1) Motivation for international accounting standardization National differences in accounting measurement, disclosure, and auditing caused great problems for companies seeking capital outside of their home markets and investors attempting to diversify their investments internationally. Thus, the substantial differences in financial reporting requirements and practices around the world, and the increasing need of financial statement users to compare information of companies from different countries motivated the standardization of crossborder accounting.
CHAPTER 2: GLOBAL ACCOUNTING STANDARDS CONTENT Motivation for international accounting standardization Advantages and disadvantages of international accounting standardization Classification of international accounting standardization approaches Overview of major international organizations LOGO promoting international accounting standardization LOGO 1) Motivation for international accounting standardization -National differences in accounting measurement, disclosure, and auditing caused great problems for companies seeking capital outside of their home markets and investors attempting to diversify their investments internationally Thus, the substantial differences in financial reporting requirements and practices around the world, and the increasing need of financial statement users to compare information of companies from different countries motivated the standardization of cross-border accounting LOGO 1) Motivation for international accounting standardization -Standardization may refer to the efforts to harmonize or converge -Distinguish between harmonization and convergence + Harmonization was generally taken to mean the elimination of differences between existing accounting standards + Convergence might also involve coming up with a new accounting treatment not in any current standard + Neither process necessarily implies replacing national standards with international ones; national and international accounting standards can coexist LOGO 2) Advantages and disadvantages of international accounting standardization 2.1 Advantages -Creat a common accounting language for readers and users across countries reducing the cost of accessing the capital markets around the world In short, convergence is good business and good for investors -A thriving capital market requires a high degree of investor understanding and confidence Converging with or embracing a common set of high quality accounting standards contributes mmensely to this investor understanding and confidence -Help investors better understand investment opportunities as opposed to financial statements prepared under differing sets of national accounting standards LOGO What happens for investors if accounting standards which are not viewed as being of high quality or with which the investor is unfamiliar are used? LOGO 2) Advantages and disadvantages of international accounting standardization 2.1 Advantages -What happens for investors if accounting standards which are not viewed as being of high quality or with which the investor is unfamiliar are used? + Make a wrong investment decision + Incur more time and cost to understand and convert the financial statements so that they can confidently compare opportunities + Lower investors’ confidence LOGO 2) Advantages and disadvantages of international accounting standardization 2.1 Advantages - Embracing a common set of accounting standards can also lower costs for issuers When companies access capital markets beyond their home jurisdiction, they incur additional costs of preparing financial statements using different sets of accounting standards These include the costs for company personnel and auditors to learn, keep current with and comply with the requirements of multiple jurisdictions Similarly, use of resources dedicated to standards writing could potentially be optimized if fewer separate accounting models are pursued LOGO 2) Advantages and disadvantages of international accounting standardization 2.1 Advantages -Other benefits: + High-quality financial reporting standards that are used consistently around the world improve the efficiency with which capital is allocated The cost of capital will be reduced + Investors can make better investment decisions Portfolios are more diverse and financial risk is reduced There is more transparency and comparability between competitors in the global markets + Companies can improve their strategic decision-making in the merger and acquisition area + Accounting knowledge and skills can be transferred seamlessly around the world + The best ideas arising from national standard-setting activities can be leveraged in developing global standards of the highest quality LOGO 2) Advantages and disadvantages of international accounting standardization 2.2 Disadvantages -International standards are too simple for a complex problem, since they are not flexible enough to handle differences in national backgrounds, traditions, and economic environments, and internationalization would be a politically unacceptable challenge to national sovereignty -Reflecting the underlying reality of a company’s performance and financial position (that is, achieving a fair presentation) may be sacrificed in pursuit of achieving comparability - A global monopoly standard-setter will inhibit innovation and the development of better quality standards -Comparability can only be achieved with proper enforcement and as long as firms’ reporting incentives differ across countries LOGO 2) Advantages and disadvantages of international accounting standardization 2.2 Disadvantages -As international financial institutions and international markets insist on the use of international standards, only large international accounting firms will be able to meet the demand Harm other smaller accounting service companies -Some critics maintain that international standards are not suitable for small and medium-sized companies, particularly unlisted ones with no public accountability LOGO 3) Classification of international accounting standardization approaches - Use of international standards: International convergence which comes up with a new accounting platform for multinational companies to follow A C B LOGO 3) Classification of international accounting standardization approaches - Mutual recognition: exists when regulators outside the home country accept a foreign firm’s financial statements based on home-country principles Reciprocity does not improve the cross-country comparability of financial statements and can create an “unlevel playing field” in that it may allow foreign companies to apply standards less rigorous than those that apply to domestic companies A B LOGO 3) Classification of international accounting standardization approaches - Reconciliation: foreign firms can prepare financial statements using home-country accounting standards, but also must provide a reconciliation between critical accounting measures of the home country and the country where the financial statements are being filed A B B LOGO Three solutions have been proposed for resolving the problems associated with filing financial statements across national borders: (1) reciprocity (also known as mutual recognition), (2) reconciliation, and (3) use of international standards What you expect would be the preferred approach from the perspective of each of the following: (1) investors, (2) company management, (3) regulatory authorities, (4) stock exchanges, and (5) professional associations? Discuss your reasons for each response Which approach you predict will eventually prevail? LOGO ... leveraged in developing global standards of the highest quality LOGO 2) Advantages and disadvantages of international accounting standardization 2. 2 Disadvantages -International standards are too... national and international accounting standards can coexist LOGO 2) Advantages and disadvantages of international accounting standardization 2. 1 Advantages -Creat a common accounting language for... Lower investors’ confidence LOGO 2) Advantages and disadvantages of international accounting standardization 2. 1 Advantages - Embracing a common set of accounting standards can also lower costs