What are the benefits and the limitations of IAS

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What are the benefits and the limitations of the International Accounting Standards for developing countries?

With the increasing internationalization of economic trade, communication and the globalization of the financial system, many accounting standards no longer meet the needs of companies` situations, such as economic characteristics, and a range of different and large international financial issues. Sometimes ,the purely domestic accounting standards have become a handicap for the business as well as investors. The International Accounting Standards (IAS) are a kind of common guide and rule which is suitable for international accountants to do fundamental work. However, International Accounting Standards (IAS) cannot satisfy all developing countries in a short time and have some drawbacks for developing countries, for example, the adoption problem. Even though the IAS have some disadvantages , IAS`s advantages still outweigh the shortcomings. This essay investigate two benefits and two limitations of IAS for developing countries.

The first advantage for IAS is the capital market. The use of IAS can be beneficial for capital markets, which could be the first suitable accounting choice for the developing countries . IAS can afford different opportunities to investors .To be specific ,if the companies have high quality of accounting standards, companies will be more able to link with internationalization and become easier to communicate with each other. If high quality accounting standards do not exist there will be a lack of international news and there will be problems in communicating the financial issue ,then they may lose many opportunities to operate with globally.

According to the evidence about 327 countries from 27 countries have used IAS from 1994 to 2003. Bath et al (2008)) investigates the link between the application IAS and financial quality, the result shows that the quality of finance increased dramatically when implementation of IAS took place. What is more, Larson & Kenny (1995, as cited in Zeghal & Mhedhbi, 2012) stated , the relationship between the adoption of the IASB Standards and the development of capital markets in the context of developing countries’ capital markets, indicates that there are eighteen countries of twenty-seven development countries that have adopted the IAS. Therefore finding the IASB as useful to capital markets. In contrast , though Larson & Kenny (1995, as cited in Zeghal, & Mhedhbi, 2012) also mentioned that the conclusion may need a long period to be stable, the aim of the research is to try to overcome the limitations and the result turned out to be positive.

In addition , the implementation of IAS will be helpful to avoid a financial crisis. It cannot only decrease the financial crisis and make global financial stability but also attracts foreign investment dollars. According to the financial stability `s endorsement ,which has already established a new principle for adoption of IAS. THIS IS TOO SHORT TO BE A PARAGRAPH

In regard to East Asia crisis research (Arnold, 2012)) ,the main outcome presents that IAS would save money and avoid the financial crisis. Because IAS reduces transaction cost by removing the need to adapt to financial reports as the reason for the different national accounting standards. In addition, Wade (2007, as cited in Arnold, 2012) commented ,when communism came to an end in the USSR and Eastern Europe and Eastern Asian development was crippled, the Anglo-American financial capitalism became a standardization .Therefore, IAS was no longer regarded as a way to focus on developing countries ,but the only path to develop and integrate the whole global economy .

Fortunately, IASB was set by the acceptance of financial reporting standards and the Financial Stability Forum`s endorsement played a prerequisite role (Arnold, 2012)). However, Arnold (2012) assessed that those studies have few shortcomings ,which does not mention the way of responses to the East Asian financial crisis, IAS will have the tendency to used in a highly financialized and crisis-prone world economy. To be specific, the research has already told readers that IAS plays an essential way in the institutional governing financial markets. Furthermore, as Young (1995, cited in Arnold, 2012) has proven that if there are no arguments left, the belief will persist on implementation of IAS, which will enhance the financial stability both in the domestic financial structure and the international financial organization.

However, there are still some limitations for IAS of developing countries , the first one is adoption problems. Because the operation of IAS needs many qualifications and stable conditions, such as increasing economic growth, high educational level, the high degree of external economic openness and open cultural membership in a group of countries .However , developing countries cannot meet all of the requirements in a short term.

For instance, evidences shows that the developing countries cannot meet the level to such a high requirement ,therefore countries cannot adapt to IAS well. (Zeghal, D., & Mhedhbi, K. (2012)).There is no doubt that these conditions will need a long time to complete. Furthermore, a research result shows that IAS `s well-being must be under these occasions, highest literacy rate, capital market, even the need for an Anglo-American to meet the requirement of IAS .(Zeghal, D., & Mhedhbi, K. (2012)). In terms of the research , most debates have been focused on the adoption of these standards by industrialized countries which are United States ,Canada, and members of the European Union, however, less discussion has focused on the opportunities of developing countries to adopt IAS. Zegahl & Mhedabi, (2006, as cited in Zeghal & Mhedhbi 2012) argued, despite developing countries having an urgent need to have capital market investment from foreign countries, accounting and financial information from developing countries still cannot be trusted, and there are still no accurate data to ensure all of the developing countries to comply with the IAS. McGee (1999 as cited in Zeghal, D., & Mhedhbi, K. (2012)) also assessed the outcome of IAS implementation in developing countries. Through the result of analyzing Armenia as an example indications were found that this procedure faces difficulties regarding training problems and information dissemination of new accounting standards . Another case in point is that Woolley (1998, as cited in Zeghal, D., & Mhedhbi, K. (2012))works out a similar result in Asian countries where are no obvious evidence to show that there is no significant difference to promote a great economic growth rate between non-adoption and adoption for IAS. Even though Wolk,Francis,and Tearney (1989, as cited in Zeghal & Mhedhbi 2012) analyzed that international accounting harmonization is beneficial for developing countries ,which have supported better-prepared standards and the best quality accounting framework and principles. Therefore,the IAS still needs a long time to develop and to balance.

