Global accounting standards and their implementation

International Accounting Standards: Adoption And Transition

Traditionally, the accounting profession has been seen as a functionary occupation, the practitioners of which are concerned with the presentation of economic figures relating to individual and organizational financial performance. Accountancy has been seen largely as a field reserved for mathematical grunt-work, with its output serving as indicative of performance rather than incursive upon it. Today, that perspective has been altered significantly, for better and for worse. The role of accounting professionals has both diversified and expanded considerably over the past few years, with practitioners in this field coming to serve as primary decision-makers and organizational visionaries in their own right. This serves as a testament to the crucial contribution of accountancy-derived economic insight in the determination of sensible and profitable business decisions, reporting practices and levels of compliance with international law. In many ways, in both highly developed economic contexts such as the United States, the United Kingdom and the European Union, and in developing parts of the world such as the Bulgarian context in which this research has been conceived, the importance of the accountancy of organizations has accelerated with the acceleration in the interdependence of various parts of the global economy. This is the reality that has contributed to the development of the International Accounting Standards Board (IASB), the International Financial Reporting Standards (IFRS) and the impetus for the research contained herein. The IASB and its guiding doctrine in the IFRS are designed to regulate accounting standards across a global community. With economies in both the developed and the developing spheres interacting with greater fluidity under current global economic structures, there is a clear need to establish consistency and control across the variance of responsibilities which fall upon the accountant.

The research undertaken here will examine in specific detail the various implications of this issue through the lens of the accountancy profession. The consideration of such areas of relevance as free trade proliferation and the economic aims of globalization; the nature of the accounting profession today especially in light of accountancy as being at the base of many of today's major economic scandals and meltdowns; the experiences of developed markets such as the United States, the United Kingdom, Canada, Australia and India under the implications of IFRS and other such trade agreements; the experiences of fast developing markets but smaller markets and the general challenges facing all nations, continental unions and the International Accounting Standards Board itself in realizing the broader aims tied to the Standards in question.

A thorough discussion concerning the relevance of these various areas of consideration will help to provide a firm basis of understanding of the importance and meaning in the objective and resulting sections of the IFRS, from which key areas will be dissected to the benefit of our research process.

The primary objective of this study will be to clarify and evaluate the terms of existing international agreements on financial reporting standards with respect to the accounting profession. The research promotes the argument that effective global integration of standards will be based primarily on the capacity of participating economies to educate, certify and monitor accountants in a field which has suffered in recent years for its shortcomings in ethicality, competence and legal compliance.

The present moment is one of historical importance where the international recognition of accounting standards is concerned. For the International Financial Reporting Standards, the latter part of this decade has seen myriad advances in terms of the refinement of its principles, the expansion of its influence to compliant states and its proximity to its ambition of universal accounting standards for the global community. In many ways, though there is both a detailed history of evolution producing the IFRS and a clear global context for its emergence, it is only its incubation phases right now. The following history is a concise recounting of the events and context leading to this moment while simultaneously helping to illuminate the intended purpose of IFRS, its stated objectives and the conditions which helped to produce the policy terms to be examined in detail hereafter.

The history of IFRS ostensibly begins in 2001 with the creation of the International Accounting Standards Board. "Although it is several decades since the International Accounting Standards Committee -- the forerunner of the International Accounting Standards Board -- first started to develop standards for international use, it is only in the last few years that major steps have been taken to achieve substantive convergence on a global scale. At the heart of that convergence is IFRS." (Dilks, 1)

The International Financial Reporting Standards were enacted with the creation of the International Accounting Standards Board in 2001 but the development of these Standards actually precedes this considerably. Its formation was the offshoot of the already enacted International Accounting Standards, themselves produced by the International Accounting Standards Committee. This was organized in 1973 and was the most substantial recognition to that point of the internationalization of capital markets with the opening up of the world to capitalist development after World War II. The members were emissaries of their respective nations who, as accountancy professionals, corporate leaders or financial scholars, served in this part-time capacity to help establish regulations that could be applied to the unique challenges of international commerce. (Camfferman & Zeff, 1)

It was at the juncture preceding its emergence that the IASC would be conceived according to an apparent need to address the rising tide of firms with operations that spread across differing national contexts. The desire to reconcile the inconsistencies that had obfuscated financial reporting for such entities would lead to the spearheading of the Committee's development by British accountancy professional named Sir Henry Benson. In response to the problem notated here above, "Benson secured the support of the principal accountancy bodies in Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom, and the United States to establish a body that would narrow the differences across accounting standards." (Camfferman & Zeff, 1) Thus, the initial office for the operation was established in London and was funded by the accountancy groups respective to each member country.

