing recognition of the need for common and global accounting standards that could be used multinational and local listed companies alike. Also the business preparers were convinced and motivated by the possibility cost saving and investors by the need for easy comparable financial information internationally. . A big development of the IFRSs is that as of January 1st, 2005, entities of member states of the European Union (EU) who are listed on the EU-regulated stock exchanges to prepare their consolidated financial statements must do so in accordance with IFRS. Most member states of the EU has retained its own national set of financial reporting standards which any company who is not listed on the EU regulated markets can decide to use. This was a real successful step by IASB as its much of the efforts this past year have focussed on the adoption of these standards by the 25 countries of the European Union.

Standard setting Process

At present, there are two different approaches to standard setting. This causes a problem for the harmonisation of financial reporting standards. The first is the rules based approach, which is commonly used in the US, and also the principles based approach which is used by the IASB.

The rules based approach approach incorporates a list of detailed rules which must be followed in accordance with the law when producing financial reports. This approach of a strict list of rules is the traditional approach US accountants are required to follow and their method of producing financial reports. Harden (2002, p. 2), believes that this approach is too complex, and that the principles based approach is a much clearer way of presenting guidelines. In the article, Harden illustrates FAS 133 as an example of the rules based approach being over complicated, stating that 'FAS 133 spans 153 pages… although this could be fairly brief and uncomplicated- - perhaps only two paragraphs long'

The principles based approach is a conceptual based approach. It is a more simple set of key objectives to ensure good reporting standards. Although some rules are unavoidable, the guidelines or rules set are not meant to be used for every situation. This approach is generally less substantial in quantity than the rules based approach, offers the users broad guidelines which can be practical in a variety of circumstances, and reduces the complexity that is experienced in the expansive rules based approach to financial reporting.

This issue of a rules or a principles based approaches to the premise of a single framework for financial reporting, is that these are the underlying principles for financial reporting standards, meaning that one of the approaches will need to be extinguished for this to occur.

There is an argument put forward by some professionals that a rules based approach is a fairer framework of financial reporting as the rules are made by a board that have no obligations to the companies required to follow these rules, where as a principles based approach allows the final decision to be that of the company involved.

Mintzer (2002, p. 1) states:

Sure, that's a lot of rules, but they are developed and deliberated by accounting experts without the influence of a particular business' financial statements in mind. It is this due process and public debate in developing accounting rules that result in our high-quality standards. Principles-based standards simply would move the debate and deliberation away from the public forum and into each accounting department where the results would be inconsistent and perhaps unknown.

As a result of the principles or rules based debate, the main attention regarding the development of a single set of accounting standards on an international basis is focused on the FASB and the IASB. Most of the literature on this subject identifies these two bodies as the main entities in which convergence or harmonisation needs to occur in order for a single set of financial reporting standards to be developed. This is mainly due to the size of the user base of both and the substantial differences in the underpinning assumptions of each framework. But with the present substantial differences between the rules based approach and the principles based approach, there is a huge difficulty in attempting to harmonise the framework of financial reporting. Nobes & Parker (2006, p. 76)) define harmonisation as 'the process of increasing the compatibility of accounting practices by setting bounds to their degree of variation'. They then go on to comment 'harmonisation is best suited to an environment where similar users receive similar information from their governing bodies. This is not currently the case on a global status with the framework for financial reporting, again, due to the fact that there are currently rules based approaches and also principles based approaches.

Advantage and disadvantage of the IFRS

There are many reasons why companies are choosing to migrate towards adopting IFRS before they become mandatory. One of the most important reasons is due to globalization, as most countries have already made the switch over to IFRS. If companies in the US switched over to IFRS it would make transactions and deals with companies who operate under IFRS much easier. It would also give companies and stockholders in other countries a better economic indicator as to how companies here in the US are doing. However, US is still maintains its own Financial Accounting Standards Board (FASB). Both IASB and FASB have created International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (U.S.GAAP) respectively. These accounting standards are rules of measurements for financial statements that companies issuing stock to the public must provide to stockholders (Libby, 21). I we mainly concentrate on convert from US GAAP to IFRS, there are various advantages and disadvantages of the U.S. companies changing their systems from U.S.GAAP to IFRS. As the markets have grown to become more complex and global, the disparities between the two standards have been a significant issue as consumers and producers call for reform.

