With the globalization of the world\'s capital markets in the last quarter of th
ID: 2457956 • Letter: W
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With the globalization of the world's capital markets in the last quarter of the 20th century, investors and creditors became increasingly frustrated when comparing financial reports of companies from different countries. In response to this, many countries have adopted International Financial Reporting Standards (IFRS) or decided to use IFRS in the near future. In 2006 the Financial Accounting Standards Board (FASB) in the US and the International Accounting Standards Board (IASB) published a Memorandum of Understanding (MoU). In this document both boards "acknowledged their commitment to the development of high quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting". Both the IASB and the FASB believe that global accounting standards would improve the quality, consistency, and comparability of financial information for investors and capital markets around the world. This has significant implications for the future globalization of accounting standards. In your own words, discuss the advantages and disadvantages of developing a global set of accounting standards. In your answer, you should provide real life company examples to support your discussion. E.g. a company that is currently listed on two securities exchanges which has to provide two sets of reports.Explanation / Answer
The entire world has become one single market in this century.Trading has become globalized. Because of this tremendous growth,the need for international accounting standards has arised. Theglobal economy has affected the entire business world.
Global corporations have more than one head quarters, theirproduction and distribution are scattered throughout the world.
Commodity prices, interest rates and exchange values havebecome internationally linked. So governments around the world aresupporting the harmonization of accounting practices andprocedures. So, it is a must for multinational companies to preparemultiple reports for different nations they do business in.
Advantages
1. The greatest benefit would be the comparability of financialinformation between countries. Such comparisons eliminate themisunderstandings about the reliability of foreign financialstatements and increase the international investment flow. Forexample,
Unilever Inc. would report its financial statements according tothe country it operates and international financial reporting.
2. It saves time and money in understanding the reports, sincethe statements are prepared according to international financialreporting standards.
3. International standard reporting would help in raisingforeign capital because investors, financial analysts and foreignlenders will be able to understand the F/S of foreign companies.They could compare the investment opportunities which motivate themto make the right decisions. Eg. Unilever is a multi-nationalcompany listed in both London exchange and New York stock exchange.It owns many of the world’s consumer product brands in foods,beverages and personnel care products. So, its investors are a widerange from several foreign countries. They could easily follow theinternational standards reporting before they invest.
4. International accounting firms could move their staffs acrossnational boundaries and they don’t need to spend to traintheir staffs. Unilever frequently sends its employees to severalbranches without having to worry about training them.
5. As taxes are levied on the total global income, national taxauthorities find it very easier to check the figures. In our caseof Unilever company, the numbers could be verified by any of the international tax authority as the business followed theIFRS.
Basically, multi-national companies are not finding it veryhectic in preparing their financial statements as they couldclearly interpret their financial position to anybody in the globalmarket.
Disadvantages
1. Accounting is flexible in nature, but the standards are not.Each country has its own national circumstances, legal systems ,cultural development etc. For example, Unilever faces its ownculture in Indian market, a different environment in London andAmerican market has its own legal and political systems.
2. IASB may find it difficult to reach unanimous agreement onsome of the standards and they might have to make compromises to beaccepted globally. If this has to be done by IASB frequently, thenit takes time for every new standard to be approved or revised orupdated.
3. International standards could be dangerous to the companiesas it cuts profits and raises volatility to the balance sheet ofthe companies. For example, Unilever in its 2004 statements, someof its items reported as exceptional on the segmentalanalysis are restated for IFRS. It restated the itemsper operation and also per geographical areas of America’s,Asia’s and Africa’s. This reduced its operating marginto 4.5% for the year ended 2004.
4. The companies may have to educate their investors about thevolatile situation and the major impact of restatements due to theIFRS.
5. Another difficulty is IASB needs to ensure that there arestrong audit practices in order to bring about the integrity ofstandards.
6. A major drawback is international accounting standard seemsto be created by superior countries and forcing it towards theinferior countries .
Conclusion
With all being said, there is no doubt that benefits from IFRSare more for the global public than its disadvantages. WithoutIFRS, business expansion won’t be possible and the confidencelevel between the investors have grown up to its maximum . Everybusiness, no matter where it originates, the investor confidenceand the investment is its long run goal. So, it is achieved throughIFRS.
http://www.unilever.com/investorrelations/annual_reports/IFRSreportingchanges.aspx
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