Global business community structures and dynamics

International Accounting Standards

Why the Global Business Community Should Formally Recognize the International Accounting Standards Board as the Primary Rule Making Body

Today's business world is increasingly globalized. With this in mind, the International Accounting Standards Board was created. However, not all organizations have adopted the standards set forth. This paper will explore the reasons why the global business community should formally recognize the International Accounting Standards Board as the primary rule making body.

International Accounting Standards Board Overview:

The International Accounting Standards Board (IASB) was created in 2001. Their mission "is to develop, in the public interest, a single set of high quality, understandable and international financial reporting standards (IFRSs) for general purpose financial statements" ("About Us"). Their goal is "to provide the world's integrating capital markets with a common language for financial reporting" ("Who We Are").

The IASB is an independent standard setting board. It is appointed and overseen by a professionally and geographically diverse group of trustees who are held accountable to capital market authorities, as well as the public interest. The IASB is supported by an outside standards advisory council as well as an interpretations committee. These bodies offer guidance to the IASB when divergence in practice happens. More than 100 countries either require or permit the use of IFRSs ("Who We Are").

Why the IASB Should be the Primary Rule Making Body:

For decades, organizations have experienced increasing worldwide competition, according to Gebhardt. As such, many have responded with their own strategies of globalization. Today, many companies now conduct business globally or at the least interact with other globalized organizations. Globalization strategies go beyond simply operating globally and include investing and financing. Accounting information plays a critical role in these strategies.

As Gebhardt noted, "For globalizing companies, accounting reports are a vital means of internal communication between managers and employees from different national backgrounds. Even though the core concepts of accounting are not very different internationally, differences in rules and in the application of those rules hamper internal communication." Accounting reports also can serve as a means of external communication. Again, although the core concepts are the same, the differences in rules can lead to miscommunication. As an example, SFAS 34.8 states that borrowing costs require capitalization; however, EU rules of accounting state that capitalization is optional only for self-constructed assets. An international standard would correct this disparity between the two sets of regulations.

The U.S. Financial Accounting Standards Board (FASB) was established to standardize accounting rules to ensure there was consistency in accounting across the country. Now Generally Accepted Accounting Procedures (GAAP) mean that an investor or stakeholder can review an organization's financial data and know that the rules applied are the same as comparative organizations. The acceptance of the IASB as the primary rule making body for the global business community would achieve the same effect.

Currently, national accounting rules impact accounting numbers. Differences in socioeconomic functions of accounting lead to differences in the processes of accounting regulation as well. Enforcement and interpretation of accounting regulations too is different by nation. Allowing an international body, such as the IASB, to be the primary rule maker would also ensure that enforcement and interpretation was consistent for all organizations, no matter where their home base was geographically located.