Business Guides

Convergence of Accounting Standards

Globalization has increased the need to have a standard set of accounting standards. Financial users around the globe are working towards establishing common global accounting standards, but the efforts are yet to bear fruits. The process of creating a universal set of accounting standards has received conflicting views from different countries. Some countries support the implementation of a single set of accounting standards, and most of these countries are embracing the IFRS. Some states still use their local GAAP standards and feel that changing to another accounting standard would cause various complications and undermine the sovereignty of a nation. This paper will shed light on why some countries support a standard set of accounting standards and why others support keeping different accounting standards set at a local level.

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One of the most influential arguments in support of universal accounting standards is comparability. Today large organizations are looking for opportunities in the global market. Global companies have a considerable number of investors and frequently record higher profits. Investors and various business stakeholders are not involved in the daily management of the business. Therefore, they need to look at the financial statement to understand the performance of the company. When investors are making investment decisions, they are primarily guided by the financial statement of a business building financial reports very critical. Problems arise when an investor has to compare the performance of a company, but the company follows different accounting standards because of its operation in different countries. A country that is located in China will follow different accounting methods from a firm that is found in the U.S. the accounting standards will have an impact on the quality of the financial reports. For instance, the depreciation and amortization methods used and the stock valuation method will impact on the statement of financial statements. It is difficult to compare the performance of different companies if the financial statements are prepared using different accounting standards. If there were a standard accounting standards users of financial statement would have an easy time comparing the creditworthiness, liquidity, solvency, and profitability of different companies. Comparability is enhanced for a single organization operating in different parts of the globe. A company such as McDonald’s has various subsidiaries around the world. The company is expected to adhere to the local accounting standards it operates in when preparing its financial statement and reporting income. If there were single accounting standards, the company would compare the performance of a subsidiary against another. It is difficult to compare the performance of different branches when financial reports are prepared using different accounting standards.

Establishing a single accounting system would enhance the quality of financial reports. In the current system, businesses are already finding loopholes due to lack of a universal accounting system. When it comes to taxation, enterprises are transferring assets to subsidiaries in lower tax countries through accounting to minimize the amount of tax. Lack of a common accounting system is providing businesses with loopholes to manipulate financial reports and sometimes mislead investors. The case of the 2008 economic crisis is one that indicated the need to have quality global accounting standards. Lack of adequate financial information caused investors to lose millions of investment due to the crisis. A single accounting system will enhance the quality of accounting standards by eliminating loopholes. Additionally, countries that are willing to converge their accounting standards demand that the quality of the new set of a counting standards should be of high quality. The issue of quality is central to the development of accounting standards. The converged accounting standards, IFRS has improved the quality of information. Research indicates that IFRS standards have played a significant role in ensuring users of financial statements get the right information from financial statements.

Implementation of a single accounting system would lead to simplification. Some companies have many subsidiaries and operate different business lines. These companies are expected to consolidate financial reports to provide a comprehensive report on the overall performance of the company. However, if a company is required to follow different accounting standards, it becomes challenging to consolidate business reports. Items are represented differently in various financial statements making it hard to merge the report. Additionally, use of different currencies such as yens, pounds, and dollars make it difficult to consolidate the reports. A global accounting system would simplify the accounting process and enable multinationals to combine their financial statements with ease.

One of the arguments against universal accounting standards is the uniqueness of every country. Different countries are guided by various accounting standards based on the needs of the nations. States use the generally accepted accounting standards (GAAP). The United States uses the U.S. GAAP, and United Kingdom uses the U.K. GAAP. The needs of accounting standards determine the accounting standards that a company will use, for instance, the United States and United Kingdom accounting standards are stock market oriented because the foreign firms based in these countries rely on the stock exchange as a source of finance. Conversely, the accounting standards of Japan are bank oriented because companies rely on bank loans and not willing to participate in stock markets.

The sovereignty of a country makes it hard to unify the accounting standards. Some countries feel that establishing a unified set of accounting standard would impose on the accounting standards of sovereign nations. The new set of rules would undermine the sovereignty of nations. The standard set of criteria is further seen as western dominance. When coming up with the global accounting standards, the West is actively involved, and poor countries do not get to contribute adequately. When the accounting standards are imposed on other nations, it strips them the ability to establish different accounting standards that are unique to the situation.

Having different accounting systems creates inconsistency in financial reporting. As the economy is becoming integrated and geographical barriers are eliminated, there is a need to come up with a single set of accounting standards. The harmonization of accounting standards will eliminate inconsistency, enhance quality, and comparability.

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