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Critically examine IFRS as a on-size-fits-all reporting standard

发布时间:2017-02-16
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ACCT 301 - 14A

Accounting Theory

Against the background of the dominance of IFRS consider the counter view that one size may not fit all

Assignment Due: 5/5/2014

Word account: 2256

Introduction

With the developing of economy, globalization affects the society, not only for international companies, but also investors. For example, investors can invest international companies easily. For this reason, investors need more fair and true information to help them make decisions. International accounting has obtained an important position in the area of accounting because of the global economy, the increasing number of multination corporations and the widening group of information users who rely on financial reporting. Therefore, some experts claimed that an international standardisational of financial accounting is required to enable investors understand the financial statements, and help them compare the companies from different countries. The appearance of International Financial Reporting Standards is an example to prove those experts opinions. However, the other experts believe that different countries should not adopt the same accounting standards, as the differences in cultures, legal systems and financial systems make one size may not fit all. This essay will discuss the opinion that IFRS may not fit all the countries through analysing its background, advantages and disadvantages.

Background of IFRS

The IFRS refers to the International Financial Reporting Standards which is a set of accounting standards issued by the International Accounting Standards Board (IASB) for global use. The goal of IFRS is to provide a global framework about how companies prepare and disclose their financial statements (Rouse, 2011). IFRS is a principles-based standard, which means that the standards will set out the principles that should be followed in the preparation of financial statements accordance with how to apply those principles to common events and circumstances (Odia & Ogiedu, 2013). In other words, instead of setting rules, IFRS provides a general guidance for preparation of financial reports.

IFRS was known as International Accounting Standards (IAS), which was issued by International Accounting Standards Committee (IASC) since 1973 to 2000. The purpose of the IAS was to fix the global accounting standard to better understand all companies (Cairns, 2004). However, IASB replaced the IASC in April 2001, and took the responsibility to set IFRS. Therefore, the term “IFRS” included both IFRS issued by the IASB and International Accounting Standards (IAS) issued by the IASC and adopted or revised by the IASB (Cairns, 2004). Currently, IFRS has supported by more than 100 countries (Deegan, 2013), which includes members in European Union, Australia, India and so on.

Advantages of IFRS

There are various advantages to adopt IFRSs, and many researchers are engaged in this research. Davey (2013) stated that many countries still do not have enough codified standards of accounting and auditing; however, “adoption of IFRSs would not only eliminate the set-up costs for those countries but would allow them to immediately become part of the mainstream of accepted international accounting standards” (p. 490). Thereby, IFRS would help to create standards which could be used by smaller developing countries which were not able to set their own accounting standards.

Nobes and Parker (2004) also explained that reasons for adoption of IFRS. IFRS can help investors understand the different countries’ and companies’ financial statements easily, since companies adopt the same standards. Because of globalization, investors are increasing investing in companies from diverse countries. Usually, these investors use financial statements as an important source of information to help them make decisions. Deegan (2013) held the view that standardisation is important to enable investors to understand the financial statements, and have a reasonable basis for comparing the companies form different countries. If there is no international accounting standard, international investors have to understand numerous different series of accounting principles, regulations and assumptions. As a result, it is more complicated for investors to make effective and efficient international investment decisions. However, if different countries adopt the same accounting standards, the difference among the results of different countries would disappear (Deegan, 2013). In this concept, IFRS is needed, since as an international accounting standard it can eliminate the difference and help investors make investment decisions.

In Ball’s (2006) opinion, IFRS will lead to “more accurate, comprehensive and timely financial statement information” (p. 11), relative to the information generated from the national standards they replaced. Generally, small investors are less likely than professional investors to be able to access to particular financial information from other sources. Because of the improved financial reporting quality, small investors has an opportunity to compete with professional investors, and hence will reduce the risk that small investors are trading with better-informed professional investors. This is because the accurate, comprehensive and timely financial statement information required by IFRS improve the quality of information received by small investors, even if the quantity of the information is still same.

Issues of IFRS

There are many experts insist that IFRS may not fit all the countries, because differences exist in different countries. If a particular country adopts the IFRS, both multinational and domestic companies are required to follow the standards. However, the requirements to financial information of international users and domestic users are usually different. Chand and White (2007) commented that the IASB cannot take account of the individual national, cultural, and political factors of all its members while preparing IFRS. Nevertheless, there are many factors would influence differences in accounting practice of different countries, such as political systems, culture, level of education, taxation and so on. This essay will discuss the reasons why IFRS cannot fit all countries from culture, financing systems and taxation.

