Over the past 10 years, the widespread use of international accounting standards (IAS) is one of the most significant developments in business circles. These standards, formally known as the International Financial Reporting Standards (IFRS), refer to the entire body of International Accounting Standards Board (IASB) pronouncements, including the standards and interpretations approved by the IASB, the International Financial Reporting Interpretations Committee (IFRIC), the Standing Interpretations Committee (SIC) and the International Accounting Standards Committee (IASC), the predecessor organization to the IASB.
Since 2000, efforts have been underway to develop a high-quality set of IAS. Today, there are more than 100 countries across the world where IFRS is either required or permitted. This paper will discuss the IAS in four sections: 1) the history of IASB and the IAS setting, 2) the acceptance level of the IAS, 3) the pros and cons of the IAS, 4) the problems of the IAS and the related recommendations to those problems.
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Introduction to the Background
"The history of the IAS really began in 1966, with the proposal to establish an International Study Group comprising the Institute of Chartered Accountants of England & Wales (ICAEW), the American Institute of Certified Public Accountants (AICPA) and the Canadian Institute of Chartered Accountants (CICA)." (Institute of Chartered Accountants of England & Wales [ICAEW], 2010a)
In the past decade, the globalization and the integration of capital markets around the world have increased the demand among investors for a universal set of reporting standards. In 1973, the IASC was formed, soon after the formation of the Financial Accounting Standards Board (FASB) of the United States. The IASC aims at providing a "single set of high quality, understandable and enforceable global accounting standards."(International Accounting Standards Board, [IASB], 2010a) Over the course of approximately 28 years, the IASC has issued 41 standards, called the International Accounting Standards. In 2001, the IASC was replaced by the IASB, and all new standards published since then have been issued as IFRS.
The IASB is better-funded, better-staffed, and more independent than its predecessor, the IASC. The IASB is organized under an independent foundation named the IFRS Foundation. That Foundation is a not-for-profit corporation created under the laws of the state of Delaware, in the United States, on March 8, 2001. The structures of the IASB and the FASB of the United States have a lot in common. Both structures are designed to support those features that are regarded as desirable in establishing the legitimacy of a standard-setting organization. (IASB, 2010b) The trustee selects and appoints the 15 members from auditors, preparers, users, and academics. These members represent the wider community and are independent. The IASB is responsible to approve interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC). Thus far, the IASB has issued eight new standards, and largely focused on improving the quality of existing standards, providing standards in areas where they did not exist already, and converging accounting standards around the world
Widespread Acceptance of IAS
Since the formation of the IASB in 2001, the IAS has been attracting increasing attention around the globe, obtaining growing acceptance among nations. "In 2005, as a result of a European Union (EU) directive, a large number of publicly-traded companies in those member countries adopted EU-endorsed IFRS." (Cabrera, 2008) Countries such as Iceland, Liechtenstein, and Norway, who are not members of the EU, but are members of the European economic area, required their publicly-held companies, including banks and insurance companies, to use IFRS.() Moreover, many small or developing countries, like Jamaica, Kenya, Guatemala, Guyana, Honduras, and Lebanon, have turned to IFRS as their Generally Accepted Accounting Principles (GAAP).
Other countries also are moving towards the IFRS. For example, Canada's Accounting Standards Board, who previously planned to converge their GAAP with the U.S. GAAP, now plans to require the IFRS for publicly accountable entities in 2011. China has announced that convergence with the IFRS is one of the fundamental goals of its standard-setting program. The IASB and the Accounting Standards Board of Japan (ASBJ) launched a joint project to reduce differences between the IFRS and Japanese accounting standards. The two boards plan on convergence by 2011. (ICAEW, 2010b)
From the perspective of the United States, in 2002 the IASB and the FASB issued the Norwalk Agreement, acknowledging their joint commitment to developing high- quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. In 2008 the FASB and the IASB updated the Norwalk Agreement with the goal of accelerating the convergence. The updated Norwalk Agreement requires that large U.S. public companies convert their financials to the IFRS in 2013.()
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Today, due to the belief that the IASB's standards are enhanced by the geographically diverse views that are considered when developing those standards, approximately 100 countries require or permit the IFRS in varying degrees, (Cabrera, 2008) either as originally issued by the IASB, or as modified and endorsed by a particular jurisdiction. The IASB and its resulting standards have gained widespread recognition and acceptance all over the world.
