THE REGULATORY FRAMEWORK
KEY POINT
4 Progress towards global harmonisation
Introduction
This section first looks at the arguments for and against having accounting standards, then moves on to consider the global effect of IFRSs and the progress towards global harmonisation of accounting standards.
4.1 Accounting standards and choice
It is sometimes argued that companies should be given a choice in matters of financial reporting on the grounds that accounting standards are detrimental to the quality of such reporting. There are arguments on both sides.
In favour of accounting standards (both national and international), the following points can be made. They reduce or eliminate confusing variations in the methods used to prepare accounts. They provide a focal point for debate and discussions about accounting practice.
They oblige companies to disclose the accounting policies used in the preparation of accounts. They are a less rigid alternative to enforcing conformity by means of legislation.
They have obliged companies to disclose more accounting information than they would otherwise have done if accounting standards did not exist.
Many companies are reluctant to disclose information which is not required by national legislation. However, the following arguments may be put forward against standardisation and in favour of choice. A set of rules which give backing to one method of preparing accounts might be inappropriate in
some circumstances. For example, IAS 16 on depreciation is inappropriate for investment
properties (properties not occupied by the entity but held solely for investment), which are covered by IAS 40 on investment property.
Standards may be subject to lobbying or government pressure (in the case of national standards). For example, in the USA, the accounting standard Financial Accounting Standard (FAS) 19 on the accounts of oil and gas companies led to a powerful lobby of oil companies, which persuaded the SEC (Securities and Exchange Commission) to step in. FAS 19 was then suspended.
Unlike IFRSs, many national standards are not based on a conceptual framework of accounting. There may be a trend towards rigidity, and away from flexibility in applying the rules.
4.2 Criticisms of the IASB
Any international body, whatever its purpose or activity, faces enormous political difficulties in attempting to gain international consensus and the IASB is no exception to this. How can the IASB reconcile the financial reporting situation between economies as diverse as third-world developing countries and sophisticated first-world industrial powers?
Developing countries are suspicious of the IASB, believing it to be dominated by the USA. This arises because acceptance by the USA listing authority, the Securities and Exchange Commission (SEC), of IFRS is seen as the priority. For all practical purposes it is the American market which must be persuaded to accept IFRSs, and a lot of progress has now been made in this direction.
Developing countries have been catered for to some extent by the development of IAS 41 on agriculture, which is generally of much more relevance to such countries.
PART A REGULATION AND ETHICS OF FINANCIAL REPORTING 1: The regulatory framework
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There are also tensions between the UK/US model of financial reporting and the European model. The UK/US model is based around investor reporting, whereas the European model is mainly concerned with tax rules, so shareholder reporting has a much lower priority.
The break-up of the former USSR and the move in many Eastern European countries to free-market economies has also created difficulties. It is likely that these countries will have to 'catch up' to international standards as their economies stabilise.
4.3 Global effect of IFRSs and the IASB
As far as Europe is concerned, the consolidated financial statements of many of Europe's top
multinationals are already prepared in conformity with national requirements, European Commission (EC) directives and IFRSs. These developments have been given added impetus by the internationalisation of capital markets. IFRSs have been implemented in the European Union since 2005 for the consolidated financial statements of public listed companies.
In Japan, the influence of the IASB had, until recently, been negligible. This was mainly because of links in Japan between tax rules and financial reporting. The Japanese Ministry of Finance set up a working committee to consider whether to bring national requirements into line with IFRSs. The Tokyo Stock Exchange has announced that it will accept financial statements from foreign issuers that conform with home country standards, which would include IFRS.
The Japanese standpoint was widely seen as an attempt to attract foreign issuers, in particular companies from Hong Kong and Singapore. As these countries base their accounting on international standards, this action is therefore implicit acknowledgement by the Japanese Ministry of Finance of IFRS requirements. In December 2009 the Japanese FSA announced that Japanese listed companies would be allowed to use IFRS from 31 March 2010.
In the USA, the Securities and Exchange Commission (SEC) agreed in 1993 to allow foreign issuers (of shares, etc) to follow IFRS treatments on certain issues, including statements of cash flows under IAS 7. The overall effect is that, where an IFRS treatment differs from US GAAP, these treatments will now be acceptable.
In certain countries, the application of IFRSs is mandatory for all domestic listed companies. The following provides an example of some of the countries, but the schedule is not exhaustive: Barbados, Cyprus, Georgia, Jamaica, Jordan, Kenya, Kuwait, Malawi, Mauritius, Nepal, Peru, Serbia and Trinidad and Tobago.
Countries that implemented IFRSs for the 2005 European ruling in respect of the consolidated financial statements of public listed companies include Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Liechtenstein, Lithuania,
Luxembourg, Netherlands, Norway, Poland, Portugal, Slovenia, Slovak Republic, Spain, Sweden and the United Kingdom.
Many non-European counties also require their listed companies to adopt IFRSs. These include Australia, Bahamas, Bahrain, Chile, Costa Rica, Egypt, Hong Kong, Kenya, Kuwait, Mauritius, New Zealand, and South Africa.
There are some countries where the implementation of IFRSs is not mandatory but discretionary. These include Aruba, Bermuda, Bolivia, Cayman Islands, Dominica, El Salvador, Gibraltar, Laos, Lesotho, Swaziland, Switzerland, Turkey, Uganda and Zimbabwe.
However, there are several countries where the use of IFRSs is not currently permitted. The following are some of the countries, but the list is not exhaustive: Bangladesh, Cuba, Indonesia, Iran, Senegal, Taiwan, Thailand, Tunisia and Vietnam.
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1: The regulatory framework PART A REGULATION AND ETHICS OF FINANCIAL REPORTING4.4 Approaches to implementation of IFRSs
There are generally three ways a country choosing to adopt international standards can go about it. (a) Adoption as local accounting standards. Some countries choose to adopt IFRSs with little or no
amendments for their particular countries.
(b) Model for local accounting standards. Other countries adopt IFRSs, but adapt them to suit local needs. This is the case in Australia.
(c) Persuasive influence in formulating local accounting standards. Some countries already had accounting standards which pre-dated IFRSs. Many of these countries have been working for may years to narrow the gap between their local standards and IFRSs. This is the case in the UK.
Section summary
In its attempt to formulate standards which are accepted internationally, the IASB has met opposition over various issues from companies, interest groups and countries.
Some progress has been made towards global harmonisation of accounting standards, with many countries, including EU member states, requiring mandatory use of IFRSs for listed entities.