As with many international governing bodies, the IASC is one which began with a far more informal tone and purpose than that which has evolved there from. From the time of its formation through its first decade, the Committee would issue policies that were designed with a high degree of flexibility and that were less a matter of enforcement than clarification in those areas where differing national accounting policies might demand guidance. That stated, the policies which it created would begin to take on some degree of seriousness when applied to developing countries which, in their interest in becoming more entwined with the world economy, would find more strict compliance in their best interests. This scenario, however, would ultimately segue into the era of globalization for which we provide a parallel history later in this literature review. Here, "as the pace of globalization picked up in the 1980s and especially in the 1990s, the IASC, with strong encouragement from major securities market regulators, began improving its standards to a level of quality that commanded attention and respect of national and regional regulators, national standard setters, major multinational companies, and leading accountancy bodies." (Camfferman & Zeff, 1)

With this improvement came an increasingly sturdy reputation as the foremost standard-making body for international accounting, which Camfferman & Zeff indicate would ultimately be transferred to the restructured and renamed International Accounting Standards Board. With the release of its International Financial Reporting Standards, comprised of a new set of Standards (IFRSs) and of either revised or simply commuted pre-existing Standards (IASs), the International Accounting Standards Board would position itself as the primary entity existing for guidance, regulation and oversight of international accounting and financial reporting.

Though there are certainly challenges, setbacks, philosophical conflicts and practical discrepancies which arise and which are addressed further in this account, these are essentially addressed by the overarching statement that "a high standard of accounting and financial reporting is an important factor in the proper functioning of capital markets and in strong corporate governance." (Camfferman & Zeff, 2) This is especially true as the complexity of international markets becomes a more persistent reality for nations which are collectively opening their borders to international trade with modest restriction. As the text denotes, the primary ambition for the establishment of these regulatory conditions is the refinement of the way that financial reports are presented so that these can become increasingly informative and useful to those making decisions according to their terms.

Here, the Camfferman & Zeff text offers one of the underlying premises to both the initiation of the IASC and the transition to the IASB as well as setting out a fundamental principle of our own research. The authors makes the argument that "accounting standards have the potential to contribute significantly to an improved quality of financial reporting by playing an educational role, by encouraging the resolution of differences of view through discussion and debate, and by imposing a more or less arbitrary but nevertheless useful consistency in treatment in cases where a consensus has not yet emerged." (Camfferman & Zeff, 2) Indeed, the purpose which seems to stand above many others as specific Standards are examined is the improvement of financial reports as informative documents inbuilt with the capacity to educate users as to the financial disposition and outlook of reporting entities.

The declared purpose of the IFRS is to improve the comparability, clarity, relevance and reliability of accounting processes and the resultant financial reporting across a global scale. (IASC Foundation, Framework) This purpose is directly correlated to the apparent direction in which the global economy has thrust itself across the last few decades, with the deconstruction of trade barriers and the forging of encompassing exchange agreements producing a circumstance where proponents view a categorical necessity in standardizing accounting practices. Therefore, in a discussion on the global applications of the IFRS, which is conducted by a consideration of the adoption challenges, procedures and experiences of some key nations, there is a core understanding that many fundamental differences in these nations have rendered the adoption process as widely variant. The global applications of the IFRS, though intended to achieve a sense of uniformity in the eventuality, are presently characterized by transitional processes that naturally differ according to venue. A consideration of some of these processes helps to reveal the status of IFRS with respect to its intention for global application.

