Why Do Countries Adopt Global GAAP Accounting Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Each country using their own generally accepted accounting principles (GAAP) to report their financial statement so there are many accounting standards in the world. Nowadays, with the development of business globalization, an increasing number of companies do business in multiple countries. So the application of a single set of high quality globally accounting standards is more significant than ever. In this report I discuss the potential benefits and challenges of Global GAAP and the possibility of the adopting of IFRS especially the convergence of IFRS and US GAAP. I believe that the harmonization of reporting standards will benefit the world in the long run, but the adoption will not be achieved in short time.

Is Global GAAP desirable?

Why do countries adopt Global GAAP

Cost reduction

Adopting a single set of high quality accepted accounting standards, the cost of information processing and auditing can be reduced. The preparers will not have to produce different reports according to different standards. The users of the financial reports in multinational companies can familiar with one set of accounting standards then lower the information costs. For the national government, accepting a set of accounting regulations can reduce the cost of setting national accounting regulations.

Transparency and comparability

In an increasingly integrated global economy, transparency and comparability are regarded as essential. (Bhimani, 2008) The adoption of a single set of standards increasing the quality of financial information and makes it easier for investors and other stakeholders to compare companies' performance across industry sectors and over large geographical distances. The companies could have more effective communication with investors and other international users of the accounts and increase the comparability with competitors both nationally and internationally. In order to enhancing the transparency of business information, a single set of high quality accounting standards is more informative and increasing the clarity and understandability of accounting reports. This could also result

3. Reducing the risks

With the financial reporting information disclosure becomes more reliable and effect the risk of investment will be reduced. Then the investors can reduce the likelihood of making poor decisions by less misunderstanding of different accounting system. The allocation of global capital resource could also be improved. The harmonization is one way to restore trust and provide investors more useful and reliable information. (Jopson, 2005) Companies benefit from the greater investor confidence and the restoring trust after financial crisis and scandals. It encouraging international flows of capital across national borders and increased the demand for share investment.

Limitations of Global GAAP

The environmental, institutional and cultural difference caused the variation of national accounting system. (David Alexander, 2011) " You can't have a single set of accounting standards for multiple forms of capitalism," said Martin Walker, professor of finance and accounting at Manchester University said in 2005. "Accounting has to reflect the economic, legal and political systems in which it is operating. Until those systems are the same, you can't standardize accounting."

As the majority user of Global GAAP, the multinational companies will have fewer opportunities to influence an international standard setter than a domestic one. Companies in different countries have different responds of business and economic environment. The diversity may not be presented by a single set of the global standard. The companies may face the high cost of changing standards and there is big uncertainty of the future of convergence. For small and medium-sized companies and the companies focus on national market the adoption is unnecessary and expensive.

For investors, the use of global standards, particularly in the early years of alternation, can cause confusion and may hides real differences of commercial activity.

For national government, the future of harmonization is unpredictable. Since the harmonization is more beneficial to countries where foreign trade is an important part of the economy, so some developing countries may be put at a competitive disadvantage. More powerful countries are more likely to be able to influence the setting of international standards through explicit lobbying and pressure tactics. (Sletten, 2009)Developing countries may not be able to influence global standards as much as developed countries.

Although there are limitations of Global GAAP currently, the globalization, development of capital market and constantly improvement of standards setting process could reduce or even eliminate those limitations. The Global GAAP is desirable.

Is Global GAAP feasible?

