International Accounting Standards (IAS) Around the World:
The economic and financial crisis which began in 1998 in certain Asian countries and spread to other regions of the world showed the need of reliable and transparent accounting and financial reporting to support sound decision making by investors and regulating authorities. In 1998, G-7 finance ministers and central bank governors committed themselves to endeavor to ensure that private institutions in their countries comply with internationally agreed principles, standards and codes of best practices.
Many countries throughout the globe already endorse IAS’s as their own either without amendment or else with minor alterations. Further more important developments are taking place in European Union, where the European commission is progressing proposals that will require all listed companies in the European Union to prepare their consolidated financial statements using IAS’s.
How IAS’S and IFRS’S are being used:
(i) Use of IASB standards in countries with domestic ASB liaison.
(ii) Use of IASB standards in other countries.
Joseph. J. Schultz Jr. Thomas Lopez:
In article “The impact of national influence on accounting estimates: Implications of international accounting standard setters” have tried to examine the process by which investigating judgments made by accountants in France, Germany, and USA. To facilitate a comparison of this process across international borders, this experiment presents these accountants with the same economic facts that are governed by similar financial reporting rules.
Results of these indicate that, even given similar facts and rules judgments among the three nation’s accountant vary significantly. They also suggest that national culture interacts with findings accepted as general within behaviour decision research.
Alison. J. Kirby in his article on “international competitive effects of harmonisation” has tried to examine international competitive consequences surrounding harmonisation of IAS’s. His research concluded in his article that two firms in each of two countries when operate only domestically, harmonisation of accounting standards may not be beneficial for both countries. Conversely, when firms operate both domestically and internationally a variety of equilibria may emerge.
The IASC recently has published a study of business reporting on the internet as the first step in a possible project to develop standards in that area. The study examines.
(i) The current technologies available for electronic business reporting.
(ii) What companies around the world are actually doing (This involved a detailed analysis of the web sites of 30 largest companies in each of 22 countries, 660 companies in all)
(iii) The sort of standards for electronic business reporting that are needed now within the constraint of today’s technologies.
(iv) The shortcomings of business reporting on the internet within current technologies.
(v) The technological changes that are on the horizon and how can they improve electronic business reporting.
“Technology has altered irreversibly not only the physical medium of corporate financial reporting but also its traditional boundaries”. Commented Sir Bryan Carsberg, Secretary General of IASC “Paper reports are being supplemented and, for many users, replaced by electronic business reporting, primarily via the internet and while we accounting standard setters have even to this day, tended to focus primarily on the traditional financial statements and related note disclosures, Investors and lenders have far beyond that” Sir Bryan said Paul Pacter who is managing the project for IASC said, ‘This is a pioneering study. It illustrates to accounting policy makers the nature of changes occurring in business reporting and explains how changes are affecting the dissemination of accounting and business information. The study also identifies the effects those changes may have on accounting standard setting in the future. And, by recommending a set of measures to address those changes in internet corporate reporting occurring now and currently anticipated; the report charts a sensible course for IASC to help ensure the availability of high quality data in electronic form to the users of business and financial information.”
In recent years tensions have built up between IASC and national standard setters. In particular those known as G4 Australia, Canada, New Zealand, the U.K. and the U.S.A. As IASC has assumed the role of standard setter rather than merely a “standard harmonizer”. At present standard setting bodies of different nations are not represented on IASC Board. This lack of representation on the IASC board constitutes a barrier to convergence of AS in the sense of national and international standards conversing to one another.
IASC being a private standard setter body educates and propagate its member institutes for formulation and implementation of these IAS as AS in their respective countries.
Developing nations like Singapore, Malaysia, Zimbabwe and Sri Lanka have ended their search for development of accounting standards. IASG’s efforts for harmonisation has also gained acceptance in China, Yugoslavia and Soviet Union due to return of these countries to the market economy. IASs issued by IASC in these countries have helped in these countries in making their accounting systems more compatible to requirements of global capital market.
Need of High Quality IASS:
USA at present is acting like trail blazer in the field of accounting developments. In USA, SEC staff monitors these standard setting activities. Establishing and maintaining high quality accounting standards are critical to US approach to capital market regulation. One way to look at this is to view accounting standards as the camera used to photograph a company. Good standard like good camera produce sharper, more accurate pictures. Weak standard like bad camera are unreliable—how some, you never know if you will get a good shot, while others produce fuzzy, out of focus images.
The US approach to capital market regulations make financial statements the Balance Sheet a snap shot and Income Statement —Video—the centre piece of financial reporting. Good accounting standards produce financial statements that report event in the period in which they occur not before not after.
