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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 GAAP (Generally Accepted Accounting Procedures), 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 provide a general platform for the reporting of financial standing of the trade and commerce industrial sector under their jurisdiction. They are a set of common accounting principles globally referred to as Generally Accepted Accounting Principles or simply GAAP. Since each country develops these principles according to their requirements and also based on rules that best suits them, they are apparently quite unique in nature. They stand only for the purpose of providing a general and established standard for the appraisal and assessment of the financial status of companies. On a general principle countries considered U.S GAAP as a general and key system of rules to evaluate businesses and business dealings. U.S GAAP is invasive 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 when you conduct business on the other half of the world. Uncle Sam's GAAP (US GAAP) dictates on several aspects like the way in which business transactions are to be constituted and directs the manner in which legal framework of the trade should be outlined. Since this dominance of US GAAP has pushed the countries that has trade relations with U.S into a severely disadvantaged position during international trade. This called 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 IFRS (International Financial Reporting Standard). This analysis details the significance of IFRS (International Financial Reporting Standard) and its adoption globally. IFRS (International Financial Reporting Standard) gives 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 (International Financial Reporting Standard) principles and their comparative significance. We will also look into the aspect of why some countries are hesitant towards the adoption of IFRS (International Financial Reporting Standard) and India businesses adopting IFRS.
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 (International Financial Reporting Standard) 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.
Over the years the business community has admitted that the accounting is "the language of business" and financial information is a form of language. And undoubtedly, to ensure its usefulness, financial information should not only be intelligible, but also be comparable so that investment and credit decisions can more readily be taken. Over the past few decades, the accounting profession has been facing the pressure of globalization and continuously seeking the way to present financial situations using unique accounting procedures which can be understood by the entire business community. Due to the fact that this process followed the global trends, and the globalization is first of all a political process; the starting point in creation of a unique accounting system needed to pass a difficult process where the main accounting systems will litigate to impose their accounting policies and practices (Belkaoui, 1994). Despite the difficult process 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 comparison, as the basic form of economical judgment can be realized only if the accounting system is unique for all the companies involved in the analysis. Also harmonization is absolutely necessary because national standards of financial statements are virtually useless; financial markets in more regulated countries are threatened with a loss of market share; and multinational corporations must prepare multiple reports for different nations they do business in. (Nobes and Parker 1991). In order to accomplish this target the accounting profession developed the solutions like: the American solution GAAP or the European solution (British solution to be read) IAS/IFRS. On the backdrop of getting a single set of international accounting standards (since October 2002, the IASB and FASB have been working systematically toward convergence of IFRS and U.S. GAAP), IFRS is rapidly gaining acceptance as over 100 countries have recently moved to IFRS reporting or decided to require the use of these standards in the near future and even the U.S. Securities and Exchange Commission (SEC) is considering allowing U.S. firms to prepare their financial statements in accordance with IFRS.
IMPORTANCE OF A COMMON SET OF REPORTING STANDARDS
A single set of accounting standards, like IFRS, offers a number of advantages. First of all, IFRS will mean a reduced cost of capital because the same standards will apply regardless of location. The time and expense of applying different accounting standards will be greatly reduced with the use of one consistent reporting standard. In essence, it is like using the same language. Translation costs are eliminated.
Secondly, the information for decision making is enhanced by a single set of accounting standards. A similar basis for comparison is established. ''Apples to apples'' will be the basis of comparison and decision-making, as opposed to an ''apples to oranges'' basis for comparison. The latter is inexact, and the degree of the disparity is often uncertain and subject to varying interpretations.
DIFFERENCE BETWEEN IFRS AND US GAAP
In an overall sense, IFRS and US GAAP are far more similar than they are different. The influence of US GAAP and U.S. practices on IFRS is substantial. In addition, many of the trustees of the Foundation and many of the members of the board of IASB are U.S. practitioners, U.S. trained experts, or practitioners with years of experience working with US GAAP on behalf of their clients. As opposed to historical cost, both IFRS and US GAAP are increasingly based on a fair value asset and liability model. IFRS is generally viewed as being more principles based in orientation than US GAAP, which is viewed as being more rule-based. By analogy and practice, IFRS has more of a common law approach, whereas US GAAP has more of a civil law approach.
WHY TO ADOPT IFRS AS A GLOBAL STANDARD
The Foundation's objective is the development of a single set of ''high-quality'' international accounting standards that are transparent, understandable, and enforceable, and that are rigorously applied. The Foundation also seeks to use the standards it develops through the IASB as the basis for the convergence of national accounting standards and IFRS into a single set of high-quality international accounting standards. The Foundation mandated that the international accounting standards developed by the IASB be of high quality. Otherwise, the establishment of IFRS will be of little benefit if the ultimate result of convergence is a set of standards based on the lowest common denominator. They would be subject to a wide range of interpretations, and they could not be expected to be rigorously and consistently applied. In such circumstances, IFRS would be useless because no reasonable reliance could be placed on them.
From the perspective of the United States, both the SEC and FASB are, in concept, very supportive of convergence. Formal efforts are currently underway to narrow differences. But the movement towards convergence will continue to be incremental. A number of major differences have yet to be resolved. Many of these differences cannot be resolved until the SEC and FASB are adequately assured that the important protections afforded by US GAAP will not be lost. Whatever the context, U.S GAAP can no longer be assumed to be governing the preparation of financial statements. Special care needs to be exercised to determine what standards apply and what the implications of those standards may be. Once that determination is made, precision is required in the drafting of legal instruments to ensure that any linkage to financial instruments is appropriately qualified by applicable accounting standards and by the context in which those standards are to be applied.
GLOBAL CONVERGENCE ON IFRS
IFRS AND INDIA INC'S FORTHCOMING TRYST WITH IT