Two Sides of International Standard Setting
The application of the IAS has combined effects of features to the financial reporting system. On one side, the widespread international adoption of the IAS offers companies and investors a variety of advantages. On the other side, the high convergence costs and the compliance problems may be a burden to some countries and their companies.
First, the adoption of the IAS is associated with higher accounting quality by the companies. Through the provision of more accurate, comprehensive, and timely financial statement information, the IAS offers higher accounting quality than non-U.S. domestic standards. For example, Barth, Landsman, Lang and Williams (2009) found that accounting amounts of firms that apply the IAS exhibit "less earnings management, more timely loss recognition, and higher value relevance" when compared to the accounting amounts of firms that apply domestic standards. They found that accounting quality improves after firms adopt the IAS. (Barth, Landsman, Lang and Williams, 2009) Moreover, to some small investors, improving the quality of the financial reporting allows small investors to compete better with professionals, and hence reduces the risk that they are trading with better-informed professionals. (Ball, 2006)
Second, the IAS established a common standard in most countries. From the perspective of the investors, by eliminating many international differences in accounting standards, the IAS facilitates financial statement comparisons among different countries. The investors can easily compare the results of financial reporting entities from different countries, and they can understand potential opportunities better. Investors whose understanding and confidence are increased will have more options. By utilizing more valuable information, investors can confidently invest in foreign companies without reconciling foreign GAAP to other GAAPs with which they are familiar, thus reducing risk.
The IAS also can benefit the companies. On the one hand, the IAS reduce premiums that investors demand, which for companies translates to lower cost of capital. Moreover, by eliminating duplicative costs, the IAS can create direct cost savings for the companies. For example, companies would not need to keep multiple sets of books to operate in multiple jurisdictions. They can also eliminate the costs that are used to reconcile the different GAAPs. The education costs of training personnel to study different accounting standards also can be saved. The reduction in costs will boost the stock price of a company, which brings greater benefits to the company.
In addition to this, companies who migrate to the IAS can access international capital markets. Today, many entities are expanding or making significant acquisitions in the global area, for which a large amount of capital is required. One unifying set of standards can remove the barriers to cross-border acquisitions and divestitures. (Ball, 2006)
Third, the IAS increases the scope of the financial professionals. In a truly global economy, financial professionals, including CPAs, will be more mobile, and companies will able to respond more easily to the human capital needs of their subsidiaries around the world.
In summary, there are a variety of direct and indirect ways in which the IAS offer benefits to investors. However, the IAS is not flawless. The high convergence cost and the related competition problems that arise from convergence could affect the countries and companies who move towards the IAS.
The first drawback of the IAS is the convergence cost. The cost of convergence with new standards is not low, and the issuers need to be concerned. Dye and Sunder (2001) listed that the costs of standards include direct costs, such as the costs incurred by the standard--setting body and the costs of implementing the standards, and the indirect costs, such as the economic consequences of adjusting the behaviors. Although over the long term, the potential advantages that the IAS bring to companies and investors could well exceed the disadvantage of the operation pressure, the direct cost is not low. Companies need to spend huge amounts to complete the convergence. For example, in their roadmap, the SEC estimates that the average cost for companies to adopt the IAS is approximately $32 million. (American Institute of Certified Public Accountants, 2010)Â The high cost may hinder the motivation of companies to switch to the IAS.
