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Accounting is defined as the language of finance. The basis of accounting is financial accountability attained through financial reporting and can be explained as the communication of "financial information useful for making investment, credit, and other business decisions" (Wild, Shaw, & Chiappetta, 2009). Financial reporting includes income statements, cash flow summary, tax and equity reports and balance sheets. Companies across the globe use reporting systems for the general purpose of financial communiqué and annual statements. They by and large stick to the reporting system accepted and practiced by the countries they operate in. This has resulted in a non standardization of accounting statements in international finance, trade and banking scenario, and as a result made the true and fair analysis of various types of accounting statements a laborious task. Countries like U.S.A, U.K, France, China and India were following individual versions of Generally Accepted Accounting Procedures (GAAP), a common set of accounting standards and procedures. But more and more countries are agreeing on a convergence towards IFRS or the international Finance Reporting Standard. Although U.S GAAP has been widely prevalent as a global system until now, it has always been under fire for being a theoretically accurate yet not a morally purist system of finance reporting. Why other financial reporting systems have lost their sheen and why most finance pundits are batting for IFRS? This essay will analyze the importance of a common financial reporting system, why it has become significant to adopt IFRS and also India Inc's forthcoming tryst with IFRS. The paper will be done as an analytical study on the current scenario.
Key Words: IFRS Convergence, GAAP, Global adaptation, Transparency, Principle-based, Rule-based
A good number of countries have built up a set of accounting principles that will provide a general platform, for the reporting of financial standing for the trade and commerce sector under their jurisdiction. These are a set of common accounting principles, globally referred to as the Generally Accepted Accounting Principles or simply as GAAP. Since each nation develops these principles according to requirements that best suits them as well as based on rules that favors them in commercial disputes, each GAAP is apparently quite unique in nature. They serve the purpose of providing a general and established standard for the appraisal and assessment of the financial status of the companies doing international trade. On a general rule, countries consider U.S GAAP as a universal and key system of evaluating businesses and business dealings. But U.S GAAP is quite invasive in nature, as it has a say on every aspects of decision-making either when you are conducting business within the boundaries of the U.S.A or even while you do business on the other half of the world. Uncle Sam's GAAP (US GAAP) dictates several key aspects, for example the method in which business transactions are to be constituted or the manner in which legal framework of the trade should be outlined. Since this dominance of US GAAP has pushed the countries having trade relations with U.S into severe disadvantage during international trade. This drawback called in for a new set of financial reporting system which supports all the international business houses equally without country preference. This newly suggested system is referred to as International Financial Reporting Standard (IFRS). This analysis details the significance of IFRS and its adoption globally. IFRS accommodates many standards for the emergent economies that can increase their fiscal revenues by presenting an actual reflection of their economy. This paper intends to analyze the IFRS principles and their comparative significance. We will also look into the aspect of why some countries are hesitant towards the adoption of IFRS and Indian business's forthcoming multi-phased rendezvous with it.
Although U.S GAAP has been widely prevalent as a global system until recently, it has always has come under fire for being a theoretically accurate yet not a morally purist method of finance reporting. IFRS has several obvious advantages of the like the comparative analysis of factual and accurate reports, apposite distribution of assets, shareholder confidence etc. IFRS also will help in diminishing US hegemony in international business transaction they seems to enjoy due to US GAAP.
Last few years have witnessed a great emphasis being put on a unified accounting language. The main objective of which is to help those who depend on that accounting data to make well informed choice rather than going by the veiled and misleading data provided by the respective businesses in an increasingly globalizing economic scenario. Many economists openly question the effectiveness and practicality of such a reporting framework. Reviewers like Choi & Meek, 2005 & Armstrong et al. (2010) are in favor of such a system and vouch that a common set of synchronized accounting procedure will limit information lop-sidedness. Naomi S. Soderstrom & Kevin Jialin Sun,2007 argue that "cross-country differences in accounting quality are likely to remain following IFRS adoption because accounting quality is a function of the firm's overall institutional setting, including the legal and political system of the country in which the firm resides."Horton et al. (2008) positively assure that IFRS boosts share and trade market efficiency and Platikanova (2009) points out the new system will bring in better simplicity and stability in financial reporting across global borders. David Cairns (2006) in his paper titled 'The Use of Fair Value in IFRS' studies the role of fair value in determining assets and liabilities. 'International Financial Reporting Standards: what are the benefits?' by Philip Brown (2011) goes clear on the point that that adopting IFRS has had several aftereffects on both the valuation of capital funds and equity markets on the whole. On the whole we can say that, though there are and will be winners and losers, as a result of these transitions from predominant accounting systems mostly due to their wide spread effects, the consequences are considered as balanced and beneficial by most companies and countries.
