International Financial Accounting
The establishment of international financial accounting standards has proven critical in a worldwide economy that is increasingly eschewing national borders in order to conduct global commercial enterprise. Such standards provide uniformity in practice from industry to industry and region to region; an important characteristic in a world that is becoming more interconnected. This paper will explore the ways uniformity may be created among financial accounting practices, outlining the global standards that have been established in this arena and the areas in which those standards are applicable. The reader will glean a more comprehensive understanding of the benefits and intricacies of international financial accounting practices.
Keywords: Balance Sheet; Cash Flow Statement; International Accounting Standards Board (IASB); International Financial Accounting Standards (IFAS); International Financial Reporting Standards (IFRS); Income Statement; Transparency
The famed American writer and humorist James Thurber was once called into his bank to speak with the manager about his account, which was overdrawn. After some discussion, Thurber confessed that he did not keep a record of the checks he paid. Confused, the bank manager asked Thurber if he knew how much money was in his account. Thurber simply responded, "I thought that was your business" (Anecdotage.com).
There are countless methodologies by which businesses manage their books; thankfully, the majority of these methods are not nearly as lax as the system employed by Thurber. In fact, financial accounting is one of the most important aspects of a successful business, providing a detailed report on the true fiscal status of the company.
Adding to the diversity of financial accounting is the 21st century global economy. Over the last several decades, aided by state of the art technology such as the Internet and cellular telecommunications, businesses from virtually every industry have made connections around the globe. This new environment seems to thrive outside of the traditional purview of the nation-state, locating a lack of uniformity among accounting practices.
This paper will explore the ways uniformity may be created among financial accounting practices, outlining the global standards that have been established in this arena and the areas in which those standards are applicable. The reader will glean a more comprehensive understanding of the benefits and intricacies of international financial accounting practices.
In the mid-18th century, the Industrial Revolution brought a new era of development, as advances in agriculture, transportation and manufacturing technology helped increase production and the speed by which the products of that output could be delivered. As these industries continuously and quickly evolved, so too did their marketability. However, although the Industrial Revolution began in Europe in the mid- to late-1700s, the field of accounting did not see full development until the latter years of the era, when that marketability led to the formation of publicly-shared joint stock companies.
Prior to the mid-1850s, the field of accounting was limited to bankruptcy work; the creation of detailed reports of the failings of businesses so that assets could be distributed and debts paid. In 1856, however, the British government introduced what was known as "the Companies Act," which helped increase the power and relevance of accountancy companies while establishing regulations for those in business and stock trading to follow in uniform fashion. Provision 69 of that Act mandated that Boards of Directors keep "true accounts" of stock trades, profits, expenses, credits and liabilities (Joint Stock Companies Act, 1856).
By the time the Companies Act became law, organizations comprised of accounting firms and professionals began taking shape, primarily in Edinburgh and Glasgow, Scotland. In 1870, the landscape changed significantly, however, when the first local accounting societies formed in England. Within two years, those groups joined together to form a national body, the Institute of Accountants in England. At the same time, another group, the Society of Accountants, also came into being. Other groups, most notably the Chartered Institutes of England and Wales (ICAEW) and the Chartered Institutes of Scotland (ICAS), would join them soon after (MacDonald, 1995).
Although accounting and bookkeeping had been prevalent throughout history, the formal practice of accounting was largely specific to individual businesses and certain political systems. Even as accounting associations began to jell in Europe by the late 19th century, accounting as a collective industry still had not formally taken shape. One exception was Argentina, which in 1886 legally recognized the profession of accountant, applying government standard qualifications to those individuals who sought to enter the field (Brown, et al., 1905). Argentina stood out, however, as accounting remained fragmented in industrialized countries. The ICAEW was one of the few organizations of accounting professionals that worked to create some regional connectivity and even industry standards.
Prior to World War I, the ICAEW led the charge to create recognition for the industry under the law. The war, however, rendered moot the debate over the dozens of bills filed to that end. In the meantime, commerce continued to expand and international trade crossed borders, continents and oceans. In 1966, the efforts initiated by the ICAEW were reinitiated, as a proposal was offered to create a international study group comprised of that organization, the American Institute of Certified Public Accountants and the Canadian Institute of Chartered Accountants. The study group, which was finally approved a year later, began to offer a number of position papers and research materials, many of which would later become the standards of international financial accounting.
International Financial Accounting Standards
In 1973, the push for international financial accounting standards was furthered with the establishment of the International Accounting Standards Committee (IASC). For 27 years, that organization crafted a wide range of standards that were designed to reverse the countless variations of the practice of accounting. In 2001, the IASC was replaced with the International Accounting Standards Board (IASB). During that time, the standards that were introduced by the IASC and its successors were becoming increasingly popular throughout the industry. In 2000, the U.S. Securities and Exchange Commission endorsed the acceptability of establishing international accounting standards (Institute of Chartered Accountants, 2009). The central vehicle for delivery of such standards would be the International Financial Reporting Standards (IFRS), which are a series of benchmarks created by the IASB that create universally accepted public company financial statements.
The establishment of international financial accounting standards has proven critical in a worldwide economy that is increasingly eschewing national borders in order to conduct global commercial enterprise. It provides uniformity in practice from industry to industry and region to region; an important characteristic in a world that is becoming more interconnected. Many areas of international financial...
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