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1
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4.2 Global standardisatin of accounting requires the United States to adopt IFRS. Do you think it is likely that the United States will embrace IFRS in the near term, and what do you think are some of the factors that might discourage the country from adopting IFRS?

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4.2 Global standardisatin of accounting requires the United States to adopt IFRS. Do you think it is likely that the United States will embrace IFRS in the near term, and what do you think are some of the factors that might discourage the country from adopting IFRS?

One notable exception to the global adoption of IFRS is the United States. Given that the US represents the world’s major capital market, the non-involvement of the US represents a significant limitation in the global acceptance of IFRS. About a decade ago, the US appeared very strong in its resolve not to adopt IFRS believing that its ‘rules-based’ standards were superior to the more ‘principles-based’ standards of the IASB. However this resolve to retain their own standards (and to reject IFRS) appeared to diminish around 2001/2002 with various ‘accounting scandals’ involving organisations such as Enron.

In terms of whether the US will adopt IFRS in the near future, there is currently a process being undertaken jointly by the IASB and the FASB (called the ‘Convergence Project’) which is seeking to converge the two sets of standards thereby paving the way for the US ultimately switching to IFRS. However, at this point in time it would appear that the US adoption of IFRS for use by US companies appears a number of years away, if indeed it ever happens. The adoption of IFRS will be contingent ultimately on whether the SEC and FASB are satisfied with the results generated by the IASB/FASB Convergence Project). Nevertheless, from late 2007 the SEC adopted rules that permitted foreign private issuers (but not US domestic companies) to lodge with the SEC, their financial statements prepared in accordance with IFRS without the need to provide a reconciliation to generally accepted accounting principles (GAAP) as used in the United States.

In terms of some of the factors that might discourage the US from adopting IFRS one obvious factor is that the FASB, FAF and SEC must be satisfied that the convergence project has lead to accounting standards that are appropriate to the US context. In 2007 the FAF also raised concerns about the perceived independence of the IASB and they argued that before the US adopts IFRS (which we know emanate from the IASB) certain changes need to be made to the governance policies of the IASB. The FAF was also concerned that in many jurisdictions there are amendments being made to IFRS at a local level before the standards are used in that particular country. This will also need to be addressed.

2
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4.3 Identify some factors that might be expected to explain wh different counries use different systems of accounting

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4.3 Identify some factors that might be expected to explain wh different counries use different systems of accounting

Chapter 4 has provided a number of factors which have been suggested to explain why different countries would use different systems of accounting if there standards were developed domestically. These include the following:

  • It is argued that as countries become more ‘wealthy’ they tended to develop their own accounting standards (which can be costly). Less-developed countries typically adopted the accounting standards issued by the IASC/IASB (which may or may not actually be relevant to the information needs of the local people).
  • It has been argued that the nature of the domestic business ownership and financing systems can influence the accounting methods being used within a country. For example, in countries which have companies that rely relatively more on equity capital (funds from many ‘outsiders’) there will be a tendency to provide greater disclosures than in countries with companies that rely relatively more on debt capital.
  • It has been argued that the colonial inheritance or history of a company will impact the accounting methods employed.
  • Invasion is another factor that can affect accounting practices. A country invaded by another may have a particular method of accounting imposed upon it.
  • A commonly mentioned reason for international differences in accounting is tied to the broad notion of ‘cultural difference’. Culture itself could be expected to influence other things (some already discussed above) such as legal systems, tax systems and how businesses are formed and financed, which will in turn influence the types of information demanded.
  • Sources of aid or finance might also influence the accounting methods used. For example, an international funding organisation (such as the World Bank) might require that particular accounting rules be used as a condition of providing funds to a country.
  • Religion, which is obviously linked to culture, has also been found to provide explanations for differences in accounting methods. Because religion can extend across national boundaries, religion has been used to explain why some different countries show similarities in accounting methods.
  • Other factors to explain differences in accounting systems have included different taxation systems, the relative strength of the accounting profession, and accidents of history.