USE OF INTERNATIONAL REPORTING SYSTEMS
Accounting is defined as "the language of finance" (Lasher, 2008). The basis of accounting is financial accountability attained through financial reporting and can be explained as the communication of "financial information useful for making investment, credit, and other business decisions" (Wild, Shaw, & Chiappetta, 2009). Financial reporting includes income statements, cash flow summary, tax and equity reports and balance sheets. Companies across the globe use reporting systems for the general purpose of financial communiqué and annual statements. They by and large stick to the reporting system accepted and practiced by the countries they operate in. This has resulted in a non standardization of accounting statements in international finance, trade and banking scenario, and as a result made the true and fair analysis of various types of accounting statements a laborious task. Countries like U.S.A, U.K, France, China and India were following individual versions of GAAP (Generally Accepted Accounting Procedures), a common set of accounting standards and procedures.
Since a very long time, globalization has been putting pressure on finance and accounting lines of work, seeking to communicate through a single accounting system which can be easily deciphered by the global business community alike. This was easier said than done, since globalization is by and large a political process. Any sudden change would invite strong resentment and rejection from the current main accounting systems and political pressure to include policies that suits the major players in global business scenario (Belkaoui, 1994). Anderson (1993) said "a set of international accounting standards will allow new horizons of evolution due to the fact that comparative analysis of the rates of returns established based on the balance sheets and profit and loss account between the companies being in competition become relevant". The global accounting community discussed the solution for years and the American solution came in the form of US GAAP and European suggestion as IFRS. In order to get a single international accounting system these two systems were converged with more weightage given to IFRS principles as they solved many fair value policy issues based on principles. Today U.S Securities exchange commission is considering the idea of allowing U.S businesses to report financial statements in line with IFRS method.
IMPORTANCE OF A COMMON SET OF REPORTING STANDARDS
Accounting is "the language of business" and financial information is a "form of language". To make sure its efficacy at all times across the globe, any financial communiqué should not only be clear and decipherable, but also be comparable. This is of utmost important to businesses, investors and countries because investment and credit decisions can be taken more enthusiastically. While analyzing and comparing IFRS with other current accounting standards, it stands to win hands down on various fronts. The most important and easily understood advantage is the reduction in investment costs as a result of the same standard being implemented across the globe. By using an unswerving and dependable reporting process, a great amount of time and expense can be saved unlike while using a diverse and non comparable accounting process. It is just like doing away with the cost of translation by using the same language. Another important aspect is that information for judgment is greatly improved by a common set of reporting standards. It facilitates a common base for comparison. In other words you can compare 'Lemons to Lemons' and arrive at a business decision as against 'Lemons to Limes' as the basis of comparison. However small these differences may be, the second comparison will bring in vagueness in financial decision-making and lead to diverse and possibly erroneous interpretations. These problems can be overridden only by introducing an internationally accepted common finance reporting system which has been attained to a great extent through IFRS.
WHY ADOPT IFRS AND NOT U.S GAAP AS A GLOBAL STANDARD
IFRS is developed and approved by IASB (International Accounting Standard Board), which in turn after its commencement adopted the body of International Accounting Standards (IAS). Theoretically IFRS includes IAS until they are replaced in due course of time. The Foundation has its prime intention as the development of a unique and universal set of accounting standards that are high-class, transparent, comprehensible, and globally implemental. These international standards should also be carefully and consistently applied in the financial transactions. Based on these criteria the current IFRS principles are formulated and suggested. Many countries are hesitant to shift to IFRS mainly because in most of its features IFRS resembles US GAAP although in various others they are distinctly diverse. The influence US GAAP has on IFRS is understandable as many on board of IASB (the foundation in charge of developing and approving the IFRSs), are infact US finance experts with many years of working experience with U.S GAAP or are trained in the U.S. Both IFRS and U.S GAAP work on a fair value asset and liability theory. But the main difference begins in the core principle, in which they work; while U.S GAAP is totally rule based, IFRS is principle based. Analysis also shows that IFRS has a common law based reporting while U.S GAAP follows civil law method.
