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As businesses begin to move production to other countries, as well as expend of multinational companies, pressuring for a single set of high quality international accounting standards have increased. Barniv & Fetyko (1997) indicates that there is an increase in demand for harmonization by global business entities, practitioners, and financial statement users. The definition of accounting harmonization is 'the process by which differences in financial statements more comparable and decision-useful across nations' (Saudagaran 2009:34). However, this process has awaked heated discussion about this probability. Some believed that the international accounting standards would bring companies greater transparency, comparability and reliability. While others hold the other opinion, they mentioned that there is a potential increase in compliance costs. This essay is going to describe some key events on the development of international standards, introduce the main standards, and address the argument for and against the single set of standards.
2. The key events on the development of international standards
'Reducing the differences between different nationals was the initial efforts of international standards bodies. After that the idea of harmonization was introduced. Then, international accounting standards setting body started set the purpose of international financial reporting standards convergence.
2.1 International Accounting Standards Committee (IASC)
In 1973, the International Accounting Standards Committee was established, which was the first international standards body. It was its responsibility to issue the International Accounting Standards between 1973 and 2000 (Chris, 29/09/2010). According to FASB, 'its mission was to formulate and publish in the publish interest, to meet basic standards and to promote their worldwide acceptance'. The IASC issued 25 standards on a variety of issues. However, theses standards often led to alternatives choices for the same transactions. In 1999, the IASC has undertaken a project to complete a set of basic standards for the International Organization of Securities Commissions (IOSCO), and thirty of these standards are approved by the IOSCO. From then on, the IASC began to 'conduct a comparability and improvements project to reduce the number of options and affording the highest standards of prescriptive rather than descriptive' (FASB, 2010).
2.2 The U.S. and IASC
In 1996, the U.S. Congress expresses its sustenance of the international accounting standards. In addition, from the press release issued by the SEC, they suggested that the IASs 'should be sufficiently comprehensive, high quality and rigorously interpreted and applied' (FASB, 2010). With these suggestion, the IASC moving toward this objective, as will be seen at the IASB's current objective, and its performance. Another issue that triggered the percussing for a single set of frameworks of international financial standards is the Asian financial crisis happened in 1998.
2.3 International Accounting Standards Board
In 2001, the IASC was restructured by the IASB, and from then on the IASB became an independent international standards setting body. International Financial Reporting Standards (IFRS) are accounting standards established by the International Accounting Standards Board. The objective of financial statements is 'provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions' (Chris, 29/09/2010).
After years of efforts done by IASB, International Accounting Standards becomes more widely accepted by the world. About 9000 listed companies start to adopt the International Financial Reporting Standards, and encourage more than 500 million non-listed companies to use the IFRS. Australia, New Zealand, Singapore, Hong Kong and other countries and regions switch to international accounting standards. Some emerging market countries or countries with economies in transition, taking into account national conditions and international accounting standards, develop national accounting standards. Some countries and regions such as France, Germany, Australia and Hong Kong stock exchanges and regulatory bodies has allowed foreign and local companies submitted in accordance with International Accounting Standards financial statements. The United Nations, G8 Group, the International Monetary Fund increased the support for International Accounting Standards Council (ISAB). The restructuring of IASC in 2001 provided the United States opportunities, although their purpose is to make the international accounting standards more favorable toward the direction of the United States. U.S. Financial Accounting Standards Board (FASB) has eased the hard-line attitude; the U.S. Securities and Exchange Commission (SEC) published the consultation, allowing US-listed foreign companies to adopt U.S. accounting standards or adopt international accounting standards for the preparation of financial reports. At the same time, more and more multinational corporations adopt international accounting standards financial statements.
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3. The principles-based accounting and rules-based accounting
IASC and FASB use different type of reporting standards. FASB use the rule-based standards, while, IASC use the principle based standards. In this section, the comparison between these two standards will be presented.
3.1 FASB---the rule-based standards
FASB Financial Accounting Standards developed (SFAS) is a model of rule-oriented accounting standards. Normally, the rule-based accounting takes into account all the possible application of the principle, and principle of these cases, into operational use of specific rules. The possible application or the circumstance, both includes the conditions that suit for this case and the non-applicable situations.
This type of standard setting mode seeks to provide every possible condition a unique answer. It aims to offering the technical standards to ensure the comparability in similar transactions. Since every possible situation has corresponding rules in litigation in the accounting profession will be able to resort to defend the rule. It is very important in the litigation explosion of the social environment. Accounting professionals, the detailed rules also limit the regulatory authority prior to the accounting practices involved in the process, but will limit its authority after the evaluation of professional judgments, and also to provide regulatory oversight, the basis for sanctions.
Although the criteria for rule-making models based on the above considerations as a starting point, in the actual operation of the process still bring some negative impact. First of all, too detailed and complex accounting standards have brought the formulation, implementation of cost. Trying to take into account all the criteria for possible development of modalities, will inevitably bring an encyclopedic accounting standards, the criteria for a number of complex business transactions easily hundreds of pages, and the resulting standard setting process is too cumbersome and slow. FASB which there are of course required procedures to be followed or the complex nature of the business it is, but trying to give each case the only of the rules guiding the formulation of guidelines will undoubtedly increase the cost. And then also the detailed rules to the facts that have occurred, or the occurrence of facts is expected to consider the object, when there is experience, unexpected situations, the guidelines focus on specific rules are often difficult to give appropriate answers in a timely manner, it is difficult to adapt to the future economic development.
