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High quality standards of financial reporting, auditing, and ethics plays a vital role in the economic development of a country. There are a lot of advantages that can be enjoyed and the benefits are admitted by most of the organizations. These advantages are highly contributive to international business and investment. International convergence can help all users to fully enjoy the benefits and this is supported by IFAC, international standard setters, many national standard setters, and international regulators. To encourage implementation, it needs to standardize the international standards, find out the way to adopt those standards, and put effort to promote it.
In this project, Peter Wong highlights the challenges to adopt the international standards and discussed about the successful cases.
A lot of major capital markets have been continuously discussing or putting power of convergence to a uniform of globally accepted accounting and auditing standards as the world is experiencing globalization. There are many advantages of a single set of globally accepted international standards. For instance, it can help to increase efficiency of cost in business, provide protection to the community, and investors are more willing to vary their investments.
The support of international convergence can be shown in a few forums and reports such as the Financial Stability Forum (FSF) and the report on Rebuilding Public Confidence in Financial Reporting - An International Perspective where the support from IFRSs and ISAs can be viewed.
Many countries have involved themselves in the converging of national standards with IFRSs and ISAs. Therefore, it is important to make sure that the convergence can happen smoothly. All the parties involved need to understand the challenges in accepting and practicing the international standards.
Understanding the meaning of the international convergence
International convergence is a procedure, with adoption as the final outcome. Lacking a commonly accepted definition of "adoption", it is hard to evaluate improvement towards international convergence. Reports on the Observance of Standards and Codes which set up by The World Bank, stated that the adoption of IFRSs could be differentiated as: full adoption of IFRSs, full adoption of IFRSs but with time lag, selective adoption of IFRSs, and national standard "based on" IFRSs. The adoption of ISAs could be equal, but with one situation, adoption of a summarized version of the ISAs.
The time lag happened mainly because of need to translate the standard while the complication of the standard, irreconcilable with national culture caused selective adoption of the international standard. Financial statements should not be endorsed as complying with the IFRSs and ISAs unless they fulfil all the requirements in the international standards as it will give the wrong impression and confuse the preparer and auditors.
The national specificities such as economy, politics, laws and regulations and culture of a country are the elements that affect the adoption and execution of the international standards in a country. Many countries have abolished international prerequisite or incorporate national practice in their adopted international standard because of the "legal obstacles".
Other dilemmas to international convergence include countries who claimed to have converged at a particular date failed to be up to date with subsequent new and revised international. Apart from that, limited access to international standards and fees being charged to obtain IFRSs are also barriers to convergence.
Some actions have been proposed to tackle these barriers. National standard setters are suggested to cover the criteria for additional national requirement as basic principle in their formal international convergences tactics. Such additional requirement should be restricted to those essential as outcome of national laws and regulations. International standard setters should carry on recognizing the challenges which is faced by national standard setters to give adequate chance for national standard setters to give effort to the international standard-setting process. It is also recommended that regional professional accountancy organizations should help national professional accountancy bodies and national standard setters by combining efforts to adopt and implement the international standard. Other than that, The Statement of Membership Obligations are designed to provide an obvious level to current and potential IFAC member bodies to help them to make sure that there is high-quality presentation by professional accountant worldwide.
Translation of the international standard
Translation of the international standard is one of the most important challenges in the adoption and implementation of the standards. This is because translators often find it hard to express the real implication of the English text in the translated standards. Some issues have been noted, which are the English sentences is too long, incompatible use of terms, the use of the same terms to explain different theory and the use of terms that is not able to be translated.
Therefore, most participants felt that international standard should be written in simple English that can be easily to translate. Other than that, some organizations do not have the donor funding to hold up the new and revised international standard. Thus, the translated standard soon becomes out-of-date due to the rate and number of changes of the international standard. The Commision has pointed out that it may use three-quarter months from the publication of an IFRS by the IASB until the translated standards are available in the Official Journal of the Commision and this contributes to the time lag that have been mentioned above.
Factors that bring success in translating the international standard are stated in the following: Professional accountant has joined the progress of a translation project, countries that use the same language are encouraged to bring together their efforts to ensure the consistent use of terms and make best use of available resources, professional accountancy bodies have to be actively in search of and securing donor or other funding in preliminary translation of the international standards and also the translation of new and revised standard. Last but not least, the establishment of a translation progression that gives for the early translation of proposed and final international standard, which allow earlier implementation of the standard.
Complexity and Structure of the International Standards
The participants viewed that the international standards are becoming more complex, longer and rules-based. The structure and complexity have influenced the rate of adoption and implementation. However, many have supported implementation guidance to cope with the lengthy and complex standards.
The participants also stated that the international standards setters have little consideration to the adoption in some countries to incorporate the international standards in national law or regulations.