Certainly, one of the greatest successes which can be observed of the IFRS at this juncture is that it has experienced a fast and proliferated uptake, with nations actively seeking participation and in some cases, with nations pursuing very aggressive transitional tactics in order to achieve compliance with speed and purpose. At present, it can be said that IFRS though still in its induction phase, is now the largest and most determinant of global accounting bodies. To this point, "approximately 100 countries already require, allow or are in the process of converging their national accounting standards with IFRS. FASB and the IASB have agreed to converge their respective standards. The SEC also has a road map to allow foreign issuers that list on U.S. exchanges to report exclusively in IFRS by 2009." (Gill, 1) There is denoted a clear incentive for such nations as the United States, where considerable and diverse foreign investment and ownership permeates the economy, to achieve a uniformity that eases financial observation and planning.

This is why the United States is undergoing a convergence of its GAAP with the IFRS, in order to bring the accounting principles governing its internal market into concurrence with international conditions. So too are quite a few other major economies. Accordingly "countries such as Japan, the United States and Canada have active programs designed to achieve convergence with IFRS. China's Accounting Standards Committee has announced that convergence is a fundamental goal of its standard-setting program, and the Institute of Chartered Accountants of India has taken up the issue of convergence of Indian accounting standards with IFRS." (Gill, 1) It still bears noting that at this early stage, even many of those nations which have actively and voluntarily attempted to align with IFRS terms have not necessarily succeeded in full in achieving compliance or consistency. Gill (2007) makes the case that there is certainly evidence of a global convergence upon these shared standards but that we are in the incubational phase of this convergence process.

All these factors considered, now is a fully appropriate time to offer a statement such as this account, which intends to provide something an overview to IFRS that serves both as a supplemental document to the issued set of Standards and as a separate account which standing on its own qualifies as a commentary of the IFRS. Accordingly, that the composition of this report coincides with the end of the comment period for the United States, officially denoted to be drawing to a close on April 20, 2009, indicates that this is a timely discourse. (Edwards, 1) Indeed, the issues which are discussed here throughout, both with and without political connotation, are of discreet importance as such nations as the United States come into compliance.

To this point, as anticipated, the uniformity of the IFRS means that the Standards there imposed do tend to vary from one nation to the next with different economic conditions playing a significant role in how the costs of transition and of implementation will be produced. Particularly, findings produced as recently as April of 2009 and derived from Accenture indicate that American firms will pay more to make the transition from the existing U.S. GAAP than will firms in, for one instance, Europe. The report accordingly tells that "U.S. companies will spend between .1% and .7% of annual revenue to move to the global rules. By contrast, European companies making the switch did so at an average cost of .05% of revenue." (Bentley, 1) The article suggests that rules-based rather than risk-based nature of Generally Accepted Accounting Principles in the United States differentiated this further from both the counterpart GAAPs used in Europe as well as from the risk-based approach taken by the IFRS.

Because of these differences, in addition to meeting these new terms, U.S. companies will also be expected by the Securities and Exchange Commission to adhere to the terms of the U.S. GAAP. All told, the result will be a set of regulatory demands that impose an average expenditure of roughly $32,000 per company. (Bentley, 1) Some research has found that in contexts especially where some of the terms reflected in the IFRS differ considerably from those which have traditionally emerged from a nation's GAAP, the expense of time, human resource and physical resource in simply learning and adjusting to new accounting conditions will itself represent a cost to the compliant economy. As one report denotes, "implementing IFRS has increased financial reporting risk due to technical complexities, manual workarounds and management time taken up with implementation." (Ellenburger, 1) This means that for adopting countries such as the Untied States, the transition to risk-based conditions is both time-consuming and increases the costly possibility of measurement error due to unfamiliarity with the new Standards.

Here, the matter of greater importance is that this compliance is an inevitability, with the U.S. GAAP already actively undergoing convergence with IFRS. That said, the experiences reflected here in the U.S. convergence are neither fully unique nor do they capture the full range of conflicts for adopting nations. In addition, they will not be seen as deterrents as the transition process gets fully underway. As of summer 2008, "under 'road map' tentatively adopted by a unanimous commission on Aug. 27, the standards would be required in 2014. The largest 20 companies in their industries by market capitalization would be allowed to make the change even sooner. In two months, following a period of public comment, the SEC will vote again." (Epstein, 1) The circumstances therefore denote that where challenges are concerned, it is simply a matter of how these will be addressed as refinement of implementation improves.