Second, the rule-oriented guidelines may not be expected to play a regulatory role. FASB, FASB Emerging Issues Task Force (EIFT), the United States of Certified Public Accountants (AICPA) Accounting Standards Executive Committee (ACSEC), FASB special task team to four different institutions to develop the implementation of hundreds of rules. So many rules often makes users want to comply with the guidelines being difficult to determine what should be a simple start and among these rules may be conflicting and causing the user know what to do. For users who want to circumvent the rules, detailed rules can undoubtedly make it through "legal means" to achieve the desired objective: the criteria given for the construction trade rules so that formal compliance with the rules, in essence, the transaction can deviate from the principle criteria for way to allow for processing. The more detailed rules, the more as "trading plan", "Organization Innovation" and provided an opportunity for financial manipulation, has been criticized in the Enron "special purpose entities" (SPE) is a typical example. In accordance with the current U.S. accounting practices, as long as non-related parties in a SPE equity capital investments in more than 3%, even if the SPE's risk primarily borne by the listed companies, listed companies or not included in the consolidated statements of the scope of the SPE. The accounting practice is reasonable or not putting aside its own, in fact, Enron is the full use of the 3% of the specific quantitative criteria, the establishment of thousands of SPE as cover liabilities to cover up the loss of tools.
Again, rules-oriented detailed provisions of the guidelines easy to contribute to accounting professionals in the financial reporting process "by the book copy," and ignore the attitude of professional judgments. Because of the technical reference for existing, report preparation personnel in the process of financial reporting standards may be applied to machinery, rather than by a professional judge to determine whether the accounting treatment to reflect the true economic substance. After the incident of Enron, on the SPE is always the problem of Enron Arthur Andersen did not violate the formal rules of 3% to defend themselves, and set to hide Enron debt through the SPE to cover up the fact that the expense of the loss.
3.2 The principles-based standard setting mode
The International Accounting Standards Board (IASB) uses a principles-based approach to standards setting. In Rebeccca and Mark (2009)'s article pointed out that 'principles-based accounting provides a conceptual basis for accountants to follow instead of a list of detailed rules'. To principles-based standard setting mode, only for an object or transaction, accounting matters, financial report should follow the principles, which may include a number of principles-based rules, but does not try to answer all questions or for each Detailed rules are provided where possible.
The basic principles must be based on the professional judgments, so that preparers of accounting information provided by outside personnel will better reflect the economic substance of transactions, auditors' reports fairness and legality of the evaluation will be more comprehensive, more in line with the principles of the essence. When facing unexpected events, the principles-based standards will be able to make a more rapid response, thus better able to adapt to the economic development needs.æœ-è¯»
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Argument for and against the development of a single set of international financial reporting standards
There are several benefits of the widely use of international accounting standards. First, with the development of a single set of international financial reporting standards, there is an extraordinary reduction in the cost of international communication and transaction, and increase the level of comparability. Kovener (1992:1) mentioned that since comparable information gives organizations the opportunity to discover operational areas in needs of improvement, comparable financial information is useful as a management tool for organizations of all types. Choi, Frost and Meek (1998: 249) states that with the high level of comparability, it can save money and time to consolidate various financial information when more than a series of reports is required to comply with different national lows or practice.Second, a single set of frameworks can increase the transparency. According to Ray (2006:11)'IFRS promise more accurate, comprehensive and timely financial statement information, in most of the countries adopting them. To some extend that financial statement information is not known from other sources, this should lead to more-informed valuation in the equity markets, and hence lower risk to investors'. Third, it would be beneficial for the countries which still lacks the codified standards of accounting and auditing firms and international accounting firms with clients that at least one foreign subsidiary to be advantageous (Nobes and Parker 2002).
According to John and Andrew (1992:100), the arguments against can be summarized as follows: first, there are cultural, economic and political differences between countries, which means that the objectives of the accounting system can be differ from country to country. Especially, there are some countries have the potential of self-protection and the conception of self-development. Second, the process of international harmonization is very complicated and expensive. In addition, the development of accounting professions is not balanced. Third, the condition and need of developing countries is different from the developed ones. Forth, according to Roberta (2010:20) in a system of global harmonization, the regulation error can cause a greater systemic risk as regulatory incentives leading financial institutions worldwide to adopt similar strategies. When these strategies fail, they may do so disastrous, as evidenced by the recent financial crisis happened between 2007 and 2008. According to a finding by Afred (2009), 'the growth strategies adopted by the IASB are risky, the conceptual framework does not take sufficient account of the various objectives of accounting, administration, intelligence and aggregation, desirable characteristics of accounting information and standards to be developed for listed companies should not suited to private bodies'.
To conclude, the process of Harmonization of accounting standards is still under process. To achieve the objective of setting a single framework of financial reporting standards, there is still a long way to go. As presents above, there are a number of obstacles standing in front of this progress, including the potential increasing risk, the unbalanced accounting profession, and the differences between countries. However, seeing the progress from eliminating the differences between countries to international harmonization, it would be an irritable progress. After all, there are so many advantages had shown to us, such as the increasing the level of transparency and comparability. We should hold an optimistic view toward this issue. The sing framework of accounting standard is really important in modern commerce and particularly for international entities reporting in more than one national jurisdiction.