Although the above reasons have been provided to justify or explain international differences in accounting procedures, the global push by the IASB for all countries to adopt the same accounting standards tends to disregard these reasons why accounting might, or indeed should, be different in different countries. It would appear that parties supporting the IASB initiatives believe that the benefits from global uniformity (for example, enhanced capital flows, increased efficiency for multinationals and so forth) outweigh individual differences in the needs and demands for financial information.

3
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4.4 Does the adoption of IFRS by different countries necessarily mean that the accounting procedures and practices they adopt will be consistent and comparable internationally?

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4.4 Does the adoption of IFRS by different countries necessarily mean that the accounting procedures and practices they adopt will be consistent and comparable internationally?

There is a difference between adopting IFRS and adopting standardised accounting practices. There are a number of reasons why the standardisation of accounting standards will not necessarily lead to standardisation in practice. Some of the reasons include the following:

  • In many countries tax-driven accounting choices will flow through to financial statements compiled pursuant to IFRS. Taxation rules vary between countries.
  • Differences in the economic and political forces operating within a country will have implications for various decisions and judgements made throughout the accounting process. Local economic and political forces may influence how managers, auditors, courts regulators and other parties influence the implementation of accounting standards.
  • Different countries will have varying levels of expertise in applying IFRS.
  • Since the IASB has no ability to enforce the application of its accounting standards in countries that have made the decision to adopt IFRS, regulatory bodies in particular countries may take the decision to modify a particular IFRS before it is released. Inconsistencies internationally in how the adoption of accounting standards are implemented, monitored and enforced will lead to inconsistencies in how the standards are applied, which in turn diminishes the international comparability of financial reports.

Given the above points we might question the belief that the global adoption of IFRS will lead to consistency in international accounting practices. Realistically, there will continue to be international differences in accounting practice despite the efforts of the IASB.

4
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4.7 Continental European countries historically relied upon capital provided by the state, banks or families whereas other countries, such as the United States, the United Kingdom, Canada and Australia have relied on receiving funding from a large number of external investors. How would this difference in funding sources impact the type of reporting undertaken and the expertise of the local accounting profession?

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4.7 Continental European countries historically relied upon capital provided by the state, banks or families whereas other countries, such as the United States, the United Kingdom, Canada and Australia have relied on receiving funding from a large number of external investors. How would this difference in funding sources impact the type of reporting undertaken and the expertise of the local accounting profession?

In those situations where the major sources of funds come from banks, governments, or families as was historically the case in Continental European countries, then those parties with a financial interest in the organisation were typically able to obtain the specific information they needed about the financial position and financial performance of the respective organisations. They would rely upon special purpose financial reports for information rather than general purpose financial reports. This would mean that there was less need to have expertise in developing or implementing accounting standards, the implication of which was that these countries did not develop accounting standards as early as countries such as the United States, the United Kingdom, Canada or Australia. Also, the development of the accounting profession in Continental European countries was not as robust as in the other settings.

By contrast, in countries such as the United States, United Kingdom, Canada and Australia there was a greater separation of ownership and management and a greater reliance on capital markets as the basis of raising capital. Because of the separation of ownership and management, and because of the multitude of people with an interest in organisations, there was a need to produce general purpose financial reports and the need for an accounting profession that could develop financial reports in a manner that was objective and in conformance

with generally accepted accounting principles. This lead to the compilation of reporting principles and conventions, and ultimately the development of accounting standards that would enable investors in capital markets to compare and contrast actual and potential investments in different organisations.

Across time, the size of organisations throughout the world has increased and this has meant that there has been a consequent increase in the use of capital markets as a source of raising capital throughout the world, and a consequent increase in the necessity for general purpose financial reports. This has direct implications for the development of the accounting profession and accounting standards.

5
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4.10 As noted in this chapter, Hamid, Craig and Clarke (1993) provide an argument that religion can have a major impact on the accounting system chosen by a particular country and that before ‘Western’ methods of accounting are exported to particualr countries it must be determined whether particular religious beliefs will make the ‘Western’ accounting policies irrelevant. Explain their argument.