Another drawback of IAS for developing countries is the converging problem of standards. The converging problem is that some troubles will happen, when the developing countries` accounting standards tend to converge with the IAS .The accounting operation may not work effectively in the beginning ,the developed accounting standard may not be useful to promote developing countries` economy .For instance, Prather-Kinsey, J. (2006) did a research when countries adopt IAS, how IAS influences developing countries. This study assesses whether IAS are useful to two emerging stock markets, the Johannesburg Stock Exchange (JSE) in South Africa and the Bolsa Mexicana de Valores Stock Exchange (BMV)in Mexico. The result states that stock markets found book value of equity and earnings are relevant. However, Prather-Kinsey, J. (2006) also analyzes that the usefulness of timeliness is just working on JES but not on BMV, which raises a problem on the daily work. If the timeliness does not work ,it will not be beneficial for effective work ,even it leads to slowly increasing the economy .The result also argues that earnings announcements in Mexico have no significant information in the context. As Prather-Kinsey, J. (2006) concluded that though the interest tendency of IAS in the future is tremendous ,it still needs a long time to put into use in the developing countries, and needs a painstaking journey to became mature.

Finally, relevance is the last factor to affect the application of IAS in developing countries. This factor needs to be divided into two parts , one is when the main market is lead by private economic sectors it often presents the relevance. IAS can be regarded as a strength of developing countries .Another part is when the public economic sectors dominate the main market, which shows the irrelevant ,which becomes the shortcoming.

For instance , in regard to analyzing the relevance by the example of Zimbabwe in the research of Chamisa, E. E. (2000),the result tends to be ambiguous, the author argues only can under the “shareholder view/fair view” turn out to be relevant to developing countries ,which cannot meet the requirement of shareholders. It is clear to see that IAS needs a close reliance on shareholders ,in this circumstance, IAS can be relevant to the developing countries and apply better. If this circumstance does not exist , IAS will not be helpful. However, the reality is that a lot of developing countries hold shareholders` views, whilst others do not. It is hard to say whether IAS could be the advantage or the disadvantage for developing countries. Nevertheless ,there is an interesting phenomenon from scattered evidence, Chamisa, (2000) reports that developing countries are concerned more about the IAS ,whilst developed countries usually ignore it , which can be regarded as indirect relevance. Different markets still need to depend on judging the relevance to analyze whether IAS offer benefits or limitations . Perhaps it can be a solution to stimulate the relevance ,which can add more developing countries to become involved with IAS .

Conclusion

In conclusion , the benefits of the IAS for developing countries outweigh the limitations . Beneficial aspects are regarding capital markets and avoiding a financial crisis . In regard to avoiding financial crisises , IAS can both make the global financial stability and attract foreign investment dollars. When mentioning capital markets, the IAS can afford different opportunities for the investors in the capital markets. In the contrast, IAS has the limitations. As the stable operation of the IAS needs qualifying conditions, but many developing countries cannot meet all of those requirements . Furthermore, when the developing countries` accounting standards tend to converge with IAS ,the accounting operation may not work effectively in the short term. However, the IAS has a stable potential positive tendency in the future ,which will become more convenient in the global accounting system and bring large scale promotion of global trade. Those drawbacks will be overcome when IAS is adopted by developing countries.

References:

Arnold, P. J. (2012). The political economy of financial harmonization: The East Asian financial crisis and the rise of international accounting standards. Accounting, Organizations and Society, 37(6), 361-381.

Carmona, S, & Trombetta, M. (2008). On the global acceptance of IAS/IFRS accounting standards: The logic and implications of the principles-based system. Journal of Accounting and Public Policy, 27(6), 455-461.

Chamisa, E. E. (2000). The relevance and observance of the IASC standards in developing countries and the particular case of Zimbabwe. The International Journal of Accounting, 35(2), 267-286.

Ding, Y, Hope, O. K, Jeanjean, T., & Stolowy, H. (2007). Differences between domestic accounting standards and IAS: Measurement, determinants and implications. Journal of Accounting and Public Policy, 26(1), 1-38.

Dahawy, K., Merino, B. D., & Conover, T. L. (2002). The conflict between IAS disclosure requirements and the secretive culture in Egypt. Advances in international Accounting, 15, 203-228.

Lasmin. (2011). An institutional perspective on international financial reporting standards adoption in developing countries. Academy of Accounting and Financial Studies Journal, 15(2), 61-71.

Phuong, N. C., & Nguyen, T. D. K. (2012). International harmonization and national particularities of accounting: Recent accounting development in Vietnam. Journal of Accounting & Organizational Change, 8(3), 431-451.

Prather-Kinsey, J. (2006). Developing countries converging with developed-country accounting standards: Evidence from South Africa and Mexico. The International Journal of Accounting, 41(2), 141-162.

Zeghal, D., & Mhedhbi, K. (2006). An analysis of the factors affecting the adoption of international accounting standards by developing countries. The International Journal of Accounting, 41(4), 373-386.

Zeghal, D., & Mhedhbi, K. (2012). Analyzing the effect of using international accounting standards on the development of emerging capital markets. International Journal of Accounting and Information Management, 20(3), 220-237.

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