Over the past 10 old ages, the widespread usage of international accounting criterions ( IAS ) is one of the most important developments in concern circles. These criterions, officially known as the International Financial Reporting Standards ( IFRS ) , refer to the full organic structure of International Accounting Standards Board ( IASB ) dictums, including the criterions and readings approved by the IASB, the International Financial Reporting Interpretations Committee ( IFRIC ) , the Standing Interpretations Committee ( SIC ) and the International Accounting Standards Committee ( IASC ) , the predecessor organisation to the IASB.
Since 2000, attempts have been underway to develop a high-quality set of IAS. Today, there are more than 100 states across the universe where IFRS is either needed or permitted. This paper will discourse the IAS in four subdivisions: 1 ) the history of IASB and the IAS scene, 2 ) the credence degree of the IAS, 3 ) the pros and cons of the IAS, 4 ) the jobs of the IAS and the related recommendations to those jobs.
Introduction to the Background
“ The history of the IAS truly began in 1966, with the proposal to set up an International Study Group consisting the Institute of Chartered Accountants of England & A ; Wales ( ICAEW ) , the American Institute of Certified Public Accountants ( AICPA ) and the Canadian Institute of Chartered Accountants ( CICA ) . ” ( Institute of Chartered Accountants of England & A ; Wales [ ICAEW ] , 2010a )
In the past decennary, the globalisation and the integrating of capital markets around the universe have increased the demand among investors for a cosmopolitan set of coverage criterions. In 1973, the IASC was formed, shortly after the formation of the Financial Accounting Standards Board ( FASB ) of the United States. The IASC purposes at supplying a “ individual set of high quality, apprehensible and enforceable planetary accounting criterions. “ ( International Accounting Standards Board, [ IASB ] , 2010a ) Over the class of about 28 old ages, the IASC has issued 41 criterions, called the International Accounting Standards. In 2001, the IASC was replaced by the IASB, and all new criterions published since so have been issued as IFRS.
The IASB is better-funded, better-staffed, and more independent than its predecessor, the IASC. The IASB is organized under an independent foundation named the IFRS Foundation. That Foundation is a not-for-profit corporation created under the Torahs of the province of Delaware, in the United States, on March 8, 2001. The constructions of the IASB and the FASB of the United States have a batch in common. Both constructions are designed to back up those characteristics that are regarded as desirable in set uping the legitimacy of a standard-setting organisation. ( IASB, 2010b ) The legal guardian selects and appoints the 15 members from hearers, preparers, users, and faculty members. These members represent the wider community and are independent. The IASB is responsible to O.K. readings developed by the International Financial Reporting Interpretations Committee ( IFRIC ) . Therefore far, the IASB has issued eight new criterions, and mostly focused on bettering the quality of bing criterions, supplying criterions in countries where they did non be already, and meeting accounting criterions around the universe
Widespread Acceptance of IAS
Since the formation of the IASB in 2001, the IAS has been pulling increasing attending around the Earth, obtaining turning credence among states. “ In 2005, as a consequence of a European Union ( EU ) directive, a big figure of publicly-traded companies in those member states adopted EU-endorsed IFRS. ” ( Cabrera, 2008 ) Countries such as Iceland, Liechtenstein, and Norway, who are non members of the EU, but are members of the European economic country, required their publicly-held companies, including Bankss and insurance companies, to utilize IFRS. ( ) Furthermore, many little or developing states, like Jamaica, Kenya, Guatemala, Guyana, Honduras, and Lebanon, have turned to IFRS as their Generally Accepted Accounting Principles ( GAAP ) .
Other states besides are traveling towards the IFRS. For illustration, Canada ‘s Accounting Standards Board, who antecedently planned to meet their GAAP with the U.S. GAAP, now plans to necessitate the IFRS for publically accountable entities in 2011. China has announced that convergence with the IFRS is one of the cardinal ends of its standard-setting plan. The IASB and the Accounting Standards Board of Japan ( ASBJ ) launched a joint undertaking to cut down differences between the IFRS and Nipponese accounting criterions. The two boards program on convergence by 2011. ( ICAEW, 2010b )
From the position of the United States, in 2002 the IASB and the FASB issued the Norwalk Agreement, admiting their joint committedness to developing high- quality, compatible accounting criterions that could be used for both domestic and cross-border fiscal coverage. In 2008 the FASB and the IASB updated the Norwalk Agreement with the end of speed uping the convergence. The updated Norwalk Agreement requires that big U.S. populace companies convert their financials to the IFRS in 2013. ( )
Today, due to the belief that the IASB ‘s criterions are enhanced by the geographically diverse positions that are considered when developing those criterions, about 100 states require or permit the IFRS in changing grades, ( Cabrera, 2008 ) either as originally issued by the IASB, or as modified and endorsed by a peculiar legal power. The IASB and its resulting criterions have gained widespread acknowledgment and credence all over the universe.