Culture

Culture is an integrated system of beliefs, customs, values and behaviours that a group of people identified and shared. Culture usually used to explain differences in social systems. In recent decades, culture has also been used to explain international differences in accounting systems. Gray (1988) identified four key accounting values through extending the concepts Hofstede’s original four dimensions:

  • Professionalism versus Statutory Control refers to individual professional judgement and self-regulation as opposed to compliance with perceptive legal requirements and statutory control.
  • Uniformity versus Flexibility refers to the enforcement of uniform accounting practices as opposed to flexibility in accordance with the perceived circumstance.
  • Conservatism versus Optimism is a cautious approach to measurement of uncertainty in contract to an optimistic, laissez-fair and risk-taking approach.
  • Secrecy versus Transparency is confidentiality and restriction of disclosure of information about the business as opposed to a transparent and publicly accountable approach.

Gary (1988) also developed four hypotheses relating Hofstede’s four social cultural dimensions to each one of his four accounting values, which was listed in the Table I. Gary’s research explain how culture influences different countries adopt IFRS.

Take Fiji as an example. Chand and White (2007) found that it is better for Fiji to adopt rules-based standards rather than principles-based standards. This is because both indigenous Fijians and Indo-Fijians possess the characteristics of uncertainty avoidance and strong power distance. According to Gary’s (1988) hypotheses, the higher ranks in Uncertainty Avoidance and Power Distance, it is more likely to rank highly in Uniformity. Therefore, Fijian prefers to enforce uniform accounting practices between companies and the consistently use such practices over time. In other words, rules-based standards would be more appropriate, since there are a list of detailed rules which accountants must follow with. Without rules-based standards, accountants with strong uncertainty avoidance may not know what to do when meeting uncertainty. However, rule-based standards can guide accountants’ actions clearly, and then reduce risks. Furthermore, it is easy for investors to compare companies in the same industry for the same rule. Rules-based standards in uncertainty environment can also increase accuracy and reduce the ambiguity of the financial statements. Thereby, the cultural values of Fiji would require Fiji accountants more rely on legal requirements. Moreover, Chand and Whited (2007) also found that banks in Fiji are conservative in asset valuations offered as security in assessing loan application. However, accounting values determined by IFRSs are not accepted by conservative banks. Thereby, IFRS may not fit Fijian conservative financial reporting models. In conclusion, because of the cultural values: high power distance, strong uncertainty avoidance, the accounting values of Fiji are uniformity, statutory control and conservatism. As a result, IFRS does not fit Fiji.

It is important to understand whether culture will influence a country to adopt IFRS or not, especially for international companies. This is because culture in international companies are diverse from groups. If ability of the groups to accept the IFRS is different, IFRS cannot be adopted successfully. In Ramanna and Sletten's (2009) research, culture is a factor to obstruct adoption of IFRS, since they found that more powerful countries are less likely to adopt IFRS because they unwilling to surrender to the IASB. Therefore, because of the diverse culture, not all countries will adopt IFRS, which means one size not fit all.

Financing System

The academic literature of Nobes (2011) offers many possible reasons for international differences in accounting, and how companies are financed is one of the factors. There are two dimensions, "insider" system and "outsider" system need to be considered (Nobes, 2011).

"Insiders" refers to the investors who have long-term relationship with the company (Nobes, 2011). In the insider systems, ownership is concentrated, and owners have incentives to be actively involved in the management firms (Mayer & Sussman, 2001). Insider system may contain family-owned business, banks and governments. Deegan (2013) explained that banks in some countries have historically been the main source of long-term finance for large companies, which developed a supportive relationship between banks and companies. As a result, the representatives of banks can acquire detailed management accounting information available to all members of the supervisory board. Under insider systems, accounting dose not provide fair, balanced and unbiased information to help outside investors make effective and efficient investment decisions (Deegan, 2013).

"Outsiders" refers the external shareholders who own small percentages of shares (Nobes, 2011). In addition, "no one institution or individual holds a large stake in a single company" (Mayer & Sussman,2001, p. 461). Unlike the insiders, external shareholder will not be involved in the company's managed; in return, they do not have the access to the company's financing information. Therefore, company needs to provide financial accounting information to help external shareholders make effective and efficient investment decisions. Because of the importance of outsiders, the primary role of accounting is to provide fair, balanced and unbiased information to external shareholders (Deegan, 2013).

It can be concluded that the financial information disclosed in financial reporting and the level of disclosure will be different due to the different financing systems. Similarly, IFRS as an accounting standard cannot fit all companies, because of the different financing systems. For example, Chand and White (2007) argue that the financing systems inherent in Fiji do not match IFRS. This is because accounting values determined by IFRS are not accepted in assessing entities' capacities to repay loans due to the insider system in Fiji. Therefore, financing system is a factor to obstruct adoption of IFRS. In other words, IFRS does not fit all countries.

