Comparable, transparent, and reliable financial information is fundamental for the smooth functioning of capital markets. In the global arena, the need for comparable standards of financial reporting has become paramount because of the dramatic growth in the number, reach, and size of multinational corporations, foreign direct investments, cross-border purchases and sales of securities, as well as the number of foreign securities listings on the stock exchanges. However, because of the social, economic, legal, and cultural differences among countries, the accounting standards and practices in different countries vary widely. The credibility of financial reports becomes questionable if similar transactions are accounted for differently in different countries.
To improve the comparability of financial statements, harmonization of accounting standards is advocated. Harmonization strives to increase comparability between accounting principles by setting limits on the alternatives allowed for similar transactions. Harmonization differs from standardization in that the latter allows no room for alternatives even in cases where economic realities differ.
The international accounting standards resulting from harmonization efforts create important benefits. Investors and analysts benefit from enhanced comparability of financial statements. Multinational corporations benefit from not having to prepare different reports for different countries in which they operate. Stock exchanges benefit from the growth in the listings and volume of securities transactions. The international standards also benefit developing or other countries that do not have a national standard-setting body or do not want to spend scarce resources to undertake the full process of preparing accounting standards.
The most important driving force in the development of international accounting standards is the International Accounting Standards Committee (IASC), an independent private-sector body formed in 1973. The broad objective of the IASC is to further harmonization of accounting practices through the formulation of accounting standards and to promote their worldwide acceptance.
One hundred and forty-three professional accounting organizations in one hundred and four countries are IASC members. The IASC Board, presently consisting of sixteen member organizations, is responsible for establishing accounting and disclosure standards. The board follows due process in setting accounting standards, thus allowing for a great deal of consultation and discussion and ensuring that all interested parties can express their views at several points in the standard-setting process. The final standard requires approval by at least twelve member organizations.
On May 24, 2000, a new structure for IASC was approved unanimously by its membership. Under the new structure, IASC will be established as an independent organization that will have two main bodies, the Trustees and the Board. The Trustees will appoint the board members, exercise oversight and raise the funds needed, whereas the board will have sole responsibility for setting accounting standards. It is expected that the new structure would come into effect on January 1, 2001.
The IASC has issued forty International Accounting Standards (IASs) to date covering a range of topics, such as inventories, depreciation, research and development costs, income taxes, segment reporting, leases, business combinations, investments, earnings per share, interim financial reporting, intangible assets, employee benefits, impairment of assets, and financial instruments. It has also issued a Framework for the Preparation and Presentation of Financial Statements that sets forth the concepts underlying the preparation and presentation of financial statements for external users.
International Accounting Standards initially tended to be too broad, allowing many alternative accounting treatments to accommodate country differences. This was a serious weakness in achieving the objective of comparability. To gain acceptability of its standards, in 1989 the IASC undertook a project (called the Comparability Project) aimed at enhancing comparability of financial statements by reducing the alternative treatments. An important part of this effort was its work plan to produce a comprehensive core set of high-quality Standards (Core Standards project). The IASC has completed its Core Standards project, and the revised standards are a significant improvement over the earlier ones.
IASC standards are not mandatory. However, the acceptability of IASs has been on the rise, with an increasing number of companies stating that they prepare financial reports in accordance with IASs. Many countries endorse IASs as their own standards with or without modifications, and many stock exchanges accept IASs for cross-border listing purposes. For example, the Arab Society of Certified Accountants, comprising twenty-two Arab nations, has signed a declaration supporting IASs as the national accounting standards in all its member countries. Some European countries are developing legislation to allow not only foreign but also domestic companies to use IASs in their consolidated financial statements.
In the United States as of mid-2000, IASs are not an acceptable basis for financial statements filed with the Securities and Exchange Commission (SEC). Although the SEC has expressed support for the IASC's objective of developing accounting standards for financial statements used in cross-border offering, it has also stated that such standards must be comprehensive, possess high quality, and be subject to rigorous interpretation and application. The SEC is under increasing pressure to make U.S. capital markets more accessible to non-U.S. issuers.
Internationally, the International Organization of Securities Commissions (IOSCO), an organization comprised of securities regulators from more than eighty countries, as of mid-2000 is considering the endorsement of IASs for cross-border capital raising and listing purposes in all global markets.