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The second issue is the stringency of the IAS. Achieving uniformity and comparability of financial reports across firms and across time is a difficult problem in financial accounting. Because the IAS must gain approval from many countries, it may be constructed relatively broadly and less specifically. This will create more ambiguities and vagueness, which gives firms more opportunity to manage their earnings, thus harming the investors. Moreover, the competition between the IAS and domain accounting standards could present a problem. Dye and Sunder (2001) worried that (page) IAS may increase the risk of a "race to the bottom". They think the competition between the FASB and the IASB could degrade the quality of the accounting standards, which would allow the issuer, who views accounting standards as a burden, to comply with the least rigorous and demanding standards.
Although the IAS has received widespread acceptance all over the world, several obstacles remain that work against moving to this one set of high-quality, globally--accepted accounting standards. National pride is one of these obstacles. Because accounting standards have been promulgated on a national level, and people believe that the familiar is superior to the unknown, there is often the resistance to the IAS. For example, in the United States, not all issuers will voluntarily elect to use the IAS, and many people still believe that the U.S. GAAP is the gold standard. In fact, this idea exists in many countries with significant economic clout, such as China and Japan. Even Europe has not completely accepted the IAS, since it refuses to sanction certain elements related to hedge accounting.
Another concern is that the IAS cannot get 100 percent compliance among the countries who adopt the international standards. In some countries, the market and politics remain local (Ball, 2006). Local economic and political policy could affect the preparer and enforcer of the financial reporting, and thus affect the implementation of the IAS (Ball, 2006). For example, in some jurisdictions, the use of accounting standards must be approved by the local authorities, and the IAS often needs to be changed according to local law to satisfy local economic interests. This process can result in delayed or partial acceptance, which could lead to incomparability.
In addition, the language problem is an issue with the IAS. There are over 100 countries converging with the IAS, it is hard for the IAS to catering all of them. Not only is the translation problem a barrier, but the explanation and definition of some terms is also difficult. For example, terms like "turnover," "stocks," and "schemes" can have different meanings in accounting, depending on the country in which they are used. Moreover, the IAS often use many vague descriptive words, such as "most," "reasonable," "possible," and "probably," which leads to differences when different countries translate them.
Finally, whether the IAS can obtain real acceptance throughout the world depends on how they are applied. Because the IASB does not have an enforcement mechanism for its standards, it needs cooperation of the local countries to make sure that the IAS have been applied fully. Otherwise, the IAS may face the risk of the adoption in name only (Ball, 2006).
Overall, due to the rapid development of the global economy, the globalization and integration of capital markets continue to increase, which makes worldwide popularization of the IAS inevitable. Indeed, the popularization of the IAS will bring positive effects to the global economy and the countries who adopt them. The IAS improve the quality of accounting by making the company exhibit less managing of earnings, and the unified accounting standards enhance the comparability and the transparency of the accounting information, which benefits the investors. With more accurate information, investors can make wise decisions and better evaluate their investments. For the companies, the higher accounting quality could save operation costs and boost the stock price, as the one set of standards could enhance the probability that the companies will have access to the foreign capital markets. Although the high convergence cost and the competition problems bring a burden to the companies in short period, the long-term benefits will cover these costs, and eventually the benefits of the IAS will outweigh its costs.
In order to making full use of the advantages of the IAS, some issues must be resolved. First, through education, the IASB should help more countries and companies understand the IAS so that they are willing to accept them. Second, they can reinforce training on language and reduce vague terms, allowing more countries to accurately interpret the IAS. Third, they can cooperate with local government, reducing the interventions of the local jurisdictions and policy, so that the IAS is fully applied. Only after overcoming these issues, can the IAS use its strength fully, and enable the companies to earn profits.
Finally, for CPAs and accounting professionals, the increasing acceptance of the IAS around the world means that now is the time to become knowledgeable about these changes. Companies who adopt the IAS will need accountants and auditors who have been trained and thoroughly understand the IAS. Therefore, at the moment, the accountants need to study and understand the IAS, and to prepare for the not-so-distant future when the IAS earns full acceptance all over the world.