Convergence of accounting standards in a global economy

Dhaka,  Sun,  24 September 2017
Published : 11 Mar 2017, 21:26:59

Convergence of accounting standards in a global economy

Shanzida Begum
In the context of financial reporting, convergence is the process of harmonizing accounting standards issued by different regulatory bodies. The objective is to produce a common set of high quality accounting standards to enhance the consistency, comparability and efficiency of financial statements. Currently there are basically two standards, one is introduced by International Accounting Standards Board (IASB) naming International Financial Reporting Standard (IFRS) and the other is introduced by Financial Reporting Standard Board (FASB) which is commonly known as Generally Accepted Accounting Principles (GAAP). The main objective of this article is to compare and consider the difference between these two, finding out the most effective one that could be followed as a single standard all over the world. Statistically speaking, convergence is taking place in many countries, with over 100 countries having made public commitments supporting convergence towards the International Financial Reporting Standards (IFRS). Nevertheless this write-up succinctly highlights these issues as well as looks at the extent to which this convergence has been successful. The results reveal that countries like Albania, Belize, Bermuda, Cayman Islands, Egypt, Macao, Paraguay, Surinam, Switzerland and Vietnam have not yet accepted a single global standard. And since September 2002 the IASB and the FASB agreed to work together, in consultation with other national and regional bodies, to remove the differences between international standards and US GAAP. This decision was embodied in a Memorandum of Understanding (MoU) between the boards known as the Norwalk Agreement. Since then the convergence is in process and still progressing.

The international convergence of accounting standards refers to the goal of establishing a single set of high-quality accounting standards to be used internationally, and the efforts of standard-setters towards achieving that goal. International convergence of accounting standards is not a new idea. The concept of convergence first arose in late 1950s in response to post World War II economic integration and related increases in cross-border capital flows. The goal of financial reporting is to make information available for decision making. Historically, there is diversity in financial reporting in different countries due to their different cultures, legal systems, tax systems and business structures. International financial reporting standards (IFRS) harmonizes this diversity by making information more comparable and easier for analysis, promoting efficient allocation of resources and reduction in capital cost. However, before the evolution of IFRS, other accounting standards such as US Generally Acceptable Accounting Principles (US GAAP), Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), were in force.  Convergence - which involves moving from the old system to IFRS is not an easy job just like any transitional process.

Convergence would help ensure the comparability of financial statements. It would allow companies to enjoy a lower cost of capital as a result of their financial statements being more readily understood. A single set of accounting standards would pose lesser barriers to the free movement of accountants in business across jurisdictions. 

The observation of Harvey Pitt, US SEC Chairman at SEC Conference, (2002) is worth mentioning in this regard. He said, "High quality global accounting standards are needed to improve the ability of investors to make informed financial decisions. Companies must keep pace with this progress in order to promote and protect their business credibility in the international market place." Jules W. Muis, at the World Bank Conference in 1999 spoke, "….power to control the language of business is important. Standard-setters will come to a head as the world grows smaller, and economic independence is no longer an option but a reality. So it happens that today a good observer can see the battle preparations for the control of the international language of business slowly unfold…" These two statements are so compatible and highly supportive of the concept of converging into a single standard.

A single global standard renders international investment more comparable to investors, reduces the cost of complying with global business practices, reduces the cost of capital, reduces the operational challenges for accounting firms and gives standard setters the opportunity to improvise the reporting model. The biggest advantage of a single set of global accounting standards is that it enhances the comparability between companies in different countries. Currently, accounting standards can differ greatly between countries. Before an investor can compare two potential investments, he/she must reconcile the two companies to the same basis of accounting. The problem is similar for creditors: While evaluating a company's creditworthiness, differences in accounting standards can make two companies appear very different that are in similar economic shape.

Growing interest in the global acceptance of a single set of robust accounting standards comes from all participants in the capital markets. Many multinational companies and national regulators and users support it because they believe that the use of common standards in the preparation of public company financial statements will make it easier to compare the financial results of reporting entities from different countries. They believe it will help investors understand the opportunities better. Large public companies with subsidiaries in multiple jurisdictions would be able to use one accounting language company-wide and present their financial statements in the same language as their competitors. Convergence is driven by several factors, including the belief that having a single set of accounting requirements would increase the comparability of accounting numbers of different entities, which will contribute to the flow of international investment and benefit a variety of stakeholders.

Some believe that in a truly global economy, financial professionals, including CPAs, will be more mobile, and companies will more easily be able to respond to the human capital needs of their subsidiaries around the world. Now, it is increasingly felt that IASs/IFRSs would be the right choice for a single global standard, since it has been prepared with lot of considerations and consultations.

The writer is a student of BBA, Noakhali Science and Technology University.

Editor : A.H.M Moazzem Hossain
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