One set of Global Accounting Standards Good idea

One set of Global Accounting Standards Good ideaThe US generally accepted business relationship principles has influenced accounting metres in many countries. A decade ago, some still expected that it would eventually become globally accepted but in youthful times, this is non likely beca mathematical function there has been a distinctive global shift towards the uptake of International Financial Reporting Standards (IFRS) in the past few years. umpteen nations much(prenominal) as Japan, China and India birth active programs designed to achieve convergence with IFRS for financial reporting purposes and more than carbon nations either require or permit the use of IFRS for financial reporting and is likely that it will soon become globally accepted (James, 2009). There has been a broad movement in the US towards the acceptance of IFRs, supported by the Financial Accounting Standard Board (FASB). The Security Exchange Commission (SEC) is also considering allowing US companies c hoose between US generally accepted accounting principles and IFRS when reporting to the SEC and may require that all US public companies utilize IFRS by the year 2016 and while no final decisions have been made, it is quite certain that the US will be moving away from the traditional GAAP and towards a convergence with IFRS(James, 2009).For several decades, global organisations such as the European Union (EU), International Organisation of Securities Commission (IOSCO) and the International Accounting Standards Commission (IASC) have supported international efforts to harmonize financial accounting standards and reporting(James, 2009). To some extent, the EU gave global convergence a kick-start when they made it compulsory for EU companies listed on an EU exchange prep be their consolidated accounts after Jan 2005, under IFRS (Gill and Rosen, 2007). In 2001, the IASC reorganized and the IASB was required. Harmonization efforts thereby shifted to globalization and in 2002, the FA SB and IASB signed what is commonly referred to as the Norwalk Agreement, in which the two standard setting organisations agreed to melt together to develop a high quality single set of accounting standard that would be used internationally for domestic and cross reverberate financial reporting. It was agreed that to achieve this goal, they would eliminate existing differences between US GAAP and IFRS and coordinate their efforts on future standard setting projects. As a result of this, they atomic number 18 now compatible in many aras even though some significant differences still exist such as last in first out inventory cost valuation which is widely used in the US but is specifically prohibited under IFRS. Others like presentation, pre-operating and pre-opening costs, borrowing costs and reasonably value (Gill and Rosen, 2007) exist and have to be reconciled if a global set of standards are to emerge (FASB, 2002).POTENTIAL ADVANTAGES AND DISADVANTAGES ARISNG FROM ONE SET OF GLOBAL write up STANDARDSHaving a single set of global accounting standards has its benefits. Firstly, a single set of high quality globally accepted financial accounting standard tends to serve the financial users better and would likely lead to the greatest equation between companies (James, 2009). The SEC identifies comparability of financial information to investors as a fundamental benefit. Firms choose to adopt IFRS in order to increase opportunities such as increasing the number of global customers and suppliers. US companies loss to investigate the financial military group of these customers when establishing long term relationships and these can be facilitated through the use of superstar reporting standardSecondly, academic research suggests that investors prefer to invest in companies that use familiar standards. Firms that engage in international activities would benefit from convergence and are more likely to voluntarily adopt IFRS if they have more international interactions (Bradshaw et al., 2010).Furthermore, volunteer adoption of IAS reduces the tendency for investors to everyplace invest in domestic stock and under invest in foreign stocks. This could suggest that foreign investment decisions are related to conformity of accounting methods with domestic accounting standards. US Companies will therefore benefit from convergence of US GAAP and IFRS given that IFRS has over 100 countries adopting to it , thereby increasing foreign investment (Bradshaw et al., 2010).One set of global accounting standards would lead firms to exhibit less(prenominal) earnings management, more timely, less designation and more value relevant information. There would be improvement in accounting quality and also increased liquidity in markets because IFRS is considered a high quality set of standards as evidenced by lower information instability and greater liquidity (Bradshaw et al., 2010).Lastly, it allows US issuers greater opportunity to compete in gl obal capital markets. Replacing the competing and often contradictory standards would improve investor confidence, allow investors draw better conclusions and simplify the process and cut costs for issuers (Gill and Rosen, 2007).However, having only one set of global accounting standards has its demerits. Adopting IFRS when material differences exist at both conceptual and magnitude level could pose great costs and can be detrimental to investors(Bradshaw et al., 2010). For