END OF CHAPTER QUESTIONS

4.2 Global standardization of accounting requires the United States to adopt

IFRS. Do you think it is likely that the US will embrace IFRS in the near term, and
what do you think are some of the factors that might discourage the country from
adopting IFRS?

The IASB has convinced almost every country to adopt their IFRS standards, but there
are still a few countries that are reluctant to accept IFRS and would rather use their own
accounting standards. A major country that refuses to adopt IFRS is the US. The US
still adopts the accounting standards set out by the FASB. This is mainly because they
believe that the ‘rule based’ standards set out by the FASB are far more superior to the
‘principle based’ ones set out by the IASB. But in recent years, especially after the string
of accounting scandals in 2001-2002, this resolves seems to have weakened. (tb
ref)The IASB and FASB decided to come together and reduce the differences between
the IFRS and the GAAP, by forming a MoU known as the Norwalk agreement. This was
in 2002, and though they have published reports that announcing their progress since
then and established milestones and priorities, the full adoption of IFRS as their
standards seem to be a long way from now. (Ifrs.org, 2017). The reasons the US is
deterred from adopting IFRS can be due to the highly litigious business environment
that is present. This results in all of the blame being placed squarely on the shoulders of
the accountants. Accountants thus, have ‘high professional liability’ in this scenario and
thus would rather rely on the very specific rules provided by the FASB rather than the
general guidelines provided by the IASB. Another factor is that the FASB continues to
issue new guidance standards on very specific issues, without there being a
simultaneous equivalent standard issued by the IASB. And thus despite the
convergence projects between IASB and FASB, they may not necessarily lead to actual
convergence in the accounting standards. The third reason could be politics and the fact
that the US would not want to give up the standard setting process to a foreign body,
however neutral and international they are or claim to be. They see their standards as
superior and refuse to adopt the IASB standards unless they reach the same perceived
level of quality. (Ifac.org, 2017)
4.6 Any effort towards standardizing accounting practices on an international
basis implies a belief that a globalized ‘one size fits all’ approach is appropriate.
Is this naïve?

Before IFRS was introduced, all countries followed accounting systems that was suited
to the needs of their country. This might have evolved over time to adapt to their
requirements of information. The accounting standards of each country has evolved
with the circumstances of the country and focused on their needs at that particular point
in time. So it is safe to say that pre-2005, the accounting systems in place in different
countries were considerably different. These differences are present because the
various differences in many areas like culture, history and geography of the country, the
established political system in the country, taxation system in the country, inflation
levels, the nature of the accounting profession within the country, the stage of economic
development within the country, etc. and because of the sheer number of these factors,
it is evident that the accounting differences would be very high. But despite all of these
differences, the global standard of IFRS was still adopted by over 100 countries. In
theory the idea of a global ‘One size fits all’ approach does seem to be a naïve concept,
especially since the factors that cause the accounting differences are still present, but
the fact is that none of the countries that have adopted these standards have not
abandoned the IFRS, despite the fact that not much really holds them back from doing
so.

4.10 As noted in this chapter, Hamid, Craig and Clarke (1993) provide an
argument that religion can have a major impact on the accounting system chosen
by a particular country and that before ‘western’ methods of accounting are
exported to particular countries it must be determined whether particular
religious beliefs will make the ‘western’ accounting policies irrelevant. Explain
their argument.

The impact that a cultural factor such as religion, has on the accounting practices are
explored thoroughly by the examination of the values of one of the major religions of the
world - Islam. (Hamid, Craig and Clarke, 1993) They found that they have failed to
embrace the concepts of western accounting practices. This is mostly because the
Islamic religion encompasses many areas of a believing individuals life including the
conduction of his business. The tenets of the religion also dictate the usage of debt and
prohibit the disbursement of interest. Thus it is evident that the religion can have a huge
impact on the way that business is carried out and this can have considerable impact on
the way that their accounting practices are shaped and this could subsequently mean
that the western accounting practices will not be easy to adopt in countries that follow
that particular religion.

4.12. In the early 1990s, the US FASB’s chairperson Dennis Beresford claimed
that the US accounting and reporting system was regarded by many as ‘the most
comprehensive and sophisticated system in the world’. Evaluate this statement.
How do you think its validity might have changed in the aftermath of accounting
failures at Enron, WorldCom and Anderson in 2001-02? Do you think that the US
system would be regarded as sophisticated in all cultural contexts?

