1. The ultimate goal of both harmonization and convergence is to achieve international
comparability in financial reporting, and both are processes that take place over time.
However, while harmonization refers to the reduction of alternative accounting practices in
different countries, convergence refers to the process of developing a set of high quality
financial reporting standards for use internationally (the process of global standard setting).
Until the establishment of the IASB in 2001, the main objective of the IASC was to achieve
international harmonization in accounting standards. Accordingly, the focus was to achieve
consensus among different countries with regard to accounting standards. In this process
different countries were allowed to have different accounting standards as long as they did
not conflict, for example, the harmonization program of the European Union. On the other
hand, convergence implies the adoption of one set of standards internationally.
2. The potential benefits for a multinational corporation from convergence of financial reporting
standards are derived mainly as a result of international comparability of financial reporting
standards and practices. Examples of such benefits include: reduction of financial reporting
costs for multinational corporations that seek to list their stocks on foreign stock exchanges;
reduction of cost of preparing worldwide consolidated financial statements; and ability to
transfer accounting staff to other subsidiaries overseas more easily.
3. The EU Directives were not completely effective in generating comparability across EU
member nations because the Directives:
a. allowed countries to choose among available options in many areas and
b. did not cover many accounting issues, such as leases and translation of foreign currency
4. The three phases in the life of the IASC were:
a. 1973-1988 – lowest common denominator approach to standard setting
b. 1988-1993 – reduction of existing options in IASs through the Comparability of Financial
c. 1993-2001 – development of core set of standards under the IOSCO Agreement
5. IOSCO’s endorsement of IASs legitimized the IASC’s claim as “the” international accounting
standard setter. This also helped in addressing, at least partly, the problem of IASC’s lack of
6. Twelve of 14 members of the IASB are full-time. They are required to sever all ties to former
employers to establish their independence. The most important criterion for selection of IASB
members is technical competence. These aspects of the Board’s structure confirm the IASB’s
commitment to develop the highest quality standards possible. In addition, the IASB follows
an open process in which constituents are able to provide input and feedback on IASB projects
and proposed standards. The geographical representation is achieved through the method of
appointing the IASC Foundation Trustees.
7. A principles-based approach to accounting standard setting refers to the development of
standards that provide the basic guidelines for accounting in a particular area without getting
bogged down in detailed rules. The IASB uses a principles-based approach in developing
IFRS. Traditionally, the U.K. and the member countries of the British Commonwealth have
adopted this approach.
8. IFRS appear to cover most of the major accounting issues. With the issuance of IFRS 2,
“Share-based Payments,” IFRS even provide guidance with respect to the accounting for
stock options. Other than banks and financial institutions (IAS 30), IFRS do not provide rules
for specific industries. On the other hand, IAS 41, “Agriculture,” provides guidelines for a
particular sector of the economy for which rules are lacking in many countries.
9. The IASB has adopted a principles-based approach to develop a set of accounting standards
that constitute the “highest common denominator” of financial reporting. This approach is in
sharp contrast to the approach adopted by the IASC in its early years. Also, unlike the IASC,
the IASB is now formally linked to national standard setters. Seven of the 14 Board members
have a direct liaison relationship with influential national standard setters and the IASB has
entered into a formal agreement to converge its standards with those of the U.S. FASB. The
major change is in the emphasis of the role of the IASB, from harmonization to global standard
10. The different ways in which IFRS might be used within a country include:
• Required of all companies domiciled within the country.
• Required of parent companies in preparing consolidated financial statements; national
GAAP used in parent company-only financial statements.
• Required of all companies (both domestic and foreign) publicly traded within the country;
non-listed companies use national GAAP.
• Required of foreign companies that are publicly traded within the country. Domestic
companies use national GAAP.
• Required of domestic companies with foreign operations and/or foreign stock exchange
listings. Domestic companies without a foreign presence use national GAAP.
• Instead of requiring the use of IFRS in each example above, a country could allow the use
of IFRS in lieu of domestic GAAP in each situation.
11. There are several factors that might inhibit worldwide comparability of financial statements
even if IFRS are required in every country. First, even though the Comparability Project of
the 1990s reduced the number of alternative methods allowed, several IFRS continue to allow
companies to choose between a benchmark and an allowed alternative treatment. If the
benchmark is adopted by one company and the allowed alternative by another company, strict
comparability will not exist. (It should be noted that this is also true within a country if domestic
GAAP allows choice among alternatives, for example, in depreciation and inventory valuation
methods.) Second, even if the same treatments are selected, cross-national comparability
could be harmed if accountants apply the principles-based IFRS differently. Differences in
cultural values across countries could cause accountants to have biases, for example, with
respect to conservatism that could influence their judgment in applying IFRS.
12. The objective of developing a set of high quality standards for financial reporting by companies
internationally is commendable. There are many potential benefits associated with it. For
example, it would increase the level of comparability of information contained in financial
statements prepared by companies from different countries, and this would benefit investors
when using those statements to assess the performance of companies as the basis for their
investment decisions. Currently, about one hundred and twenty countries are adopting IFRS
and some other countries, including the U.S., are taking steps so that they can use those
standards in future.
However, adoption of IFRS is different from their implementation on a consistent basis. If the
standards are not implemented consistently by companies in different countries, the objective
of international comparability of information contained in financial statements would not be
achieved. There are many factors that are likely to influence the consistency with which IFRS
are implemented in different countries. IFRS are principles-based standards. To start with,
arriving at principles that satisfy all of the parties involved in different countries seems an
almost impossible task. Further, accountants’ professional judgments play an important role
in implementing principles-based standards, as there are many principles and uncertainty
expressions that need interpretation. But, accountants’ professional judgments can be
influenced by factors such as cultural values and the level of professionalism in a particular
country. One can argue that it is unnecessary to force all companies worldwide to follow a
common set of rules requiring to comply with a set of standards which may not be relevant to
them as it would be unnecessarily costly and would lead to a situation of standards overload.
Furthermore, not only is convergence difficult to achieve, but the need for such standards is
not universally accepted. Finally, global convergence may not be necessary as the
international capital market will force those companies that can benefit from accessing the
market to provide the required accounting information without convergence.
13. IAS 1 indicates that, if existing IFRS do not provide guidance in a specific area, management
should refer to the definitions, and recognition and measurement criteria for assets, liabilities,
income and expenses set out in the Framework.
14. The amendments to IFRS 1 First-time Adoption of IFRS address the retrospective application
of IFRS to particular situations and are aimed at ensuring that entities applying IFRS will not
face undue cost or effort in the transition process.
15. Nearly 120 countries have either adopted or allowed the use of IFRS.
16. The SEC has ruled that beginning in 2007, foreign companies which have prepared their
financial statements on the basis of IFRS need not include a reconciliation to U.S. GAAP in
filing the Form 20-F. A possible reason for this rule is that it would help better serve investors.
The AICPA, FASB and senior finance professional supported this view. Taking a step further,
the SEC has considered allowing U.S. domestic companies also to use IFRS and developed
a “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with
International Financial Reporting Standards by US Issuers”.
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