Adoption of IFRS in the world

The International Accounting Standards Board (IASB) was established in 2001 to develop a single set of high quality, understandable, enforceable and globally accepted International Financial Reporting Standards (IFRS). The first IFRS was issued in 2003, until January 2005, not only all listed companies within the EU and European Economic Area have to comply with IFRS, also Australian listed groups. Since then, nearly 70 countries have mandated IFRS for all listed companies. Further, about 23 countries have either mandated IFRS for some listed companies or allow listed companies to voluntarily adopt IFRS. However, as of 2007, at least 40 countries continue to require domestically developed accounting standards over IFRS, and this list includes some large economies like Brazil, Canada and China. (Sletten, 2009)


The US moving toward IFRS, unlike what happened with other countries, IASB and FASB have been working on convergence for many years. (Forgeas, 2008)

The major differences between these two standards are the US GAAP is rule-based, while IFRS is principle-based. Rule-based standard are basically a list of detailed rules and mandatory, which could limit the judgment of accountants and protect them against litigation. However, the principles-based standards are just a simple set of key principles to ensure the quality of report. Then crucially depend on the professional judgment of accountants and auditors.

Prior to 2001, a central SEC concern had been that IASC standard were insufficient stringent and rigorous in communicating financial information relative to US GAAP, little reason for US GAAP to alter significantly in the face of initiatives in other countries to develop international accounting standard. (Bhimani, 2008) Nevertheless, the financial crisis of 2001-2001, the collapse of Enron and WorldCom the FASB noted that it is necessary to focus more on the principles in accounting standards. (FASB report, 2002). Because principles-based is more simpler and based on objectives so it could makes the standards more flexible with changing situations and harder to avoid. Its broad principles can be practical for a variety of circumstances. The growing complexities of corporate affairs have led financial reporting rulings to become more complex. (Sunder, 2002)The role of principles-based IFRS accounting had gained credibility in its ability to address some of the root causes of financial reporting crisis. (Bhimani, 2008)

In 2006 the IASB and the FASB (the boards) agreed on a Memorandum of Understanding (MoU) that identified the short-term and longer-term convergence projects that would bring the most significant improvements to IFRSs and US GAAP. The MoU was updated in 2008. Currently, most of short-term and several long-term projects have been completed or are close to completion. (Hans Hoogervorst, 2012) In 2008,the SEC also issued its prosed "roadmap" to convergence of IFRS.

Challenges for IFRS adoption

Currently, many challenges exist for IFRS adoption, and the biggest one is the training of accountants and auditors. Because IFRS is principle-based accounting standards, require more professional judgments to deal with the financial problem. The investors need to understand the variety of information even for the same circumstance as a result of different judgments. Firms not only have to train employees to prepare IFRS financial statements but inform analysts and investors of the changes of numbers shown on financial statements (Hail, 2009). Therefore, preparing a team of IFRS educators for firms and investors is necessary and urgent if firms want to mandate to report under IFRS.

A oneĀ­time transition cost will be incurred during the adoption phase. This transition cost can be onerous especially to small sized firms. The adoption of IFRS in Europe and Australia has demanded significantly more time and resources than expected, and IT, or Information Technology, costs contribute to more than half of the conversion cost (IFRS: Don't Get Caught Short). Deutsche Telekom also experienced high IT cost when converting to IFRS (Heffes 2009).

Another risk of adopting IFRS is that firms, which prefer U.S. GAAP, will not apply the principles of IFRS faithfully, and they will be able to achieve the goal of evaluating a certain item under local GAAP by using discretion (Epstein, 2009, and Hail, Leuz and Wysocki, 2009). If auditors are reluctant to confront those clients who aggressively interpret IFRS standards, the accounting information under IFRS will be distorted and the direct victims will be investors (Epstein, 2009). Evidence from other countries has shown that firms tend to refer to their local GAAP when making judgments, and U.S. firms are expected to do the same; hence, whether true comparability in financial reporting can be achieved through IFRS adoption is called into question (Hail, Leuz and Wysocki, 2009).

Another concern of the U.S. adopting IFRS is that the competition of financial reporting standards will be greatly reduced, and the diminishing of U.S. GAAP will grant IFRS a monopoly status. Potential deficiencies of a monopolistic standard are lack of innovation, slower reaction to market changes, and less motivation to provide best possible accounting standards for investors; however, unless countries are in the process of adopting a different set of standards, or at least willing to consider such an option, competition among standards will not take place at the country or regional level (Hail, Leuz and Wysocki, 2009).