Benefits of and Obstacles to Global Convergence of Accounting Standards

[Abstract: Global convergence of accounting standards has continued to generate interest among
accounting practitioners, academicians, investors, regulators and other users of corporate financial
reports. In this context, an attempt has been made in the paper to discuss some important issues
relating to global convergence of accounting standards such as benefits of converging/harmonizing with
IASs/IFRSs, criteria for evaluating accounting standards, and obstacles to accounting convergence. The
study reveals that there are many direct or indirect potential benefits and causes for the
convergence/harmonization of accounting standards that are recognized internationally. Production of
high quality financial statements, comparability of cross national financial reports, enhancing common
financial reporting standards, making better investment decisions, lower cost of capital, cost savings
accruing to multinational companies, and so on are the benefits of global accounting convergence
revealed in the study. Global convergence of accounting standards has problems, barriers and
limitations. Some problems identified by the academicians and researchers against global convergence
have merits. The study attempts to identify all the possible obstacles in order to understand the major
impediments in achieving global convergence of accounting standards. The study also identified a
number of criteria for the evaluation of accounting standards that will be helpful in reducing the
considerable degree of obstacles depending on circumstances in achieving the global convergence of
accounting standards to some extent.]

Key Words: Global convergence, Accounting Standards, IASs/IFRSs and BASs

Introduction

In the past, different views of the role of financial reporting made it difficult to encourage convergence
of accounting standards. Now, however, there appears to be a growing international consensus that
financial reporting should provide high quality financial information that is comparable, consistent and
transparent in order to serve the needs of investors. Over the last few years, we have witnessed an
increasing convergence of accounting practices around the world. A number of factors have contributed
to this convergence. First, large multinational corporations have begun to apply their home country
standards, which may permit more than one approach to an accounting issue, in a manner consistent
with other bodies of standards such as IASC standards or U.S. GAAP. Second, the IASC has been
encouraged to develop standards that provide transparent reporting and can be applied in a consistent
and comparable fashion worldwide. Finally, securities regulators and national accounting standard-
setters are increasingly seeking approaches in their standard-setting processes that are consistent with
those of other standard-setters. Some national standard-setters are participating in multinational
projects, such as those on accounting for business combinations, in order to draw on a broader range of
comment about an issue. If convergence of disclosure and accounting standards contributes to an
increase in the number of foreign companies that publicly offer or list securities in the capital markets,
investors would benefit from increased investment opportunities and stock exchanges would benefit
from attracting a greater number of foreign listings. In such a context, establishment of a high quality
comprehensive set of generally accepted international accounting standards would greatly facilitate
international financing activities and, most importantly, would enhance the ability of foreign
corporations to get access and list in the stock markets. It is important that convergence does not
sacrifice key elements of high quality financial reporting that investors enjoy in a country. Investors
benefit when they have the ability to compare the performance of similar companies regardless of
where those companies are domiciled or the country or region in which they operate. Over the years, it
is realized that foreign companies make their decisions about whether to offer or list securities for a
variety of economic, financial, political, cultural and other reasons. Many of these reasons are unrelated
to regulatory requirements. However, some foreign companies show, among other reasons, a
reluctance to adopt accounting practices as a reason for not listing in abroad. These companies have
indicated that they have forgone listing in the abroad rather than follow accounting standards that they
have not formulated. Therefore, preparing financial statements using IASB standards without requiring
reconciliation to local GAAP could be an inducement to cross-border offerings and listings in the abroad.
On the other hand, other factors could continue to deter foreign access to the markets. For example,
some foreign companies have expressed concern with the litigation exposure and certain public
disclosure requirements that may accompany entrance into the U.S. markets. Further, the foreign
companies also may be subject to domestic pressure to maintain primary listings on home country stock
exchanges. After studying issues relating to international equity flows, International Organization of
Securities Commission-IOSCO noted that development of a single disclosure document for use in cross-
border offerings and listings would be facilitated by the development of internationally accepted
accounting standards. Rather than an attempt to develop those standards itself, the IOSCO focused on
the efforts of the IASC. In 1993, the IOSCO identified for the IASC what IOSCO believed to be the
necessary components of a core set of standards that would comprise a comprehensive body of
accounting principles for enterprises, making cross-border securities offerings. The IOSCO later identified
a number of issues relating to the then-current IASC standards. The IASC then prepared a work plan
designed to address the most significant issues identified by IOSCO -- the "core standards" work
program. In 1995, IOSCO and the IASC announced agreement on this work program, and IOSCO stated
that if the resulting core standards were acceptable to IOSCO's Technical Committee, that group would
recommend endorsement of the IASC standards. The focus of IOSCO's involvement in the core standards
project is on use of IASC standards by large, multinational companies for cross-border capital raising and
listing.

In the above background, an attempt has been undertaken in this paper to examine some important
issues toward the global convergence of accounting standards in order to understand the benefits of
and obstacles to achieving global convergence to IFRSs and also develops the criteria for the evaluation
of accounting standards.

Objectives of The Study

This study is an attempt to examine some important issues concerned with the global convergence of
accounting standards with special reference to IFRSs. The study covers the following specific objectives:

To point out the benefits of achieving the convergence to IFRSs .