It is important to state at the outset that there is not at present; a set of high quality IAS’s which could be considered acceptable for purposes of domestic and cross border financial reporting. Some may claim that the current set of IASs issued by IASC is such set. However the claim would be impossible to defend in the absence of endorsement of these standards by the members of IOSCO (International Organisation of Securities Commission).
Turning to the global arena, Investors are broadening their horizons beyond national borders. Global corporations have given rise to cross border financial reporting. At the same time, there are major new demands for capital that must be satisfied at global level. The inter play of these forces, aided by improvements in information technology, is working to correct national capital market as a part of global economy. As a result many companies are interested in the development of standards that would be accepted in all the world’s major security markets. Harmonisation would be easy to achieve if the mission were to develop standard that would accommodate every country’s preferences.
For International Standards to gain acceptance, these must meet three key objectives:
1. Standard should include a core set of accounting pronouncements that constitute a comprehensive generally accepted basis of accounting.
2. The Standard must be of “high quality” they must result in comparability and transparency, and they must provide for full disclosures. Investors must be able to meaning fully, analyse performance across time periods and among companies.
3. The Standard must be rigorously interpreted and applied.
High Quality Standards are not created overnight; their development is a part of long term process and commitment.
The questions of high quality of IAS has three dimensions:
I. Will it be possible to develop a set of high quality international standards?
II. How will it be achieved?
III. When will this be achieved?
As far as answer to the first question is concerned that is ‘yes’. Capital markets are demanding all around the globe, high quality IAS, Bureaucrats and politicians are encouraging their developments and capital market regulations and standard setters are activity pressing these developments.
As far as answer to the second question is concerned, before developing high quality standards, we have to find out various criteria which are most critical to the promulgation of high quality financial accounting standards. Financial accounting policy committee of the Association for Investment Management and Research, which is a global organisation having more than 89,000 members inclusive of investment analysts, banks, brokers, dealers and portfolio managers.
FAPC has proposed following criteria:
(1) A new standard should improve the information that is available to investment decision makers.
(2) The information that results from applying a new standard should be relevant to the investment evaluation processing.
(3) Certain financial information is better presented outside the audited financial statement and should not be included in the scope of financial accounting standards.-
(4) The information that results from applying a new standard should fit (the double entry accounting model or should enhance understanding of the data contained in model.
(5) Economic phenomena that are similar or equivalent should be depicted as such on the financial statements that depiction ought to confirm to underlying economic reality.
(0) Current values usually are more useful than historic amounts subject to reliability of their measurement.
(7) Extensive disclosures usually must be required as an integral part of new accounting standard.
They are necessary:
(i) To overcome the deficiencies of mixed attribute accounting model.
(ii) To help users understand the effects and implications of management’s accounting choices.
Disclosures are not however a substitute for measurement and recognition.
(8) Smoothing and normalization is a function of analysis not financial reporting.
FASC of AAA has proposed three basic issues in implementing criteria for evaluate proposal of accounting standard.
(a) Does the proposed accounting standard address a deficiency in financial reporting model?
(b) Does the proposed accounting standard correct the perceived deficiency in financial reporting by improving financial statements user’s ability to make investments and credit decisions?
(c) Do expected benefits from issuing the proposed standard exceeds expected costs?
The institute of management accountants believe that developing high quality standards is as much a function of having the right process as it is having the right context. The characteristics of high quality standard establish the vision or the ultimate goal of standard setting characteristics can be discussed under two parts.
1. Standards should be written in a clear, understandable manner, and their principle should be operational to apply.
(1) Make use of existing information, when possible.
(ii) To the extent practicable, base the standards upon concepts.
(iii) Accept pragmatic decisions on accounting and disclosure requirements.
(iv) Provide operational transition requirements.
(v) Ensure that the benefits that arise from the principles of a new standard exceeds the possible costs.
2. Standards should provide recognition and measurement guidance that seeks to replicate the economics of the underlying transaction or event.
3. Disclosures should be limited to those that contribute significantly to financial statements users understanding of the enterprise’s financial performances.
1. In the absence of compelling evidence of a pervasive problem new standards should be limited to the areas for which there are no existing standards.
2. The development of new standards should include rigorous frequent participation by task forces and where appropriate, be subjected to well designed and executed field tests before they are finalised.
3. The development of new standard should include the consideration of accounting standards in other countries and seek to leverage opportunities for furthering international harmonisation where it is feasible without compromising the quality of US standard.
4. Standard derived in response to new issues or events should constitute a measured response that rationally considers the importance and pervasiveness of the problem.
5. If appropriate, standards should provide for a sunset review of all or portion of the proposed guidance at a future date.
6. Standard setting project should have realistic goals for deliverables and they should be completed on a timely basis.
The US committee on corporate reporting (CCR) .of the Financial Executives Institute takes in to consideration following framework principles and other criteria when responding to enquiries about potential accounting standard projects and assessing proposed accounting and reporting standards.