As mentioned earlier in this essay the major benefit of the conversion is comparability. Switching to IFRS would allow people (investors) to see various companies from different parts of world on the same angle. As willingness to trade increases, cross-border investment and integration of capital markets are easier with greater market liquidity and lower cost of capital (Hail, 12). Investor bases would increase as the financial reports are becoming comparable. With better information, companies would be able to more effectively allocate their capital. Having one standard, however, does not guarantee comparability. With the same standard, practices and enforcement can differ considerably across firms and countries. It is only natural because diversity in accounting standards would result from diversity of the countries' institutional infrastructures. Although there are currently more than 113 countries on IFRS, an estimated 29 countries using IFRS added their own exceptions, defeating the purpose of a global standard (IOMA, 6 ) (Henry).

Generally main issue involved with Convergence to IFRS is Implementation Cost. Users, managers, and auditors of financial statements all likely face significant implementation costs as the transition from GAAP to IFRS progresses. First of all, these people must dedicate time and resources toward learning the new international accounting standards. Learning the differences between the two sets of accounting standard is not an easy task. Academic and professional bodies will need to play their part as they rewrite textbooks and revise courses to reflect IFRS, but a large part of learning for managers and both internal and independent auditors will have to occur on their job. In the other hand if we take the major international audit firm for example TOP FOUR Firms ( PricewatethouseCoopers, Delliote, Earnst&Young and KPMG) are already started to providing education courses on IFRS for their employees and for members of the academic community. The main reason that large firms showing interest in convergence to IFRS is because of its cost saving benefit in the conversion. Before companies can realize cost savings, transition costs are considerable. They include "preparation, certification, dissemination of reports, and opportunity costs" (Hail,13). Businesses will be "adjusting their computer systems and processes, updating documentation, training employees, and hiring outside specialists and consultants" (Hail,40). "Based on survey data for 2005 mandatory transition to IFRS in the European Union, it was possible to construct an estimate of the first-time preparation costs of IFRS consolidated financial statements for publicly traded firms" (Hail,41). Using the survey's measurements, the transition costs estimate "to be at least 8 billion dollars for the entire U.S. economy"(Hail,41). "The average one-time cost of $420,000" will be difficult to absorb for local and small firms (Hail,41).

Again, the main advantage goes to multinational companies. Despite "the average one-time cost of $3.24 million dollars", these companies will still be saving money when they cut down from three to two or one financial statements and reports Preparation (Hail,41). Those only on U.S. GAAP, however, will reap no benefits in the short run. Although in the long run, there may be cost savings, the small companies will probably have some issues in terms of surviving until they reach the appropriate level and time. Finally Investors also will need to educate themselves about IFRS if they want to avoid IFRS disclosure disadvantages and wrong investment decisions, due to an lack of understanding from the financial statements.

Cultural, legal and political influences also a barrier in the process of convergence to IFRS.

The appropriate authorities should help IASB to minimize these difficulties. PwC says in the View Point :

Legislators, regulators and standardsetting bodies need to be aware of the fault lines in the current convergence process and, where appropriate, should take action to ensure progress. particular there is significant concern that, without some revision, the existing U.S. legal, regulatory and standardsetting system will unduly influence the next critical phase of convergence. While few may doubt that the correct focus of regulation is to maximise investor protection in a cost-effective manner, legal and regulatory frameworks and cultural histories surrounding financial reporting vary greatly across territories.( PWC View Point 2007 Pg: 4 - Convergence of IFRS and US GAAP)

The above statement by PwC clearly states the cultural influence and barrier from the relevant authorities to implement the IFRS. Because many of these authorities dislike accepting compromise that involve changing accounting practices towards those of other countries. The major part of dislike accepting this change from the side of accountants and companies or on the part of the states that may not to lose their dominance power. (Nobes.C & Parker .R :2008) A further issue is nationalism which means lack of knowledge or interest in accounting elsewhere. Further PwC says that some long standing accounting and reporting practices may be hard to overcome in certain countries even after those countries adopt IFRS. Because their traditions may influence how they interpret and apply standards. (PwC View point : 2007)

Example of Countries which are recently adopted IFRS as their local Accounting standards.