Two Sides of International Standard Puting
The application of the IAS has combined effects of characteristics to the fiscal coverage system. On one side, the widespread international acceptance of the IAS offers companies and investors a assortment of advantages. On the other side, the high convergence costs and the conformity jobs may be a load to some states and their companies.
First, the acceptance of the IAS is associated with higher accounting quality by the companies. Through the proviso of more accurate, comprehensive, and seasonably fiscal statement information, the IAS offers higher accounting quality than non-U.S. domestic criterions. For illustration, Barth, Landsman, Lang and Williams ( 2009 ) found that accounting sums of houses that apply the IAS exhibit “ less net incomes direction, more timely loss acknowledgment, and higher value relevancy ” when compared to the accounting sums of houses that apply domestic criterions. They found that accounting quality improves after houses adopt the IAS. ( Barth, Landsman, Lang and Williams, 2009 ) Furthermore, to some little investors, bettering the quality of the fiscal coverage allows little investors to vie better with professionals, and therefore reduces the hazard that they are merchandising with better-informed professionals. ( Ball, 2006 )
Second, the IAS established a common criterion in most states. From the position of the investors, by extinguishing many international differences in accounting criterions, the IAS facilitates fiscal statement comparings among different states. The investors can easy compare the consequences of fiscal describing entities from different states, and they can understand possible chances better. Investors whose understanding and assurance are increased will hold more options. By using more valuable information, investors can confidently put in foreign companies without accommodating foreign GAAP to other GAAPs with which they are familiar, therefore cut downing hazard.
The IAS besides can profit the companies. On the one manus, the IAS cut down premiums that investors demand, which for companies translates to take down cost of capital. Furthermore, by extinguishing duplicative costs, the IAS can make direct cost nest eggs for the companies. For illustration, companies would non necessitate to maintain multiple sets of books to run in multiple legal powers. They can besides extinguish the costs that are used to accommodate the different GAAPs. The instruction costs of developing forces to analyze different accounting criterions besides can be saved. The decrease in costs will hike the stock monetary value of a company, which brings greater benefits to the company.
In add-on to this, companies who migrate to the IAS can entree international capital markets. Today, many entities are spread outing or doing important acquisitions in the planetary country, for which a big sum of capital is required. One consolidative set of criterions can take the barriers to cross-border acquisitions and divestitures. ( Ball, 2006 )
Third, the IAS increases the range of the fiscal professionals. In a truly planetary economic system, fiscal professionals, including CPAs, will be more nomadic, and companies will able to react more easy to the human capital demands of their subordinates around the universe.
In drumhead, there are a assortment of direct and indirect ways in which the IAS offer benefits to investors. However, the IAS is non unflawed. The high convergence cost and the related competition jobs that arise from convergence could impact the states and companies who move towards the IAS.
The first drawback of the IAS is the convergence cost. The cost of convergence with new criterions is non low, and the issuers need to be concerned. Dye and Sunder ( 2001 ) listed that the costs of criterions include direct costs, such as the costs incurred by the criterion — puting organic structure and the costs of implementing the criterions, and the indirect costs, such as the economic effects of seting the behaviours. Although over the long term, the possible advantages that the IAS bring to companies and investors could good transcend the disadvantage of the operation force per unit area, the direct cost is non low. Companies need to pass immense sums to finish the convergence. For illustration, in their roadmap, the SEC estimates that the mean cost for companies to follow the IAS is about $ 32 million. ( American Institute of Certified Public Accountants, 2010 ) A The high cost may impede the motive of companies to exchange to the IAS.