To identify the evaluation criteria of IFRSs for convergence.

To find out the obstacles to achieving global convergence to IFRSs

Method of Study

Secondary data as well as desk research method was used for the purpose of the study. Secondary data
and information were collected from the existing literature in the field of international accounting. In
desk research, the supporting and relevant research materials were collected in order to present the
fact in a logical format. It covered research articles, papers, text books, publications and web sites of
international accounting standards setting bodies, regulators, international development agencies and
International accounting firms regarding accounting standards convergence/harmonisation and various
published and unpublished research materials on the subject.

The Benefits of Global Accounting Convergence

The benefits of having a commonly understood financial reporting standard are evident from the
different research studies undertaken in the field of international accounting. In such a context, the
pictures of the available research findings are now summarized below.

Global accounting convergence helps different uses by different ways. In fact the objectives of
accounting convergence is to give benefits to the users. But this convergence can be considered to be a
waste of time and money if there is no benefit for the accounting user groups. In such a context, the
benefits identified by the some researchers in the study associated with global accounting convergence
are worth citing which will prove the usefulness of global convergence. Fang Ai Lian (2004) has identified
the following benefits of a global financial reporting system:

Greater comparability for investors and global investment opportunities, and facilitating multiple listings
in different markets.

Lower cost of capital for companies.

Efficient allocation of resources.

Smoothing the foreign direct investment process.

Higher global economic growth.

All these are very useful to different users group, which tells about the usefulness of convergence.
Turner (1983) has also identified some other several benefits associated with accounting convergence,
which are as follows:

Cost and money savings accruing to multinational companies.

Countries with limited resources will provide low cost financial accounting standards.

Comprehensiveness and comparability of cross national financial reports and international financial
information.

Widespread dissemination of high quality accounting standards and practices. As a result, the tendency
for accounting standards throughout the world will be raised to the highest possible level and to be
consistent with local economic, legal and social conditions.

Enhancing common financial reporting standards so that financial statements will give the comparable
information on both sides of the Pacific and the Atlantic.

In 2001, the Australian Accounting Standards Board (AASB) issued an exposure draft concerning
International Convergence and Harmonisation Policy for comment. The main benefits of Convergence
and Harmonization according to this exposure draft are:

Increasing comparability of financial reports prepared in different countries and providing participants in
international capital markets with better quality information on which to base investment and credit
decisions.

Removing barriers to international capital flows by reducing differences in financial reporting

requirements for participants in international capital markets.

Reducing financial reporting costs for Australian multinational companies and foreign companies.

Facilitating more meaningful comparisons of the financial performance and financial position ...........
And .......... improving the quality of financial reporting.......

In this connection it may be noted here that the use of IFRS in the context of convergence is useful. To
this end, The Eurasian Association of Accountants and Auditors suggested that transition economies
adopt IFRSs or Converge to IFRSs for the following reasons (ICAR, 2001)
IFRSs are aimed at providing the transparency of accounting and reflecting the real economic situation,
which will enable users of financial statements to make the right decisions.

In developing IFRSs, experts use the best internationally recognized principles.

IFRSs are sufficiently simple to be understood by all users of financial statements worldwide who have
adequate knowledge of business, economics, accounting and finance.

Moreover, Vorushkin (2001) gives the following reasons why firms should adopt IASs/ IFRSs or
convergence with IASs/ IFRSs. Here, some reasons have more to do with managerial efficiency than
transparency.

The preparation of group accounts would be cheaper and quicker because all segments of the enterprise
would be using the same accounting system rather than different systems, which is the way many firms
now operate.

Accounting expertise within multinationals would become transferable between subsidiaries in different
countries.

Internal control will improve because the enterprise would operate in a standardized environment.

Firms could obtain improved access to funds and lower cost of capital because of increased
transparency and the harmonization of standards.

The cost of upgrading and training in accounting software would be reduced because IAS rules change
less frequently than the more volatile National Accounting Standards

Adopting IAS would provide less scope for management abuses and minority shareholder rights would
be better protected.

Establish equal and trustworthy international business relationships because foreign forms feel more
comfortable dealing with domestic companies that use the same accounting principles.

Make better management decisions that are based on economic reality, which will result in the more
efficient use of capital.

The above findings reveal wide-ranging benefits that are likely to be availed through global accounting
convergence. In fact many investors seek investment opportunities all over the world. Companies on the
other hand seek capital at the lowest price from anywhere and want to resolve the relevant accounting
differences for comparisons. In such a context, all the pertinent parties are moving towards global
accounting standards. In such a case the following most important reasons are cited as a case for global
convergence requirement:
Easier access to foreign capital market;

Credibility of domestic capital markets to foreign capital provides;

Lower cost of capital to companies;

Comparability of financial data across books;

Transparency;

Understandability;

Companies keep one set of books;

Reduced national standard setting cost;

Less susceptibility to political pressure;

Portability of knowledge and education;

Lead to global professional credentials.

The above discussions reveal the findings of various empirical studies as regards benefits and impacts of
adopting IASs/ IFRSs for the convergence of accounting standards globally. In such a context, following
table shows factors expected to benefit the company using IAS; specifically, the importance attached to
the different factors and their expected impact with the adoption of IASs/ IFRSs.