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4.10 As noted in this chapter, Hamid, Craig and Clarke (1993) provide an argument that religion can have a major impact on the accounting system chosen by a particular country and that before ‘Western’ methods of accounting are exported to particualr countries it must be determined whether particular religious beliefs will make the ‘Western’ accounting policies irrelevant. Explain their argument

The argument is that different religious beliefs (which are considered to transcend national boundaries) would conceivably influence how people do business, how they make decisions and, as a related issue, the information they need to make the decisions. Hamid, Craig and Clarke (1993) specifically contrast Islamic beliefs with ‘Western’ beliefs. They note how notions of stewardship, often used to explain Western accounting practice, are not relevant to the Islamic faith as resources are deemed to be held in trust for god, rather than providers of debt and equity capital. Within the Islamic faith, notions of interest returns are also not relevant (there is a general prohibition of interest on debt). A number of Western accounting standards specifically consider issues associated with present values (for example, with respect to accounting for leases or accounting for liability provisions). These standards are not applicable to faiths such as the Islamic religion. Also, various conceptual framework projects developed in countries such as the United States, United Kingdom, Australia and Canada, as well as the revised conceptual framework being jointly developed by the IASB and FASB (that is, in part of the ‘West’) discuss the objective of financial reporting in terms of assisting with ‘rational economic decision making’. Such decisions, which take into account the time (present) value of money with associated consideration of interest rates, would be irrelevant within Islamic states.

Some religions also emphasise the importance of ‘community obligations’ rather than the individual’s self-interest. Many ‘Western’ accounting methods can be explained in terms of Gray’s accounting subculture values, which in turn rely upon Hofstede’s cultural values, such as Individualism versus Collectivism. Since Western cultural values (such as scoring highly on the dimension of Individualism) might not relate well to certain religious views, the work of researchers such as Gray would also suggest the potential irrelevance of some Western accounting methods to more ‘community-concerned’ religions.

6
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4.18 On the basis of recent actions to standardise accounting across countries, does it appear that organisations such as the IASB are ignoring academic research that signals why we would expect to find international differences in financial accounting practices?

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4.18 On the basis of recent actions to standardise accounting across countries, does it appear that organisations such as the IASB are ignoring academic research that signals why we would expect to find international differences in financial accounting practices?

Bodies such as the IASB are either ignoring the literature which suggests that there is a need for different countries to adopt different accounting approaches (due to issues such as differences in culture, religion, financing systems and so forth) or they believe that the advantages that accrue as a result of standardisation out-weigh the need to consider cultural, religious and other differences. However, while the global push for standardisation does seem to ignore much of the accounting literature pertaining to culture and so forth, it should be noted that in many countries (such as EU member states) only the listed companies are required to embrace the accounting standards issued by the IASB. Smaller companies can tailor their disclosures to local needs.

What also needs to appreciated is that whilst various countries may, at face-value, adopt IFRS, different cultural and political factors may mean that the various standards are applied or enforced in a variety of ways across the various IFRS-adopting countries. That is, we can still anticipate international differences in accounting practice and many of the factors identified in Chapter 4 might be useful in explaining the international variations in practice. To assume that all IFRS-adopting countries will adopt standardised approaches to applying and enforcing IFRS would be a very naïve position to adopt.

7
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4.21 What are some possible reasons for historical differences in accounting rules operating within Australia, the United States and the United Kingdom?

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4.21 What are some possible reasons for historical differences in accounting rules operating within Australia, the United States and the United Kingdom?

Chapter 4 has provided numerous reasons for the differences in accounting rules that might operate between the three countries. For example, the extent of economic development within a country; the nature of the domestic business ownership and financing systems; the colonial inheritance or history of a company; cultural difference; sources of finance; religion; different taxation systems; the relative strength of the accounting profession; and accidents of history. Arguably these differences are fairly limited within this sample of companies relative to some other countries—for example, some Middle Eastern countries. As a result, we could argue that the differences between the accounting methods used in the United Kingdom, Australia and the United States are relatively minimal relative to the methods used in some other countries.

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