Discuss about the Accounting Standards Across World.
In any business, it is essential for the leaders to ensure that the decisions are taken in a reasonable and unified manner. The accounting standards serve as a basis for taking such decisions and enables transparency in the working of an organisation (Gresham, 2017). In this regard, the following report aims at discussing the need for having a single set of accounting standards across worldwide to be used by the organisations. It also discusses the challenges facing the standardisation of the accounting standards.
Accounting standards may be defined as the principles that standardise the practices relating to accounting and guides the organisations in carrying out their financial activities. These are basically the guidelines for an organisation which helps them in finding ways for preparing the financial statements, presenting the business expenses, income, assets and liabilities.
It specifies when and the manner in which the economic events are to be identified, measured and recorded. There are different overseas bodies that develop accounting standards for their respective countries (Rolfe, 2005). However, these standards are restricted to the country itself, that is, they are not globally recognised.
With the advent of globalisation, there has been an increase in the demand for better quality and financial information that can be compared to international platforms. There is a need for international harmonisation of the accounting standards so that the common accounting standards for all the countries can be developed facilitating easier financial comparison between companies (Godfrey and Chalmers, 2007).
The formation of a single set of accounting standards worldwide would ensure that all the business entities follow the same rules for measuring and displaying the financial information. Adopting the same rules for preparing financial statements would bring consistency in the recording of economic events and facilitate an easier comparison between multiple companies from different countries.
In the current scenario where the accounting standards followed in different countries differ, the investors, for comparing potential investments, have to reconcile the financial status of the company to a common basis of accounting. Similar is the case with creditors while determining the creditworthiness of different companies, there is a high probability that the companies with same economic structure may appear differently.
Development of a single set of accounting standards would make comparisons easier by putting multiple companies on equal footing, thereby making it easier for various stakeholders to examine international options for cash management and investment. Adoption of this system would ensure that the investors are in a better position to comprehend and make a comparison of the financial statements of the businesses which are headquartered in different nations.
Shifting to a single set of accounting standards would also help the organisations with their expansion plans as it is likely to eliminate the barriers that pose in the form of domestic accounting standards (Rolfe, 2005).When an organisation plans to expand their operations in the international markets, it has to consider international expenses relating to compliance.
This signifies that the organisation has to adopt a new set of accounting standards that are being followed in the foreign country so that the statutory requirements of such country are fulfilled. In certain cases, this may even double the accounting costs of the company. For various small businesses, this increased accounting costs dwarfs down the benefits that are to be realised on the expansion.
However, in the presence of a single set of accounting standards for all the countries, the organisations can easily expand their operations globally as the accounting costs for meeting the statutory requirements would be same (Godfrey and Chalmers, 2007). From the perspective of policy making, adoption of a single set of accounting standards worldwide would put the authority to make rules to a central authoritative body. In the present context, the accounting standards are framed by the individual bodies of the countries and international groups.
The organisations are supposed to follow and comply both the domestic and international accounting standards. In case of any non-compliances, there is a possibility of disagreements between the international and domestic boards. Adoption of a single set of standards would not only reduce the disagreements between these governing bodies but would also help in reducing the costs.
These standards would also help in bringing transparency and accountability to the businesses. It even would assist in ensuring economic efficiency in business transactions, as it provides the investors information about the opportunities and risks that are available in various multinational organisations (Gee, 2004). Moreover, it would provide a single and uniform accounting language for the businesses that would help them in lowering their costs relating to capital and international reporting.
From the discussion above, it is apparent that there is a need for globally acclaimed accounting standards that are standardised for all the countries. It provides a number of benefits to the organisations and people who are associated with such organisations. However, it is not easy to just develop and implement the accounting standards in all the countries.
There are various factors that pose challenges in the standardisation of the accounting standards (Bradshaw and Miller, 2008). According to the literature, the most significant challenge is the sovereignty issues at the international level. As per this challenge, it is required that if a single set of accounting standards is developed for all the countries, the nations adhere to such standards and make sure that they do not make any modifications in it while implementing it in their respective countries.
There are two possibilities in which the globally framed standards would not be effective. Firstly, when the countries do not accept and adopt these standards in their economic system. Secondly, if any country alters or makes any modifications in the globally developed standards, there arises a difference which makes the international comparison between multiple companies headquartered in different countries difficult.