(1) Standard should be based upon developed principles and concepts which account for the true economics of a transaction. The financial statement should reflect the substance and significance of an entity’s transactions in a standard verifiable manner. Standard should be developed which require transactions of similar substance to be accounted for consistently even though their form may vary.
(2) A new standard should produce financial information which is more relevant and meaningful to users in evaluating an entity’s performance than current standards or practices provide. The information required by a new standard should be concise, reliable and improve the quality of decision making effectiveness.
(3) Effective accounting standards are those which have been founded on a direct exposures to and study of real world operating conditions. Rigorous and objective evaluation of the perceived deficiency and an examination of the relative effects of the deficiency must be made prior to beginning project.
(4) Before promulgation of a new standard, careful consideration should be given to determining that proposed standard will prevent or minimise the perceived deficiency.
(5) In a standard of high quality a manageable subject is selected and bounded to permit completion of a new rule in a reasonable amount of time. The process for standard setting should be known, recognised and accepted by stake holders.
(6) A standard where benefits of implementation outweigh the real or economic cost to comply is considered to be of higher quality.
(7) A standard should be written to encompass the worldwide environment rather than be limited to situations which exist only in U.S.A. High quality standards are developed with full cooperation of approaches used in other major countries and with an effort made to improve comparability where possible.
(8) Standard should have certain degree of flexibility. There should be a clear and concise statement of principles to be followed rather than a detailed list of provisions and “bright lines”.
(9) Disclosures should be limited to key significant data concisely presented.
(10) A Good accounting standard has direct, clear and concise language which leaves no doubt as to what the standard is designed to address what procedures and information’s are required and why this additional information is required. There is a significant value in “Plain English” communication.
(11) Standards of high quality are those in which a follow up procedures has been included or at least performed.
The answer to the third question is that by late 2000, it will be evident that IASC’s strategy working party’s proposals have failed to gain the support necessary to succeed.
In its vision paper the FASB state that a reasonable complete set of unbiased accounting standards that require relevant reliable information that is decision useful for outside investors, creditors and others who make similar decisions would constitute a high quality set of accounting standards.
The paper notes that each of those standards should:
1. Be consistent with the guidance provided by an underlying conceptual frame work.
2. Avoid or minimize alternative accounting procedures.
3. Be unambiguous and comprehensive.
4. Be capable of rigorous interpretation and applicable.
Evaluating the IASC’s core standards by reference to SEC’s and FASB’s criteria. It is likely that there will be a number of cases where the standards will be considered to be unacceptable. For example a number of the standards contain optional treatment as IAS 2 and IAS 4. It will take the new body sometime to promulgate the standards necessary to comprise a comprehensive basis of accounting. It is estimated that a set of high quality standards be in place within 5 years of the new body being established.
Reconciliation of IASs and IFRSs with Indian Accounting Standards:
Accounting Standard Board of ICAI has recently issued Accounting Standards Interpretation (ASI) regarding substantial period of time concerning AS-16 Borrowing cost issue involved in ASI-1 is that what is the meaning of expression “substantial period of time” for defining the term qualifying asset. ASB has also issued General Classifications on Accounting Standards 2002 onwards.
These are listed out as under:
(i) GC-9/2002 (AS) 18 Related party disclosures meaning of the term intermediaries.
(ii) GC-10/2002 (AS) 20 Earnings per share disclosure of earnings per share figures in case of extraordinary items.
(iii) GC-11/2002 (AS) 17 Segment Reporting.
(iv) GC-12/2002 Applicability of accounting standards to co-operative societies.
(v) GC-13/2002 (AS) 18 related party disclosure non- executive directors on the board whether related parties.
(vi) GC-14/2002 (AS) 17 Segment Reporting treatment of interest for determining segment expenses.
(vii) GC-15/2002 (AS) 18 Related Party disclosure remuneration paid to key management personnel whether a related party transaction.
(viii) GC-16/2002 (AS) 21 Consolidated financial statements definition of control.
(ix) GC-17/2002 (AS) 21 Consolidated financial statements exclusion of a subsidiary from consolidation.
(x) GC-18/2002 (AS) 21 Consolidated financial statements accounting for taxes on income in the consolidated financial statements.
ASB has also issued various exposure drafts listed out as under:
(i) Exposure draft of the proposed Auditing and Assurance Standard (AAS) on terms of audit engagements.
(ii) Exposure draft of the proposed Auditing and Assurance Standard (AAS) on communication of audit matters to those charged with governance.
(iii) Exposure draft on revised accounting standard 11, the effects of changes in foreign exchange rates.