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The IASB at a Crossroads The Future of International Financial Reporting Standards Case Solution
| Solution Id | Length | Case Author | Case Publisher |
|---|---|---|---|
| 969 | 1555 Words (6 Pages) | Karthik Ramanna, Karol Misztal, Daniela Beyersdorfer | Harvard Business School : 113089 |
A Word File
Since the inception of domestic currency in European Union, the competitiveness of the region has increased particularly in relation to Unites States. In order to stabilize the eminence of the dollar as a powerful currency in the world, U.S has made efforts to attract capital from investors of all over the globe to its stock market. As, accounting systems being employed in different parts of the world are different, the financial reports prepared according to these systems are not comparable with each other. Since the investors now want to invest in a number of countries, the need for the clarity of the different accounting systems is now more than ever. In order to harmonize international accounting system, an international body known as International Accounting Standards Board was formed for the harmonization of accounting systems. For last ten years, the organization has been trying to establish global accounting standards so that financial statements prepared across different stock markets in the world are comparable.
Following questions are answered in this case study solution
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Should it IASB put more emphasis on full adoption versus convergence with its IFRS principles? Should it make more compromises to facilitate adoption by the U.S.?
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Should IASB, in addition to IFRS, also focus on harmonizing enforcement and auditing rules? Should it make more adjustments to its own structure to accommodate the new tasks and its growing membership and stakeholder base?
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Were there lessons to be learned from the accounting convergence process for the convergence of corporate governance practices more generally? Had the IASB moved too far, too fast, or was the pace of accounting globalization an example for other areas of business standardization to follow?
Case Analysis for The IASB at a Crossroads The Future of International Financial Reporting Standards
1. Should it IASB put more emphasis on full adoption versus convergence with its IFRS principles? Should it make more compromises to facilitate adoption by the U.S.?
One of the biggest obstacles in the implementation of IFRS is the resistance put up by America in favor of US GAAP. As, capital markets of US are the largest in the world and a large portion of international investment flows through American capital markets, US argue in favor of US GAAP instead of IFRS. The differences in the accounting practices of some of the countries with the rest of the world are so acute that it is very difficult to harmonize different accounting systems and get a global agreement on a unanimous accounting system. Also, in the developing economies, there is a severe lack of the professional accounting bodies that can play a leading role in the harmonization of international accounting system (Salin & Victoria, 2001). Accounting system in a particular society is an outcome of the social, cultural and economic needs of that particular region. Therefore, even if the same system of accounting is used for preparing financial information, different countries will interpret the same financial information differently because of the cultural differences (Fechner, 1994). For example, accounting systems of UK and USA lay stress on fairness and substance over form while the accounting system of France (FCC), lays more stress on the compliance of the rules and regulations rather than on substance. Patriotism and nationalism are also one of the reasons why harmonization of international accounting system is impractical because countries resist replacing their accounting systems with foreign rules and regulations and see this as a compromise on their independence and national interest. Therefore, a consensus on international accounting system can only be achieved if there is proper awareness regarding the benefits of harmonization of accounting system (Jennings, 2002).
United States Generated Accepted Accounting Principles and International Financial Reporting Standards Board differ regarding the degree of the specificity they require in the financial statements. US GAAP requires much more details and high level of transparency as compared to IFRS; hence, financial reporting of the companies prepared using US GAAP show very conservative results. Scandals like Enron fraud highlighted the weaknesses in the accounting system of United States. Therefore, SEC reacted by imposing very strict regulatory requirements and by making it mandatory to express clearly as many details as possible in the financial statements so that users of the financial statements are not misguided (Parker, 2002). On the other hand, IFRS’s are applicable in many countries; therefore, are very flexible so that these standards can be modified according to cultural and regulatory difference across different countries.
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