Besides, a participant commented that the international standards will influence the authority of the national standards. Therefore, it is important to compare between both standards' authority hierarchy. Moreover, some participants had difficulty to comprehend the ordering of text in the international auditing standards. The sense of the structure was ambiguous to them.
The most complex part in IFRSs is that IASB is evolving to the fair value model. The fair value is very subjective and is difficult to measure the concept precisely. Different interpretations could lead to different conclusions.
It is recommended that the international standard setters should be more aware of the challenges faced by national standard setters, prepares, auditors and users of the financial statements. Besides that, the development of international standards should be principle based, not complex in text and be able to be incorporated in the national law or regulation.
Frequency, Volume, and Complexity of Changes to the International Standards
It has been evident that there have been frequent changes to the international standards. Due to this, national standard setters could choose not to implement international standards that are subject to change in the near future like the UK ASB. Furthermore, the national law or regulation will have to be revised as well when the international standards are revised. Also, it is hard to find 'real life examples' because of the constant changes in the standards.
International standards need to be alert with the market changes, the needs of investors and diverse and complex financial products. The international standard setters need to think how they can effectively and efficiently contain national efforts to adopt and implement these standards.
Besides, EU and other countries adopted the new standards and became the "stable platform" to converge the international standards. Furthermore, the IAASB is thinking a "quiet period" that would provide users of IASs a time during which no new or revised IASs will become effective. Moreover, collecting the information regarding a realistic adoption and implementation timetable is a factor to determine the effective dates of new international standards.
Challenges for Small-and Medium-sized Entities and Accounting Firms
Small-and medium-sized entities (SME) and accounting firms make up a large portion of the entities in most countries. The financial reports of these entities, in compliance to certain generally accepted accounting principles, are to be audited and filed to a government agency and made available to the financial users.
Issues have been raised regarding whether the international standards are relevant and appropriate to small-and medium-sized businesses and accounting firms. Among the key issues regarding the international standards in this aspect that were raised include the length and complexity, cost vs. benefits, inconsistency in the application, focus on large-entities, and the insufficient representation of small-and medium-sized entity and accounting firm on the standard-setting boards.
In order for the international standards to be effective, it is vital that the IASB's project gather information from SMEs to develop international accounting standards for these entities. There was also an issue whereby it is felt that the standard setters did not realize what impact it had on SMEs and accounting firms when there were changes on the fundamental principles of the standards.
Consequently, a whole re-education process towards the preparers, auditors, and users of the financial statements is needed due to these changes since the financial statements of these entities are regularly used as the basis of tax preparation, banking covenants, and other reporting requirements.
As a result, the IASB issued a discussion paper on Preliminary Views on Accounting Standards for Small- and Medium-Sized Entities in 2004 as a basis to develop international standards for these entities, realizing the necessity to address the needs of these entities.
Our group's further research found that in 2007, the IASB drafted a proposed IFRS for SMEs. Furthermore, in July 2009, the IASB published the IFRS for SMEs. The links to the articles can be found in the Appendices.
Potential Knowledge Shortfall
Another challenge in implementing international standards is potential knowledge shortfall due to complexity of transactions, global issues, standards and financial products. Participants of the survey highlighted education and training as major challenges. For instance, during the survey, only a minority of the participants were aware of the IASB's regulations and schedules.
Likewise, the lack of knowledge has become a hurdle for developing countries to implement international standards, according to a research done by The World Bank (Appendices).
Other concerns include the heavy reliance in accounting firms towards technical expertise. Auditors have become replacements for entities that do not have technical expertise to interpret the IFRSs.
Besides that, it is also hard for students to keep up with the volume and speed of changes in the international accounting standards. Apart from that, it is also a concern regarding the educators' knowledge because they are usually not involved in the implementation.
Participants of this study were also concerned that some IFRSs are open to various interpretations. To tackle this issue, some industries have held forums where leading entities discussed about their methods in addressing common issues. Besides that, the participants also expressed the need for implementation guidance especially when the international standards are applied for the first time. Implementation guidance is needed to address translation issues, lack of technical expertise and when there is no existing example of best practice.
Among some recommendations to deal with potential knowledge shortfall include regular training of preparers, auditors and staff through seminars which can be done by professional bodies, press release and information update on websites regarding the effect of the transition to IFRSs, educational institutions to teach the international standards, and forums to discuss about the challenges and solutions in adopting the IFRS.
Implication of endorsement of IFRSs
There are some challenges faced by the European Union and other countries when these countries endorse IFRSs. The first challenge is that there are two different sets of accounting standards being applied in the same European Union member states. This is because European Union's regulation on the application of international standards limits the mandatory adoption of IFRS to listed entities that prepare consolidated financial statements while other entities which are not listed still use the national accounting standard to prepare their financial statement.
