The Convergence of International Accounting Standards and Practices. Cynthia Jeffrey Iowa State University. How different is accounting internationally (across countries)? What historical factors have contributed to these differences?.
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Iowa State University
1. Accounting itself is a judgmental and social discipline, reflecting the needs of its particular business environment
2. National traditions, educational opportunities, and business and accounting attitude differences among nations
3. Legal and economic differences among the nations
4. State sovereignty
5. Economic gaps between developed and developing nations.
TYPE A accounting differences?
True and fair view
Tax rules separate
Secrecy is emphasized
Linked to tax rules
Government rulesBroad Categorizations
Depreciation over useful lives accounting differences?
Limited or no use of legal reserves
Cash flow or funds statement
Depreciation by tax rules
Extensive use of legal reserves
No leases capitalized
No cash flow or funds statementExample of Specific Policies
United Kingdom accounting differences?
ItalyExamples of Countries
1. Evolution in the development of accounting principles.
2. The more dominant view posits that formal action should be taken to reduce diversity.
International Accounting Standards Committee
1. To formulate and publish international financial standards
2. To promote worldwide acceptance and observation
3. To facilitate a "common international approach" to the harmonization of accounting principles
1. To arrange future international congresses
2. To achieve international technical, ethical, and educational guidelines for the accounting profession;
Interactions between IFAC and IASC
Post 1992 Europe
1. Intensify consideration of IASC and other standards
2. Engage in joint standard-setting activities with foreign counterparts to produce results consistent with IASC standards
3. Consider adopting some superior foreign standards in the US and to convince others to consider adopting superior US standards. Make joint choices where neither principles are superior.
4. Continue efforts to encourage equality of financial statement requirements for US and foreign issuers in their use of US markets.
1. Global Capital Markets
2. Global Trade in Goods and Services
1. The investor in foreign markets is exposed to greater risks since his/her funds are being allocated on the basis of nonuniform accounting information.
2. Opportunity cost in lost transactions to the local financial community of the country with more rigorous requirements.
For sophisticated GAAP countries, there are serious economic consequences to a capital flight to less sophisticated markets:
1.The protective mission of their securities regulators is thwarted by their investors' considerable flight to lower GAAP markets.
2.Their investors' choices may be suboptimal since they are based on financial statements lacking uniformity.
3.Their financial services industry loses transaction revenues.
4. Their cost of debt and equity capital increases.
“We've got to trade foreign securities here; this is one industry in which this country is the leader of the world. And we're going to lose that leadership. Unless we get started this thing will pass us by.” (WSJ, 1991)
“When we prepared for the issue in 1990, we made the decision to go for a public US offering. The accounting rules were far stricter, but by complying with them we gained credibility not only in the US but also in Europe and Asia. We wouldn't have been so successful in achieving financing if investors hadn't already known that we fully complied with the SEC and GAAP.”