In an increasingly global business environment, issues such as how companies account for their relevant financial positions in different jurisdictions gain greater importance. Many companies are international in their scope with several different subsidiaries in multiple jurisdictions making the interpretation of accounts particularly difficult. Accounting standards in every country are developed with the background of that country’s individual social and economic circumstances, which results in a range of differing standards being developed across the globe.
As a result, it is very difficult for accounts to be read accurately and to make suitable financial decisions on investment by entities from other jurisdictions. Comparing performances and consolidating accounts without at least a degree of international harmonisation would prove very difficult, if not impossible.
The Importance of Harmonisation
As a result of the problems mentioned above, a uniform set of International Financial Reporting Standards (IFRS) have been developed with the view to mitigating or, in some cases, eliminating divergences in the way that accounts are reported in different jurisdictions. It is recognised that a blanket standardisation is simply impossible; countries need the flexibility and freedom to allow influences from their own social and economic backgrounds to come into play. For this reason, a process of harmonisation has been established.
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By having a guideline for the ways in which companies from different countries must deal with certain corporate issues, it makes the position of managers and investors much easier. Having a foundation of standards allows allocation choices in terms of resources and time to be made across jurisdictions. In order to do this, a like for like comparison must be possible and this can only be achieved with a degree of harmonisation.
In particular, the area of taxation has gained a great deal of attention from international accounting standard setters. For example, Financial Reporting Standard 19 states how a company should deal with deferred taxation situations, i.e. where the point of realising the asset and the corresponding liability are different and how this can be accounted for in the company accounts. By ensuring companies across the globe are broadly following the same principles, it is much easier to ascertain the true financial position of the company in question.
The International Accounting Standards Board
The International Accounting Standards Board (IASB) is a wide group of people who are independent and are involved in the development and management of the International Financial Reporting Standards. The work of the IASB is supervised by the International Accounting Standards Committee and has additional support from external advisory committees.
In total, there are fourteen board members, representing nine different countries, thus ensuring geographical diversity and representation during the standard setting process. The main work of the IASB is to work with the various different national accounting standard setters in a bid to ensure that there is a worldwide convergence of accounting standards being put in place. As mentioned previously, the aim is not to force nations into following one set of distinct rules, but rather to encourage a union of standards.
The work of the IASB has been widely recognised, with more than 100 countries across the world either requiring or at least allowing the use of international accounting standards. This substantially increases the freedom of trade and investment on an international scale. International companies are able to ensure that consolidated accounts are prepared to produce useful and accurate accounts of the way in which the company is performing. This ability to draw accurate comparison is vital for the truly international scope of modern business.
Structure and Processes of the IASB
Gaining harmonisation and convergence of accounting standards is clearly an important and useful element of international business. Achieving this is, however, a particularly difficult task. No international financial reporting standard can be passed and agreed on without the due process being followed. International agreement is vital, if such convergence is going to be efficiently attained across the globe.
The process is carried out in six stages, each of which is open to debate and is overseen by the executive committees. Firstly, the agenda is set. During this process, the IASB will look at the issue being raised, the current approaches being taken by the various different countries and the realistic possibility of achieving greater harmonisation. On the assumption that further harmonisation is thought possible, the IASB will then consider and set out the scope of the international standard that is envisaged.
Secondly, the project of establishing the accounting standard is planned fully to ensure the maximum possible buy-in from the various countries. Crucially, at this point, the IASB will decide if it is going to act alone in establishing the standard or whether it requires the assistance of other standard setting bodies.
Thirdly, once the project is fully understood, a discussion paper is published. This will state the issues as the IASB sees it and the possible solutions that exist for the problem. This is absolutely crucial. The work of the IASB relies almost entirely upon the agreement of the participating countries and, therefore, opening the discussion up to these countries is vital.
Fourthly, once the discussion stage has been duly undertaken, an exposure draft is issued with details of the proposed solution. This is essential as it will be at this point that many countries will raise objections or make further suggestions.
Fifthly, all of these processes are put together and the standard itself is drafted and published. It takes into account all comments and issues raised during the discussion paper and exposure draft.
Finally, after the standard has been issued, the IASB will review the uptake and the way it has been applied by the various countries. It may be that further amendments or new standards are needed and the process will then restart.
The entire process is based on discussion and co-operation, which is vital if any form of harmonisation can be truly efficient.
Challenges to Harmonisation
Harmonisation is clearly beneficial for international trade and businesses. However, such large scale convergence is going to be difficult to manage and achieve; firstly, as the standards have to be incorporated into the national standards set by every individual country. This requires the relevant countries to be on board and prepared to support the various international standards being developed. Naturally, the support that is being shown for this is different between the various countries, with the more affluent countries being able to comply more readily because of their advanced accounting structure.
Secondly, the changing of the way in which accounts are presented is not always a quick or cheap process, which can cause difficulties for some smaller companies. In some cases, the adoption of certain international standards will result in the reported profits of the company falsely appearing substantially lower than the previous year. For this reason, some companies will naturally be slower or more hesitant to adopt the new standards. Where there is resistance, the IASB does not have the power or teeth to enforce the standards. This lack of ability to enforce can ultimately make the process of ensuring total international harmonisation extremely difficult and potentially impossible.
The IASB plays an absolutely vital role in the move towards gaining an internationally harmonised set of accounting standards. All of the work undertaken by the IASB is mindful of the need to achieve co-operation between all countries and, as such, has been structured in the way that it establishes standards through the process of discussion and explanatory documents, encouraging the accession of all relevant parties, at every step of the way. In doing so, the chances of international harmonisation are much greater and this will bring with it all of the benefits of internationally usable accounts.
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