The 2nd issue is the tightness of the IAS. Achieving uniformity and comparison of fiscal studies across houses and across clip is a hard job in fiscal accounting. Because the IAS must derive blessing from many states, it may be constructed comparatively loosely and less specifically. This will make more ambiguities and vagueness, which gives houses more chance to pull off their net incomes, therefore harming the investors. Furthermore, the competition between the IAS and domain accounting criterions could show a job. Dye and Sunder ( 2001 ) worried that ( page ) IAS may increase the hazard of a “ race to the underside ” . They think the competition between the FASB and the IASB could degrade the quality of the accounting criterions, which would let the issuer, who views accounting criterions as a load, to follow with the least strict and demanding criterions.
Although the IAS has received widespread credence all over the universe, several obstructions remain that work against traveling to this one set of high-quality, globally — accepted accounting criterions. National pride is one of these obstructions. Because accounting criterions have been promulgated on a national degree, and people believe that the familiar is superior to the unknown, there is frequently the opposition to the IAS. For illustration, in the United States, non all issuers will voluntarily elect to utilize the IAS, and many people still believe that the U.S. GAAP is the gilded criterion. In fact, this thought exists in many states with important economic clout, such as China and Japan. Even Europe has non wholly accepted the IAS, since it refuses to approve certain elements related to fudge accounting.
Another concern is that the IAS can non acquire 100 per centum conformity among the states who adopt the international criterions. In some states, the market and political relations remain local ( Ball, 2006 ) . Local economic and political policy could impact the preparer and hatchet man of the fiscal coverage, and therefore impact the execution of the IAS ( Ball, 2006 ) . For illustration, in some legal powers, the usage of accounting criterions must be approved by the local governments, and the IAS frequently needs to be changed harmonizing to local jurisprudence to fulfill local economic involvements. This procedure can ensue in delayed or partial credence, which could take to incomparability.
In add-on, the linguistic communication job is an issue with the IAS. There are over 100 states meeting with the IAS, it is difficult for the IAS to providing all of them. Not merely is the interlingual rendition job a barrier, but the account and definition of some footings is besides hard. For illustration, footings like “ turnover, ” “ stocks, ” and “ strategies ” can hold different significances in accounting, depending on the state in which they are used. Furthermore, the IAS frequently use many obscure descriptive words, such as “ most, ” “ sensible, ” “ possible, ” and “ likely, ” which leads to differences when different states translate them.
Finally, whether the IAS can obtain existent credence throughout the universe depends on how they are applied. Because the IASB does non hold an enforcement mechanism for its criterions, it needs cooperation of the local states to do certain that the IAS have been applied to the full. Otherwise, the IAS may confront the hazard of the acceptance in name merely ( Ball, 2006 ) .
Overall, due to the rapid development of the planetary economic system, the globalisation and integrating of capital markets continue to increase, which makes world-wide popularisation of the IAS inevitable. Indeed, the popularisation of the IAS will convey positive effects to the planetary economic system and the states who adopt them. The IAS better the quality of accounting by doing the company exhibit less managing of net incomes, and the incorporate accounting criterions heighten the comparison and the transparence of the accounting information, which benefits the investors. With more accurate information, investors can do wise determinations and better measure their investings. For the companies, the higher accounting quality could salvage operation costs and hike the stock monetary value, as the one set of criterions could heighten the chance that the companies will hold entree to the foreign capital markets. Although the high convergence cost and the competition jobs bring a load to the companies in short period, the long-run benefits will cover these costs, and finally the benefits of the IAS will outweigh its costs.
In order to doing full usage of the advantages of the IAS, some issues must be resolved. First, through instruction, the IASB should assist more states and companies understand the IAS so that they are willing to accept them. Second, they can reenforce preparation on linguistic communication and cut down vague footings, leting more states to accurately construe the IAS. Third, they can collaborate with local authorities, cut downing the intercessions of the local legal powers and policy, so that the IAS is to the full applied. Merely after get the better ofing these issues, can the IAS usage its strength to the full, and enable the companies to gain net incomes.
Finally, for CPAs and accounting professionals, the increasing credence of the IAS around the universe means that now is the clip to go knowing about these alterations. Companies who adopt the IAS will necessitate comptrollers and hearers who have been trained and exhaustively understand the IAS. Therefore, at the minute, the comptrollers need to analyze and understand the IAS, and to fix for the not-so-distant hereafter when the IAS earns full credence all over the universe.