Even though, the standardisation or the harmonisation of the accounting standards would reduce transactional risks, improve accountability and transparency, it consists of various integration issues. The standards developed by the countries are complex and vary between nations. Adoption of a single set of standards would require changes in the accounting systems of the nations (McGee and Preobragenskaya, 2006).
For example- the Securities and Exchange Commission in the US requires the publicly traded companies to follow GAAP principles, which follows straight line depreciation method for the companies. However, as per the Internal Revenue Service tax codes, the depreciation method to be used by the companies is specified as Modified Accelerated Cost Recovery System.
Now if the country adopts the harmonised accounting standards, such as IAS accounting model, it is required that it make changes in its tax accounting systems also, which creates the integration problems for the standardisation of the accounting standards. Another challenge that affects the standardisation of the standards is its negative impact on the smaller businesses.
As a proportion of their revenues, the smaller businesses spend more on the regulatory compliance in comparison to the large firms. These expenses in form of regulatory requirements add costs to their working and reduce the probabilities for expanding their operations in the global market.
After the standardisation or the harmonisation of standards, the smaller businesses have to fulfil additional compliance mandates, which in turn would further add to their costs and worsen their competitiveness. The standardisation of the accounting standards also has a challenge concerning the enforcement and licensing issues (Houston, 2017). If the accounting standards are standardised, the tax lawyers, CPAs and accountants would be required to obtain licensing and comply with the international body responsible for making rules.
In terms of enforcement issues, if the rulemaking international body does not have the enforcement power, the breaking of international laws would be very common as there would be no prosecution authority available. On the other hand, even if the international rule-making body holds the enforcement power, the prosecution law may conflict with the rights of the offender available to it in the domestic country.
In addition to this, it is also difficult to determine what every single accounting standard should stand for, that is, what it should convey. The standardised accounting standards should be developed in such a manner that it corporates the preferences of all the countries across the world (Deloitte, 2014). However, there are various business practices, cultural preferences, or the accounting traditions that are practised in different countries, making it difficult to decide which factors are to be included in the standardised accounting standards.
Conclusion
The accounting standards are the principles and guidelines that help the organisations with the economic events. It helps the organisation to determine when the economic events are to be identified, measured and displayed and in which manner. With the increased international trade between countries, it has become necessary to have a single set of accounting standards for organisations to use across different countries.
Adopting a single set of standards would allow transparency, better accountability, and comparability. It would make it easier for the investors and other parties associated with the business to comprehend and analyse the financial statements by bringing them on a standard platform. However, it is not easier to develop such standards as their standardisation poses certain challenges. These include integration issues, enforcement and licensing issues, and sovereignty in the settings of the accounting standards.
References
Bradshaw, M.T. and Miller, G.S. 2008. Will harmonizing accounting standards really harmonize accounting? Evidence from non-US firms adopting US GAAP. Journal of Accounting, Auditing & Finance 23(2), pp. 233-264.
Deloitte. 2014. Ian Mackintosh discusses the challenges of global standardisation. [Online]. Available at: https://www.iasplus.com/en/news/2014/05/mackintosh-speech [Accessed on: 23 September 2017].
Gee, P. 2004. Spicer and Pegler’s Financial Reporting for Business and Practice 2004. London: Gulf Professional Publishing.
Godfrey, J.M. and Chalmers, K. 2007. Globalisation of Accounting Standards. Cheltenham: Edward Elgar Publishing.
Gresham, T. 2017. The Importance of Accounting Standards. [Online]. Available at: https://smallbusiness.chron.com/importance-accounting-standards-44927.html [Accessed on: 23 September 2017].
Houston, G. 2017. The Disadvantages of Harmonizing Accounting Standards. [Online]. Available at: https://smallbusiness.chron.com/disadvantages-harmonizing-accounting-standards-25107.html [Accessed on: 23 September 2017].
McGee, R.W. and Preobragenskaya, G.G. 2006. Accounting and Financial System Reform in a Transition Economy: A Case Study of Russia. Berlin: Springer Science & Business Media.
Rolfe, T. 2005. Financial Accounting and Tax Principles. Boston: Elsevier.
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