To this exact point, there remain many areas of consideration where conflicts between the U.S. GAAP and the IFRS remain unresolved. Edwards (2009) details this condition as it relates to hedge funds, which are at the juncture of Edwards' reporting not addressed by the IFRS. This has produced the false impression amongst hedge fund managers that the uniformity and change in accounting practices will not apply to them. At present, the expectation is that this situation will soon be altered. To the point, "although the application of IFRS requirements to hedge funds and the exact dates for conversion are still under discussion, the proposed timeline of 2014-16 for publicly traded companies (currently 2014 for larger entities and 2016 for smaller entities) suggests at a minimum investment managers should make an effort to understand the differences between U.S. GAAP and IFRS." (Edwards, 1)

This is supplemented by a warning issued by Deloitte & Touche in 2008, where it admonished that though many fund managing firms had dodged the initial rounds of policy-making, they would serve their best interests to anticipate and prepare for the inevitable application of these policies to their respective operations. The major accounting firm echoed the findings in Edwards' study, which dictated that the clear intention of universal application of IFRS, in conjunction with the convergence of the U.S. GAAP therewith, would lead to an inevitable need for compliance with the new standards. To the point, a correspondence issued to its fund managers and clients from Deloitte & Touche indicated to its recipients that "you have a choice . . . either to sit back and wait for it to happen (with all the attendant uncertainty and risk) or mobilize your company in an effort to extract every possible benefit and dodge every avoidable obstacle." (FA, 1)

This captures the conflict internal to the issue. Namely, though the imperative is certainly present for nations to begin to integrate the standards and regulations inherent to the IFRS, there are nonetheless significant institutional difficulties which are inherent to the process for all global entities. Like any substantial institutional change, this one is precipitated by the degree to which member states have cooperated in the uptake process. The European Union (EU), due to its continuity and community orientation, has proven both well suited in its nature for the transition and, simultaneously, reflective of the manner in which the international community must work to overcome specific regulatory shortcomings. So is this illustrated by the report issued by the European Commission (EC) in 2005. Here within, "the Commission Services conclude that the first year of mandatory application of IFRS in the EU has been generally positive, even if the regulatory changes and lack of experience have posed a challenge for first-time appliers." (EC, 1)

This means that the process of integration and implementation is one driven by the compromise and input of this host of parties, demonstrating that which is demanded of an international standard in an area historically governed domestically. Namely, there is a clear demand for all states invested to provide some degree of authority and some degree of input with respect to the ramifications of these standards. The International Accounting Standards Board (IASB) therefore brings together the host of perspectives, interests, legal cultures and economic imperatives facing nations, alliances and unions throughout the world community. It is therefore of the utmost relevance that those parties in which are vested the responsibilities to attend the crafting of these still developing standards be representative of the parties which will ultimately be expected to comply accordingly. Therefore, "it is important that the IASB is addressing the right issues and that future standards/interpretations provide suitable accounting solutions. Therefore the EU institutions, Member States and stakeholders have to be involved in the standard-setting process and suitable governance structure and funding of the IASB/IASCF shall be ensured." (EC, 1) To this juncture, the resident issue for the European Union is consistently the power tilt which tends to favor the interests of such leading nations as France and Germany.

This is true to the extent that it is reflected in the speed of uptake amongst members of the European Union. For many of the wealthy and more industrialized of Union members, advocacy and input into the conditions of the IFRS is perhaps demonstrated by a concurrence of standard adaptations on the domestic front. For instance, in the case of such nations as Germany, there is evidence that its path toward theoretical and practical compliance with IFRS would proceed along a very similar evolutionary path to that which produced the IFRS itself. Undoubtedly, this would give some nations a head start in implementation and thus, a greater weight of involvement in many of the conditions and terms produced. To this point, according to the report by Moya et al. (2005), at the time of inception of the IFRS for the EU, Union members would arrive to this juncture at widely variant points along the continuum of realization. As Moya et al. report, "many German companies began adopting those standards in the 1990s, on a voluntary basis, because of their need to access international capital funding. Spanish companies, by contrast, [were] not permitted to adopt IFRS before 2005." (Moya et al., 1)