Many other organizations also play an important role in the march toward international accounting standards. Among the more important are those discussed below.
IFAC. The International Federation of Accountants is a worldwide association formed in 1977 to develop the accounting profession, harmonize its auditing practices, and reduce differences in the requirements to qualify as a professional accountant in its member countries. It currently has a membership of one hundred and forty-three national professional organizations in one hundred and four countries representing more than 2 million accountants. The IFAC issues International Standards on Auditing (ISA) aimed at harmonizing auditing practices globally. The IFAC Council also appoints country representatives on the IASC Board (thirteen in total).
UN. Several organizations within the United Nations have been involved in international accounting standards. Its Group of Experts prepared a four-part report in 1976, "International Standards of Accounting and Reporting for Transnational Corporations." The report listed financial and nonfinancial items that should be disclosed by multinational corporations to host governments. More recently, it has worked to promote the harmonization of accounting standards by discussing and supporting best practices in a variety of areas, including environmental disclosures.
OECD. The Organization for Economic Cooperation and Development formed in 1960 currently has twenty-nine of the world's developed, industrialized countries as its members. A valuable contribution of the OECD is its surveys of accounting practices in member countries and its assessment of the diversity or conformity of such practices. Its Working Group on Accounting Standards supports efforts by regional, national, and international bodies promoting accounting harmonization. In 1998, the OECD issued "Principles of Corporate Governance" that support the development of high-quality, internationally recognized standards that can serve to improve the comparability of information between countries.
EU. The European Union, the powerful regional alliance of fifteen nations, aims to bring about a common market that allows free mobility of people, capital, and goods among member countries. To promote the cross-country economic integration, the EU has made significant progress in the harmonization of laws and regulations. Its Commission (European Commission) establishes standardization and harmonization of corporate and accounting rules through the issuance of Directives. Directives incorporate uniform rules (to be implemented exactly in all member states), minimum rules (which may be strengthened by individual governments), and alternative rules (which members can choose from). Directives are mandatory in that each member country has the obligation to incorporate them into its respective national law. However, each country is free to choose the form and method of implementation and also to add or delete options.
The Fourth and Seventh Directives deal exclusively with accounting issues. The Fourth Directive, adopted in 1978, covers financial statements, their contents, method of presentation, valuation methods, and disclosure of information. The Seventh Directive, adopted in 1983, requires worldwide consolidated financial statements regardless of the location of the parent company. Given the large variety of alternatives for consolidation permitted in member countries prior to its issuance, the Seventh Directive is regarded as a major development toward harmonization. The European Commission announced in 1995 its decision to rely heavily on IASC to produce results that meet the needs of capital markets. It is also investigating the possibility of requiring all member states to require listed companies to report under IASs.
NAFTA. The North American Free Trade Agreement was formed in 1993 among Canada, Mexico, and the United States to create a common market. It will phase out duties on most goods and services and promote free movement of professionals, including accountants, among the three countries. There are projects under way to analyze the similarities and differences between financial reporting and accounting standards of the member countries of NAFTA.
Other organizations. Some regional organizationsuch as the Association of Southeast Asian Nations (ASEAN), Community of Sovereign States, Economic Cooperation Organization (ECO), Baltic Council, Asia Pacific Economic Cooperation (APEC), Confederation of Asian and Pacific Accountants (CAPA), and Nordic Federation of Accountants (NFA)ave made efforts toward harmonizing accounting and disclosure standards. G4 group of standard-setting bodies in Australia, Canada, the United Kingdom, and the United States, has also started playing an important role in the harmonization of international accounting standards.
The process of harmonizing international accounting standards has come a long way on a path that has been far from smooth. While some critics still doubt the need and feasibility of such standards, it is becoming increasingly clear that the question is not whether but when the Inter national Accounting Standards will be required and followed by business and other entities worldwide. The likely endorsement by the IOSCO and SEC will make that time sooner rather than later.
International Accounting Standards Committee (IASC). http://www.iasc.org.uk. (April 2000).
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Saudagardan, Shahrokh. (2001). International Accounting: A User Perspective. Cincinnati, OH: South-Western College Publishing.
Zeff, Stephen A. (1998). "The IASC's Core Standards: What Will the SEC Do?" Journal of Financial Statement Analysis Fall: 67-78.
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