GLOBAL CONVERGENCE AND INDIA INC'S FORTHCOMING TRYST WITH IFRS
Although IFRS has been getting appreciation from most of the sources, some countries including India and the United States have yet not gone for an adoption of IFRS. This is mainly due to the opposition from various quarters owing to various reasons. In India the corporate houses are following the Indian GAAP and are apprehensive about various points while going for the adoption of the new system. The main factors affecting a fast paced adoption are:
Key Divergence in GAAP and IFRS Systems
Implementation of IFRS all of a sudden will ask for a drastic change in the whole financial statement process. The two systems are different extensively in policies and process. This is a challenging issue as to bring in awareness about the new system in a fast paced process is impractical. Hence the India is going in for a phased out process of IFRS adoption from April 2012.
Guidance and Training on the IFRS
At present India Inc has a serious drawback; first is that IFRS training is not widespread in India and also it's not a part of the Business curriculum in colleges. In order to facilitate a smooth transition the accounting professionals are to be trained in IFRS and its application. Like former chief financial officer and Vice Chairman of the Board of AT&T Corporation and a former Deloitte &Touché partner, Charles Noski aptly commented "Educating 100,000 employees on how they must do their business, is not a trivial activity". ICAI and international business houses are trying to overcome this challenge by conducting awareness workshops, seminars and training classes.
Statutory and Regulatory Concerns
At present various legal and other regulators are controlling the reporting requirements in India and their requirements make other laws ineffective. IFRS does not acknowledge such interference in its course. This is a challenging aspect which are currently looked into and addressed by the respective regulators.
IFRS implementation will affect goods that are traded in the financial statements and therefore the assessment of tax levied on each item will also has to undergo adjustments. Thus the taxation regulations should tackle the handling of tax accountability while shifting from Indian GAAP to IFRS.
Fair Value Measurement
IFRS uses fair value as a base measurement while valuing many items in the financial statements. This will bring a lot of unpredictability and subjectivity to the financial reports while it involves a lot of sweat and sound judgment to determine and ascertain the fair value which calls for the use of valuation experts.
Contract Renewals or Re negotiations
Many corporate agreements will have to be either quashed altogether or a need to sit down and re negotiate on clauses will be a certainty if a country has to go for IFRS as its clauses are very different. But if the country's trade volume is as big as that of US or India this issue can become a annoyance.
Indian policy makers, ICAI and regulatory bodies are taking various positive steps to assure a smooth convergence process. Only if the country is positive towards the idea of adopting IFRS it will be a systematic and smooth transition. So it is very important to make investors and the businesses ready for this cumbersome yet fruitful standard renovation procedure under IFRS. Each and every one involved in this should be ready for a constant updation and not only for one time adoption. The phase by phase adoption of IFRS is scheduled to begin from April 2013 in India. In US, both Securities Exchange Commission (SEC) and FASB are enthusiastic towards the convergence in theory. But the process will be slower than expected as there are a lot of issues to be sorted out. US bodies are thoroughly studying the points under IFRS to make sure the protections available in the US GAAP are still available under this too. European Countries by and large have accommodated IFRS and certain countries are on the verge of converging on it. So it is beyond any doubt that a global convergence on IFRS is an inevitable reality in the recent future itself.
As the world gears up for embracing IFRS there is an urgent need to incorporate it in the business curriculum as creating awareness is the best way to win the confidence of investors, creditors and market players. US GAAP or its variant GAAPs cannot be considered as a yard stick in the preparation of financial reports. Convergence of standards will definitely cut the first turf for convergence is other areas thus help in proficient functioning of the economy. Transparent and comparable financial statements will allow investor confidence and helps in positive decision making also. Countries and business will benefit too as this will ensure free flow of funds and direct investments in other economies. Liberalized and open economies are becoming the need of the hour as the concept of one world one economy is gaining strength to overcome economic slow down. IFRS is undoubtedly a tough yet right step in this direction.