The convergence to around the international financial reporting standards ( IFRS) is gradually means , national GAAP is becoming rarer and in many countries it is being supplemented or replaced by the use of IFRS. The extent and method of this different from country to country . in some part of the world , for example parts of Africa and the Caribbean , IFRS has become or replaced national GAAP , even some times this involves local adaption so the result is not pure IFRS. In others like European as mentioned earlier in this report , national GAAP remains but EU authorized IFRS has been mandated for the listed companies and permitted elsewhere. It this essay , I would like to discuss some of the examples of countries which is adopted ifrs recently .Eg: Turkey, Brazil, Japan, United States and United kingdom


From 1st of January 2005 , banks and firms in turkey registered on the Istanbul stock exchange have prepared their financial statements in accordance with principles set out in IFRS. The latest responsible body for accounting standards in turkey is the Turkish accounting standard board (TASB). It was formed in 1999 and it is a sole authority of accounting regulation in turkey resulted in discontinue of TMUDESK (previous body for accounting standard setting in turkey). As TASB controls the determination and application of Turkish accounting standards (TAS) has accepted a harmonization (uniformity) with IFRS in order to achieve international recognition. Therefore, TAS/TFRS were introduced by translating the original IFRS documents into Turkish and paying a copyright fee to the IASB. TASB has also prepared a draft of a simplified set of accounting standards for small and medium sized enterprises (SMEs), which is similar that of the IASB. The purpose of the draft to TFRS for SME's is to disclose the information regarding there financial position, performance, and cash flows of and entity , which will be useful for the shareholders to make sensible economic decisions. (www.iasb.org)

Brazil :

The Brazilian federal council of accounting and the Brazilian accounting pronouncements committee sighed a Memorandum of understanding (MoU) with the IASB on 28th of January 2010 (www.iasb.org) . This agreement has been made to target for full convergence with IFRS before end of 2010 and establish a framework for future co-operation between the organizations. This MoU also aims to encourage Brazilian participation in international standards-setting by greater involvement in the early development of IASB projects, thereby build a good foundation for speedier acceptance and adoption of IFRSs in brazil, and helping their proper and easy implementation. (www.iasplus.com)


The IASB and the Accounting Standards board of Japan (ASBJ) have been working together to achive convergance of IFRSs and Japanese generally accepted accounting principles (GAAP) since 2005 (www.asb.or.jp) This work was systemized in 2007 with the tokyo agreement . On this agreement IASB and ASBJ set 2008 as a target date for remove major difference between IFRSs and Japanese GAAP with the objective of eliminating the remaining differences by 30 June 2011. Having achieved the 2008 target date, the boards are continuing their regular meetings and are now working to address the outstanding issues 2011. (www.iasb.org)

United States:

In August 2008, the United States Security and Exchange Commission (SEC) unanimously agreed to provide U.S. companies and investors with a "roadmap" for moving toward potential mandatory filing of financial statements according to the International Financial Reporting Standards (IFRS) versus U.S. Generally Accepted Accounting Principles (GAAP). The SEC document, issued in November 2008, is titled "Roadmap for the Potential Use of Financial Statements Prepared in Accordance with the International Financial Reporting Standards by U.S. Issuers." This roadmap indicates that the SEC will allow some U.S. companies to use IFRS for financial reports as soon as 2010, and will require all U.S. companies to use IFRS by 2014 (Scannell & Slater, 2008). However, the new SEC chair, Mary Schapiro, has indicated that she does not feel bound by the existing roadmap, and has announced that the SEC plans to make a final decision in 2011 about U.S. companies moving to IFRS (Millman, 2009).