smaller companies, challenges will arise when their clients are acquired by foreign owners wanting to file under IFRS and this will be due to the firms not beingness prepared for the change because they dont have the same resources as the big firms(Rahr et al., 2010).Secondly, transition is costly and time consuming especially for public accounting firms due to sign education and software modifications which will require time and money to compute when transition to IFRS takes place. Fees for advising companies by CPAs would be substantial (Rahr et al., 2010).Furthermore, it can lead to users of financial statements conveying that preparers claim that they used standards that are not reliable and that they dont have sufficient knowledge of IFRS, leading to litigation issues (Rahr et al., 2010).Lastly, US colleges and universities dont appear to be equipped to teach IFRS at a level necessary for near-term adoption of standards (Bradshaw et al., 2010).WOULD ONE SET OF GLOBAL STANDARDS BE APPROPRIATE FOR ALL COUNTRIES?Though having one set of accounting standards have their benefits, it may be nave to think that adopting one set of standards for all countries. Skills transferred from Anglo-American countries to developing countries may network because they are culturally irrelevant or nonadaptive in these developing countries (Perera 1989, Cited in Deegan 2001).Also, the IASC standards are strongly influenced by Anglo- American accounting models and thus tend to reflect the circumstances and patterns of thinking in a group of countries. They are likely to have problems of relevance in countries with different cultural environments from Anglo American countries (Craig Deegan, 2001).Lastly, efforts towards assisting countries, particularly the developing countries by providing them with a mechanism to use western style accounting systems may cause harm because UK professional bodies dont make concessions to overseas students and insist on a set of knowledge cognize to UK practice and are irrelevant and harmful if applied in the wrong way (Seminar note).ADVANTAGES AND DISADVANTAGES OF A PRINCIPLE BASED APPROACH AND RULES BASED APPROACH FOR polity OF FINANCIAL REPORTING.IFRS are generally principle based standards while the US GAAP is more rules based. They differ on a number of points and can come to an entitys reported results(Gill and Rosen, 2007). The rules based approach has been under fire of late due largely to the Enron Corporation failure whereby Arthur Anderso n was seen as designing client-originated financial instruments that met the technical requirements of GAAP while violating the intent (Benston et al., 2006). The Sarbanes-Oxley Act of 2002 (SOX) was then issued to improve financial reporting and protect investors and it requires that the SEC conduct a study on the adoption of a principles based set of accounting standards (James, 2009).Principle based approach encourage the use of professional judgement with a focus on what is right and not what is in the rules and thus discourages financial engineering. They have a better ability to cope with the speed of change of environment and they are also less knotty and easier to understand as they provide latitude to financial statement preparers and are easier to conform with international standards(Moneywatch.com, 2002).However, the flexibility of principle-based approach leads to professional judgement calls when financial statements and audits are prepared and this could lead to finan cial restatements and increased litigation if the users disagree with the CPAs judgment. They can also be a significant loss of comparability among reporting entities because preparers and auditors are required to exercise judgement in accounting for transactions (Benston et al., 2006).The Rules based Approach are developed to meet demands of major constituents like management and auditors who want a clear answer to every perceivable accounting issue and this protects accountants from criticisms and lawsuits (Benston et al., 2006).There is also less need for explanation in financial statements and less room for interpretation which results in less complex and more transparent financial statements and it reduces problems in countries such as the US characterized by a agonistical environment and dominated by a very legalistic framework as the rules are stated clearly (Benston et al., 2006).However, they are too voluminous as it comprises of over 2000 separate pronouncements which are several hundred pages long and issued in various forms and formats by numerous bodies (Gill and Rosen, 2007).Secondly, because of its detailed regulations, application of rules-based approach has led to a deficiency of transparency regarding matters like revenue recognition derivatives, off-balance sheet finance and the likes (Elliot and Elliot, 2006).Lastly, rules can become useless or dysfunctional when the economic environment changes or if managers create innovative transactions (Benston et al., 2006).CONCLUSIONConvergence of IFRS and the US GAAP is in the best interest of US companies in the long run if it provides greater comparability and yields equal or higher quality standards. They both represent a high quality set of accounting standards in terms of mitigating information asymmetry and providing information important for valuation. However, its unclear whether IFRS provides equivalent financial reporting quality relative to US GAAP(Bradshaw et al., 2010).