Globalization & International Accounting
This article focuses on international accounting. It provides a description and analysis of the principle international accounting standards as developed by the International Financial Reporting Standards Board. The push for a harmonization and convergence of international accounting and financial reporting methods and practices is addressed. The relationship between international accounting standards and economic globalization is explored. This article discusses the issues related to the United States' adoption of international accounting standards.
Keywords Accounting System; Assets; Convergence; Disclosures; Economic Globalization; Equity; Expenses; Fair Value; Financial Reporting; Harmonization; Income; International Accounting; International Accounting Standards Board; Liabilities; Policy Regimes
International Business: Globalization
Accounting systems, which include accounting concepts, reporting practices and principles reflect the culture, philosophy, goals, and objectives of their users. Modern accounting systems are increasingly international in scope and standards. Economic globalization has created the demand for shared international accounting principles, standards, and practices. International accounting refers to accounting practices that cross national boundaries or is conducted in a location other than the firm's home country. International accounting encompasses “multinational enterprises, global movements to shape the direction of accounting, and comparative accounting requirements and practices” (Prather-Kinsey & Rueschhoff, 2004). The stakeholders of international accounting, including shareholders, corporations, and governments, require accurate and comparable economic data to make economic decisions and govern (Speidell & Bavishi, 1992). Comparable systems of transnational financial reporting facilitate international investment.
A lack of harmonization between national accounting laws characterized accounting practices in the twentieth century. Cultural and philosophical differences have historically been the norm in national accounting systems. Nations have based their accounting systems on culturally-specific consolidation practices and long-term investments. Differences in accounting concepts, reporting practices, and principles remain common between nations. For example, the United States' Financial Accounting Standards Board promotes the U.S. generally accepted accounting principles (US GAAP). Countries such as Japan and Canada, which conduct significant trade and investment with the United States, supplement their national accounting systems with US GAAP. The European Union has mandated the adoption and use of International Financial Reporting Standards (IFRS). Diversity in international accounting practices challenges global markets and global trade. Significant differences in international accounting concepts, reporting practices, and principles compromise the ability of national businesses and industries to compete in international markets (Wells & Thompson, 1995). The lack of harmonization in international accounting practices is creating friction and roadblocks in the process of economic globalization.
Economic globalization results from the end of financial barriers, political changes, and new communication technology. The global economy is characterized by growth (in populations and in output and consumption per capita), interdependence of nations, and international management efforts. Indicators of global growth and interdependence include the huge increases in communication links, world output, international trade, and international investment since the 1970s. The global economy is built on global interdependence of economic flows linking the economies of the world. The global economy is characterized by economic sensitivity. National economic events in one region often have profound results for other regions and national economies. National economies exist not in isolation but in relationship and tension with other economies worldwide.
The global economy includes numerous economic phenomena and financial tools shared between all countries. The new global economy is characterized and controlled through global management or governance efforts. International organizations, both public and private, work to establish norms, standards, and requirements for international financial governance. These international organizations, including the International Accounting Standards Board (IASB), G-20, Financial Stability Forum, the International Organization of Securities Commissions Organization for Economic Co-operation and Development (OECD), and the Basle Committee on Banking Supervision, develop and encourage implementation of economic standards, principles, best practices, and economic architecture (Preston, 1996).
Increased international financial activity necessitates the alignment and harmonization of national accounting practices. In the twenty-first century, the main trend in international accounting is convergence and harmonization. In the field of international accounting, convergence refers to the standardization of national accounting standards. International accounting harmonization (IAH) is a goal shared by governments, international accounting organizations, and businesses. Accounting harmonization refers to the reduction of difference in accounting practices among countries. An international accounting harmonization system (IAH system) would create a common denominator for measuring, recording, and reporting business transactions, liabilities and equities. The process of developing an IAH system will involve the selection of either Fair Value Accounting (FVA) or Historical Cost Accounting (HCA) as the shared common denominator for all international accounting practices (Barlev & Haddad, 2007).
The forces of globalization and global markets make international accounting standards necessary and advantageous for most countries. The harmonization of accounting concepts, reporting practices, and principles will allow for a level field of economic competition for all nations. The major international accounting organizations are working together with nations to build a framework for global financial reporting that is sensitive to the diversity of cultural environments worldwide. In addition, the new international accounting framework will be developed to respect differences in the following accounting values: Professionalism, statutory control, uniformity, flexibility, optimism, and transparency (Marrero & Brinker, 2006).
The following section provides a description of the principle international accounting standards as developed by the International Accounting Standards Board. This section serves as a foundation for later discussion about the issues related to the United States' adoption and accommodation of international accounting standards.
International Accounting Standards
The International Accounting Standards Board, known prior to 2001 as the International Accounting Standards Committee (IASC), is one of the main international organizations responsible for setting international standards for accounting and reporting practices. The International Accounting Standards Board uses a framework that defines terms used in financial accounting statements worldwide for the measurement of financial positions. The International Accounting Standards Board describes the terms of assets, liability, equity, income, expenses, in the following ways:
- Assets refer to resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
- Liabilities refer to present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
- Equity refers to the residual interest in the assets of the entity after deducting all of its liabilities.
- Income refers to the increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity.
- Expenses refer to decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or liabilities that result in decreases in equity (“Framework,” 2008, p. 1-2).
International Financial Reporting Standards
The International Accounting Standards Board publishes and distributes its standards in reports under the name International Financial Reporting Standards (IFRS). Prior to 2001, the International Accounting Standards Committee (IASC) issued its reports under the name International Accounting Standards (IAS). The International Accounting Standards Board has honored and adopted the International Accounting Standards Committee's numerous International Accounting Standards. Nations committed to international financial activity are increasingly adopting International Financial Reporting Standards and International Accounting Standards. Common International Financial Reporting Standards include the following:
- First-time Adoption of International Financial Reporting Standards: The IFRS includes directives...
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