United Kingdom:

As mentioned earlier in this essay , when EU listed companies were required to adopt IFRS in their consolidated accounts, changes to UK company law also provided all UK companies the choice to adopt IFRS in their stand-alone (unconsolidated ) statutory accounts. At that time there was a general expectation that UK GAAP would converge with IFRS, however the timescale was not clearly mentioned by relevant authorities. Nobes.C and Parker .R (2008) The UK accounting standards board has recently indicated that it is considering replacing UK GAAP with full IFRS and the new form of IFRS being developed for private companies. In early stage in May 2006, the UK's Accounting standard board (ASB) issued a press release outlining its current plans for convergence of UK GAAP with IFRS. The proposals outlined a tiered approach, segmenting companies into different categories, each with different levels of IFRS/UK GAAP application. PwC/ ifrs (2010)

ASB's proposals:

All UK public quoted and other publicly accountable companies would be required to apply full IFRS, irrespective of turnover and whether they present group accounts or not. This would mean that approximately another 1,000 to 1,500 companies would be required to report under IFRS.

The use of the Financial Reporting Standard for Smaller Entities (FRSSE), which enables small entities to take advantage of simplified requirements, would be extended beyond small companies to include medium-sized entities. This would mean that approximately another 30,000 companies would be able to use the FRSSE.

UK subsidiaries of group companies that apply full IFRS would also be required to apply full IFRS in respect of measurement and recognition, but with reduced disclosure requirements (yet to be defined). This would affect approximately 14,000 companies.

There has not yet been a decision on the 7,000 companies that are not included above (this being the 'gap'). The alternatives seem to be extend the application of the FRSSE further; (ii) apply IFRS to more companies; (iii) maintain UK GAAP for them; or (iv) some combination of these three alternatives.

As can be seen from the above, the scope of the FRSSE could be widened significantly. Given the IASB is currently undertaking a project on small and medium-sized entities (SMEs), the ASB recognises that the outcome of this project has significant relevance to its current plans and, therefore, it will not make any final decisions until the outcome of the IASB's project is known. PwC/ ifrs page 8 (2010)


Up to date list identifying the topics released and withdrawn of the IAS:

IAS 1 Presentation of Financial Statements

IAS 2 Inventories

IAS 3 Consolidated Financial Statements

IAS 4 Depreciation Accounting - Withdrawn in 1999, replaced by IAS 16, 22, and 38, all of which were issued or revised in 1998.

IAS 5 Information to Be Disclosed in Financial Statements - Originally issued October 1976, effective 1 January 1997. Superseded by IAS 1 in 1997

IAS 6 Accounting Responses to Changing Prices - Superseded by IAS 15, which was withdrawn December 2003

IAS 7 Statement of Cash Flows

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 9 Accounting for Research and Development Activities - Superseded by IAS 38 effective 1.7.99

IAS 10 Events After the Reporting Period

IAS 11 Construction Contracts

IAS 12 Income Taxes

IAS 13 Presentation of Current Assets and Current Liabilities - Superseded by IAS 1.

IAS 14 Segment Reporting

IAS 15 Information Reflecting the Effects of Changing Prices - Withdrawn December 2003

IAS 16 Property, Plant and Equipment

IAS 17 Leases

IAS 18 Revenue

IAS 19 Employee Benefits

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 22 Business Combinations - Superseded by IFRS 3 effective 31 March 2004

IAS 23 Borrowing Costs

IAS 24 Related Party Disclosures

IAS 25 Accounting for Investments - Superseded by IAS 39 and IAS 40 effective 2001

IAS 26 Accounting and Reporting by Retirement Benefit Plans

IAS 27 Consolidated and Separate Financial Statements

IAS 28 Investments in Associates

IAS 29 Financial Reporting in Hyperinflationary Economies

IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions - Superseded by IFRS 7 effective 2007

IAS 31 Interests In Joint Ventures

IAS 32 Financial Instruments: Presentation - Disclosure provisions superseded by IFRS 7 effective 2007

IAS 33 Earnings Per Share

IAS 34 Interim Financial Reporting

IAS 35 Discontinuing Operations - Superseded by IFRS 5 effective 2005

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments: Recognition and Measurement

IAS 40 Investment Property

IAS 41 Agriculture