. International accounting standards are currently being discussed world-wide. C
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Question
. International accounting standards are currently being discussed world-wide. Convergence, harmonization and implementation are current buzz words. There are many folks in all fields of accounting that feel this convergence to one set of rules is very necessary. There are those who take the opposing view and feel that it is a waste of time, money and effort the FASB being among this group. Considering all, discuss the following:
a. the advantages and disadvantages of uniform accounting and reporting standards.
b. the advantages and disadvantages of having separate accounting and reporting standards for each country individually based upon their unique business environment.
c. issues that may occur when a country adopts part but not all of IFRS.
Explanation / Answer
A. Uniform Accounting and reporting standards: Convergence of local standards with IFRS is a buz word at present in the world. Following are main advantages and dis-advantaes of Uniform Accounting standards:
Advantages:
1. Greater comparability: when we follow uniform accounting and reporting standards, it is a greater advantage to the investor and the management of multinationals to understand better the Financial reports of different companies. An investor can compare performance of his investment in different companies, when all the companies follow same accounting principles and standards.
2. Improved consistency and transparency of financial repoting: Consitency means following same principles throgh all the years unless the change is required by law, the principle of consistency again leads to comparability of financial statements of different companies.
3. Better access to foreign capital markets: By following uniform accounting and standards, we can attract foreign capital markets, so that we can increase forein investment.
4. One set of reporting: In the case of multinational companies, by following uniform accounting standards world wide, they can prepare only one set of reporting, other wise they have to prepare two sets of repoting, one following GAAP and other IFRS
5. Relevance: Now a days, because of globalization, it is relevant to follow uniform accounting standards to satisfy the stakeholders world wide.
Disadvantages:
1. Local advantage: By following GAAP or any local standards, the accounting community accustomed to local reporting standards which are required by their governments. So it is some what difficult to change immediately to uniform accounting
2. Cost: Cost involved to bring uniformity in accounting standards is considerable. it reuire for US companies to converge into IFRS $8billion, on an average it require even for a small company $420,000 for convergence into IFRS.
3. SMEs: It is very difficult to follow uniform accounting standards for Small and Medium enterprizes as they will be hit by large transaction cost and the level of complexity of IFRS may not be absorbed by SMEs.
4. Monopoly of IASB: All the countries in the world follow IFRS, IASB might have monopoly in framing accounting standards and are forced to implement by other countries.
5. Training of accounting staff: to converge into IFRS, all most all the countries, which are not following IFRS, now has to spend lot of amount in training their accounting staff to get acquint with IFRS
B. Advantages and disadvantages of having separate accounting and reporting standards:
Advantages:
1. It is easy to follow local accounting and repoting standard as they have accostomed to such reporting standards
2. Compliance with local government laws.
3. Transaction cost is very much low
4. No need of extra training to the accounting staff
Disadvantages:
1. Due to globalisation of business, following local accounting and reporting standards are of no use to the different
stakeholders of the company
2. No exposure to international markets: When we follow local standards, we cannot attract foreing markets and
investments:
3. Accounting reports are not consistent with international accounting standards, so there is no use of our foreign
investors.
4. Lack of comparability of accountng reports with other companies reports, which is leads to very much confusion among stakeholders.
5. If we are multinationals, our accounting reports are complex and should be made satisfy to both host country and reporting country.so we are following diversified accounting and reporting standards.
C. When we follow local standard along with IFRS, it is mix of both. In aspects,where we do not comprise with IFRS,we can follow our own standards. For eg: In IFRS, fair value wil of assets will be considered, where as in GAAP, historical cost is considered. IFRS consider,Revaluaton of assets,but some countries do not accept it
These part reporting standards, again leads to confusion in financial reporting as the business now become global and we shoudl not get the patron of all the stakeholders, if we do not convergent with IFRS
Like this some issues are not yet converged with IFRS, but one thing is important, certainly we require uniform accounting and reporting standards for comparability, consistancy, transformation etc. so it is the time to resolve the issues on convergence, all accounting bodies to strive for uniform accounting and reporting standards. Corporate people should also cooperate in this regard
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