Due to different sets of accounting standards, some cases may happen whereby a same entity may apply two different sets of standards which are national accounting standards for individual financial statements and IFRSs for consolidated financial statement. So, this will cause inconsistency.
The seconds challenge is limited application to listed entities whereby the European Union's regulator just limit the adoption of IFRS to some entities and ignore other public interest entities such as financial institutions which are not listed. The third challenge is potential late endorsement or non-endorsement of IFRS on financial instrument is creating doubt for auditors, preparers and users of financial statement. There is some serious implication on non-endorsement of IFRS, which is the entities need additional disclosure to explain the differences from IFRS for transparency. Besides that the entities cannot claim that their financial statements were prepared in accordance with the international standards. Moreover, the particular entity would also lose the chance to converge IFRS and U.S accounting standards and the loss of opportunity to participate in the discussions among countries.
Proposals for action by stakeholders
Stakeholders proposed that in order to achieve the objectives of international convergence, all the parties related to the information supply chain that delivers financial reporting should play their role to take necessary actions to support the international convergence. Such parties can be identified as government and regulators, international standard setters (IASB and IAASB), national standard setters, reporting entities, auditors, and other participants in the financial reporting process.
For the government and regulators, the stakeholders proposed that the government and regulators should establish legal and regulatory environment to comply with the international standard and with no or limited additional of national standard. Likewise, the stakeholders also suggested that the international standard setters should establish a process or enhance the existing process which would enable the national standard setters to support their agendas with that of the international standard setters and provide more opportunities to actively participate in international standard-setting processes. The international setter should also write the standards in simple English and revise the complexity structure of the international standards so that the standards can understandable, clear and consistently applied.
For the national standard setters, the stakeholders recommended that the national standard setters should form a formal international convergence strategy and obtain the commitment of all stakeholders and establish an active standard-setting agenda which is in-lined with the international standard setters and eliminate those differences between international standard and national standard.
For reporting entities, stakeholders proposed that reporting entities should take responsibility to design and implement an IFRS transition programme and provide IFRS training for all the staff that is affected by the transition to IFRSs. On top of that, reporting entities should also participate in the international standard-setting process and discuss the practical implementation issues with all related parties such as international and national standard setters. Besides that, auditors also need to create awareness of the international standard among clients and also conduct audit procedures that comply with international standard. However, IFRS and ISA training at all level of staff is also essential to achieve the international standard convergence.
While for international federation of accountants, the stakeholders suggested that they should additionally develop the concept and process that can facilitate the translation of the international standards. Furthermore these accountants also need to monitor and enforce member bodies with the development of action plan to comply with the statement of membership obligation. This statement can be referred to in the Appendices.
For the national professional accountant bodies, the stakeholders suggested that they should comply with IFAC's statement of membership obligation so that it can facilitate the adoption of international standard and create awareness and expose the international standard knowledge to all students, professional accountants and others. Besides that, national professional accountancy bodies should also develop a process that can enable the professional accountants to participate in the international standard-setting process.
Lastly, for the educational institutions, the institutions should train and educate the educators about the international standards as well as come out with programmes that can help accounting graduates to be familiar with the international standards.
Summary and Conclusion
Most of the participants were encouraging about the adoption and practicing the international standards. There were several challenges discussed to accomplish international convergence. The biggest challenge for the members was "preparing or preparedness" for the adoption of the international principles and a lot of questions can be raised up based on this.
Other than that, success cases in the organizations or the way they solve the problems also had been pointed out in this report. A list of suggestions are included, for examples, development of high quality standards can contribute to a successful adoption of international standards, the importance of integrity in the application of international standards, and also the action should be taken at either national or international levels. Moreover, all parties involved such as board of directors, management, and auditors need to cooperate together to accomplish the international convergence.
"The IFRS Convergence Quandary", by Gannon D.J., stated that the quality of IFRS has increased significantly now. Since 2005, when European companies were required to use IFRS, thousands of companies are already using IFRS. It also predicted that by 2011 year, every major capital market and just about every jurisdiction around the globe will be using IFRS as a basis of financial reporting.
In conclusion, a uniform globally accepted high quality standard brings great advantages to the public, and helps provide efficient capital flows within countries or across borders.
International Accounting Standards Board. (2007), "Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities"
IASB publishes IFRS for SMEs. (2009)
IFRS for small and medium-sized entities. Pocket guide 2009
The World Bank. (2004), "Report on the observance of standards and codes (ROSC), Nigeria", Accounting and Auditing.
Gannon, D.J. (2009), The IFRS Convergence Quandary. BusinessFinance Best Practices for Finance Executives.
Statement of membership obligation 1-7 (2004) issues by International Federation of Accountants (IFAC)