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Universal Accounting Standards

Essay by   •  January 13, 2011  •  967 Words (4 Pages)  •  1,483 Views

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Universal Accounting Standards

Issue

The internationalization of business activities has increased exponentially over the past 3 decades. Because the accounting standards and practices of different countries have developed in response to diverse environments, accounting has developed with strong national accents . As a result, multinationals with branches and investments in a wide array of countries find it difficult to achieve a consolidated financial report. Further, investors in these multinationals have trouble evaluating financial statements formed from a multitude of unusual (to the investor) accounting standards, forcing them to make less informed decisions. The benefits of a set of uniform accounting standards include greater comparability of financial information for investors, greater willingness on the part of investors to invest across borders, lower cost of capital, more efficient allocation of resources, and higher economic growth .

Drivers for Uniform Standards

1. The International Accounting Standards Board (IASB)

In 2001, the IASB was created, replacing the International Accounting Standards Committee (IASC). The mission of the IASB is to develop a set of high quality, enforceable, and global accounting standards that require transparent and comparable information . The IASB sets accounting standards called the International Financial Reporting Standards (IFRS) and through the creation of these national standards, the IASB hopes it can create uniform accounting standards for all countries. International Financial Reporting Standards are now the world's dominant regime, used in more than 90 countries across the globe .

2. The Formation of the European Union

The formation of the EU has accelerated the realization amongst EU members of the importance of common standards in all areas of the financial reporting chain. European listed companies are now in their second year of implementing common financial reporting standards (IFRS), and the EU is in the process of settling on a common set of standards for auditing ethics . This move has increased competition and transparency as well as ease the process of raising capital and moving it across boarders.

3. The Norwalk Agreement

The Financial Accounting Standards Board and the IASB jointly published a roadmap for developing common accounting standards by 2008 . The Norwalk Agreement sets out a framework to bring U.S. and international reporting closer together and to eliminate differences by adopting the best solution available.

4. Japan and IASB

Japan and the IASB have recently agreed to expedite the convergence between the Japanese Generally Accepted Accounting Principles (GAAP) and IFRS. The two boards will seek to eliminate major differences between Japanese GAAP and IFRS by 2008, with the remaining differences being removed by June of 2011 . As a major player in the world economy, the addition of Japan to IFRS is a huge boost to the universal standard-setting process.

Challenges to Uniform Standards

1. Some Experts Doubt it’s Possible

Even with the signing of the Norwalk Agreement in 2002, some experts doubt full harmonization is possible. As stated above, accounting standards and practices of different countries have developed in response to diverse environments. Cliff Verron, managing director and deputy CFO Citi Markets and Banking (CMB), said that “…many involved in the standard-setting process feel that culture is too large of a mountain to climb. Why change the way you and your ancestors have been conducting and recording business if it has always worked for you?” Other experts believe that it is more important

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