The convergence of world business language and

The Convergence of
Accounting Standard

Introduction:

 

Under
different economic circumstances, there are significant differences in the accounting standards formulated by countries around the world. Since the 1990s, due to the increasing number of international financing activities, regional economic group and transnational business of certified public accountants, the difference of accounting standards among countries has become a barrier to the international capital flow and efficient allocation of resources. In this situation, the need
to unify the
world’s business
language is becoming
increasingly urgent. As
the global convergence of world
business language and
accounting standard is
an irresistible trend
of history.

 

What is the Convergence?

 

Because the
current accounting and
reporting practices fall
short of meeting
the information needs
of the capital
markets in the
21st century
and the urgent
need of the
international convergence. A critically important element
in the solution
to this problem
is the convergence of US
Generally Accepted Accounting Principles (US
GAAP) and International Financial Reporting Standard (IFRS),
a process now
underway at an
early stage.

 

For example,
transnational corporations are
the products of
economic globalization and
have the ability
and characteristics to
allocate resources globally.

Since different countries and regions
have different accounting standards, which
could be extremely hard for
the subsidiary and
parent company of
multinational companies to
gathering and obtaining the information, as in
there was no
unified standard to
compare, and might
affect the decisive strategic of the parent
company to the
future of the global capital market.

High-quality information is essential to high-quality market. Hence,
if countries adopt
consistent accounting management and accounting standards, not
only could enhance
the connection between
the subsidiary and
parent company, but
also could promote
the ability of
parent company to
make strategic adjustment and consolidation, and to
achieve a more efficient allocation of
global resources.

 

According to
CIMA (2008), in a financial report context,
the convergence of
accounting standard is
the process of
harmonising accounting standards issued by
different regulatory bodies.

The convergence could
be considered in
2 different perspectives: international convergence – the
process within which
IASB (International Accounting Standard Board)
and NSS (National
Standard-Setters) are
converging their respective financial reporting standard into
the global set
of accounting regulations; and National
GAAP convergence the
adoption of International Standard as
national GAAP.

 

Now the
financial accounting standards board (FASB)
and the international accounting standards board (IASB)
have embarked on
a converged path,
the scope and
nature of accounting standards, as
well as the
reporting guidelines will
gradually change (Smith,
2015). If the
process of convergence is succeeded then the
US GAAP and
IFRS would need
to have a closer and new
relationship. In addition,
all the major
stakeholders could have
a positive opportunity in this
challenging process, which
reflects both their
business interests and
their commitment to
improving the global
capital markets.

 

Merits and Drawbacks of the Convergence

 

The purpose of the convergence effort is to help improve financial reporting information while also working toward the goal of one set of global accounting standards. The convergence effort is a significant move toward achieving a common accounting framework and an important step in the globalization of business. However, the convergence is also a time consuming and costly effort (Joseph, 2013).

 

The convergence of accounting can bring
some distinct advantages such as
a single set
of high-quality
globally accepting accounting standard means
that investors can
read the financial statements of
any company, understand the financial results, and
compare the results
with other companies (“Work Plan
for the…, 2013”). According to Pologeorgis, Once the standards have been
converged, the actual
process of improving and accomplishing new international standards will
be simpler and
would minimize the
comparability between different countries and
financial report.

 

If
IFRS is adopted worldwide, it will give IASB a monopoly in setting accounting
standard globally, the lack of check and balance might greatly undermine the
quality of such standard. And the independence of IASB also need to take into
consideration as the lack of stable and sustainable funding base, but now a
large portion of IASB’s funding still comes from voluntary contributions from
companies and accounting firms (IASB Funding). Therefore, in order to maintain
the independence of IFRS, the IASB must obtain secure funding which it does not
have to rely on any companies or public accounting firms.

 

Another
huge benefit should be cost saving. Especially for multinationals that must
issue financial statements in different countries. Although there may be substantial
transitional costs from the very beginning, in the long run, the cost savings
of large multinationals is imminent. However, for smaller companies that do not
have any international business, IFRS would mergers only add cost. Companies of
all sizes, often requiring similar activities to transition to IFRS but smaller
companies “Fewer internal resources are available to transition to no
routine projects such as IFRS and thus impact may be more onerous in a
relatively small issuer basis”. A plausible solution is that the United
States can allow smaller companies that do not have international operations to
continue using the US GMP, but this will only create a double reporting system
and defeat the purpose of IFRS, a set of global accounting standards. In
summary, the advantages of having one set of global accounting standard are “renewed
clarity, transparency, possible simplification, and comparability between
different countries on accounting and financial reporting.” (Pologeorgis).

 

On
the other hand, it will take time and manpower to develop and improve the new
accounting standard and rules. One of the main reasons that cause the delay is
that “unwillingness of the different nations involved in the process to
collaborate based on different cultures, ethics, standards, beliefs, types of
economies, political systems, and preconceived notions for specific countries,
systems and religions” (Joseph, 2013). Thus, the ideal and carry out of IFRS
is more theory rather than practice.

 

Conclusion:

 

What mentioned above is
based on countries which did
actually go through
the project and
have the intention of adopt
IFRS, the hypothesis is that
there will be
merits as well
as demerits even
though a single
set of high-quality global accounting standard sounds
very attempting and
like an ideal
solution for the
continuously growing world
business market, it
would still not
be able to
put into practice
anytime in the
near future. Therefore, questions like
should the US
just adopt IFRS
or another global
set of accounting standard or
choose to follow
certain standards? Or
is IFRS good
enough for the
rest of the
world to use
it? All these
questions need to
be answered before
the conclusion on whether
the world should
adopt IFRS or
not.

 

As for
now, despite there
is not clear
evidence shows that
IFRS is the
best global set
of accounting standard,
and each country
might need their
national GAAP in
practice today, there
is still potential in IFRS
and IABS and
they continue working
on the convergence effort. Whether
or not government choose to
adopt IFRS or
IABS, they are
still something the
world should not
ignore about.

 

Reference:

CIMA.

2008. Convergence of Accounting Standard, Topic Gateway Series No.4 Assessed at
27/11/17.

 

Joseph, A. 2013. An Analysis on the Advantages and Disadvantages of U.S. Generally Accepted Accounting Principles (GAAP) Converging to International Financial Reporting Standards (IFRS). Available at: http://www.usf.edu/business/documents/undergraduate/honors/thesis-joseph-ambily.pdf Assessed at 06/12/17

“IASB Funding.” Ifrs.com. 10 Feb. 2010. Web. 10 Apr. 2013. .

 

Pologeorgis, N. NB. The Impact of Combining The U.S. GAAP and IFRS. Assessed at: 06/12/17 Available at: https://www.investopedia.com/articles/economics/12/impact-gaap-ifrs-convergence.asp

 

Smith,
E. 2015.

Viewpoint: Convergence of IFRS and US GAAP. Available at: www.pwc.com/viewpoint. Assessed at 28/11/17.

“Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers.” Sec.gov. 13 July 2012. Web. 28 Mar. 2013. .