Taxation

What has discussed before that different countries have different financing systems. However, tax accounts in different financing systems will be different either. Deegan (2013) stated that in countries with largely insider systems of finance, tax accounts has not developed independently from financial accounting. In this situation, an allowance for tax claimed by a company must be included in its financial reports. For example, tax depreciation allowances must be included in financial reports when a company wishes to take a benefit form taxable depreciation allowances. Generally, the tax depreciation allowances are determined by taxation law without bearing any relationship to the amount of the fixed assets used (Deegan, 2013), whereas, in some countries tax accounts are not separated from financial accounts. Therefore, when those countries (with insider systems of finance) adopt IFRS, a significant change to their traditional accounting practices will happen. This is because when financial accounting starts to develop in the lines of IFRS, tax accounting in a country will be influenced indirectly (Fakile, Faboyede & Obiamaka, 2013). Fakile, Faboyede and Obiamaka (2013) also listed some other challenges in taxation caused by IFRS. On the one hand, the use of IFRS will require income to be taxed, which will finally affect the liquidity of companies. On the other hand, the risk of tax disputes will be increased due to the complexity of the IFRS. Thereby, because of the different taxation system, one size of IFRS can not fit all.

Conclusion

After reviewing the background of and the advantages of IFRS, this essay concluded that IFRS does not fit all countries, which means one size may not fit all. IFRS is a set of accounting standards set by IASB for global use. IFRS as an international accounting standards, it can not only help investors make investment decisions but also can improve the quality of information received by small investors. An other advantage of IFRS is that it can help to create standards used by smaller developing countries which may not able to set their own accounting standards. Although, adoption of IFRS has many benefits, and is required by many countries, it may not fit all countries. This is because different countries have different culture, financing systems and taxation systems. These diversities could influence the adoption of IFRS. For example, countries with highly rank in uniformity and conservation are not appropriated to adopt IFRS. The financing systems and taxation systems are another two factors would be considered when make the decision of adopting IFRS. In order to get benefits from IFRS, countries could harmonise rather than adopt IFRS accordance with their own characteristics.

Reference Lists

Ball, R. (2006). International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and business research, 36(sup1), 5-27.

Cairns, D. (2004). The implications of IAS/IFRS for UK companies.International Journal of Disclosure and Governance,1(2), 107-118. Retrieved from http://ezproxy.waikato.ac.nz/login?url=http://search.proquest.com/docview/196310130?acco untid=17287

Chand, P., & White, M. (2007). A critique of the influence of globalization and convergence of accounting standards in Fiji. Critical Perspectives on Accounting, 18(5), 605-622.

Deegan, C. (2013). Financial accounting theory (3rd ed.). Australia: McGraw-Hill.

Fakile, A. S., Faboyede, O. S., & Obiamaka, N. (2013). The impact of international financial reporting standards on taxation.International Journal of Business and Social Science, 4(10).

Gray, S. J. (1988). Towards a theory of cultural influence on the development of accounting systems internationally. Abacus, 24(1), 1-15.

Davey H. (2013). ACCT301/401 Accounting Theory. Auckland, New Zealand: Cengage.

Mayer, C., & Sussman, O. (2001). The assessment: Finance, law, and growth. Oxford Review of Economic Policy, 17(4), 457-466.

Nobes, C. & Parker, R. (2004). Comparative International Accounting. Harlow: Pearson Education Limited.

Odia, J. O., P., & Ogiedu, K. O., P. (2013). IFRS adoption: Issues, challenges and lessons for nigeria and other adopters.Journal of Educational and Social Research,4(3), 389-399.

Ramanna, K., & Sletten, E. (2010). Why do countries adopt international financial reporting standards?. Rochester: Social Science Research Network. doi:http://dx.doi.org/10.2139/ssrn.1460763

Rouse, M. (2011). IFRS (International Financial Reporting Standards). Retrieved form http://searchsecurity.techtarget.co.uk/definition/IFRS-International-Financial-Reporting-Stan dards

Appendix

Table 1: Summary of Gary's Hypothesis

Hypothesis 1

"The higher a country ranks in terms of Individualism and the lower it ranks in terms of Uncertainty Avoidance and Power Distance, then the more likely it is to rank highly in terms of Professionalism".

Hypothesis 2

"The higher a country ranks in terms of Uncertainty Avoidance and Power Distance and the lower it ranks in terms of Individualism, then the more likely it is to rank highly in terms of Uniformity".

Hypothesis 3

"The higher a country ranks in terms of Uncertainly Avoidance and the lower it ranks in terms of Individualism and Masculinity, then the more likely it its to rank highly in terms of Conservatism".

Hypothesis 4

"The higher a country ranks in terms of Uncertainty Avoidance and Power Distance and the lower it ranks in terms of Individualism and Masculinity, then the more likely it is to rank highly in terms of Secrecy".

Source: Deegan, C. (2013). Financial accounting theory (3rd ed.). Australia: McGraw-Hill.

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