The US board of accounting standards, FASB, claims that their accounting practices
and standards are much more superior to that of the IASB. This, superiority arises,
according to them, because of their rule-based accounting standards. But what is
considered sophisticated and comprehensive by some, are considered complex and
exhaustive by others, and though it is a rule based system that should inherently result
in the same results if applied, there have been instances where, on applying the GAAP
rule FAS133 which related to accounting for derivatives, the accountants ended up with
different financial statements for the same year. (J. Pollock, 2007). This goes to show
that despite being rule-based and being imposed, there is much room for creative
accounting, the usage of which is exactly what led to the Enron scandal in the US in
2001. Many claim that if the principle based system were to be followed in US, this
would not have happened. The US system would definitely not be viewed as
sophisticated in all countries and rather as irrelevant on various factors like culture,
religion, legal standards etc.

4.22 Does the standardization of accounting standards on a global basis

necessarily equate with standardization in accounting practice?
The standardization of accounting standards do not necessarily mean that the
accounting practice itself is standardized. On a national level, there will still be
differences in many aspects of an economy. The global acceptance of IFRS as the
standard will still see that there are many differences because of factors like differences
in taxation systems between nations. This means that financial statements can still be
prepared under different methods to accommodate the local policies regarding the
income calculations for levying tax. Another factor could be the differences in economic
and political influences on financial reporting. This states that the motivations and
incentives, of the people responsible for the preparation of and those responsible for the
enforcement of these accounting practices, remain local. How these accounting policies
are implemented and put into practice has a lot to do with how the people of power
within the accounting system and those within the nation choose to exert their influence
as well. The next factor relates to the local modifications to the IFRS at a national level.
This states that particular countries may modify an IFRS rule so as to suit their local
interests. And if countries begin to do this, it seriously hampers the ability of the IFRS
standards to establish comparability between financial statements. A good example of
this would be IAS39 which was modified by the European Union prior to its acceptance.
The next factor is differences in implementation, monitoring and enforcement. This
states that improper implementation and not enforcing the standards well enough could
lead to accounting practices to not being uniform despite the best efforts of the IASB.
This can be due to the lack of development of the accounting profession, as observed in
China.

4.24 The IASC (1998, p. 50) stated that: Many developing and newly industrialized
countries are using International accounting Standards as their national
requirements, or as the basis for their national requirements. These countries
have a growing need for relevant and reliable financial information to meet the
requirements both of domestic users and of international providers of the capital
that they need. Do you think that IAS/IFRS will provide ‘relevant and reliable
information’ that meets the needs of all financial statement users in all countries?
LONG RESPONSE QUESTIONS

1. Identify the difficulties that the IASB faced, at the time of its establishment, with
respect to its mission of "global adoption of one set of standards".

2. Outline the "watershed events" that significantly boosted IFRS adoption

/convergence.

The US GAAP had the reputation of being the best available set of standards that
sought to regulate accounting practices. But the collapse of Enron in 2001, and the
other accounting scandals that came to light in 2002, the perception of the high quality
of GAAP that was previously held, was shattered. There were many loopholes that were
found in the GAAP rules, which were effectively capitalized by Enron in hiding their
massive amounts of debt. An investigation into Enron invited criticisms from various
people, including the IASB chairman David Tweedie, who criticized the Rules-based
approach that GAAP follows. He followed it up by saying that a better stance to adopt
would be the International standards set out by the IASB. Soon after the wave of
accounting scandals in the US, the Sarbanes Oxley act was passed in 2002, in order to
protect the investors from potential fraudulent activities by the corporations. This act
mandated that the SEC look into how they can move from their rule based system to the
principle based system of the IFRS. This resulted in the FASB and the IASB entering a
joint agreement and deciding upon a convergence project, so that the standards of both
the boards can merge and improve. The ultimate goal of this project is that the US will
adopt the IASB standards, but this goal still remains unachieved as of date. (Deegan,
2009)

3. Select and outline two instances of political lobbying of the IASB identified by
McGregor with reference to the parties involved, motivations and outcomes. If
necessary, refer to other sources to support your answer.

The first instance of political lobbying that the IASB was subject to, that will be
discussed, will be the events surrounding the standard IAS39, which related to the
recognition and measurement of financial instruments. The European banks, had an
issue with the requirements that IAS39 imposed, which was that derivatives should be
measured in fair value and the changes in fair value over time must be disclosed as
income/loss. The European banks wanted to continue using hedge accounting to
negate the effects of interest risks. The board was approached with an appeal to
change the standard, but it was refused because the board was meant to be
independent and not subject to these influences. The changes that were proposed
would have shown accounting losses under hedge accounting as assets.

Simultaneously, the ECB was applying pressure on the IASB to control the usage of
Fair value option in IAS39. The ECB was concerned that the banks would lend out more
funds as their reported net assets increased.

The IASB refused to give into pressure with the EC, even with the threat of the EU
endorsement being withdrawn, because they were committed to stay independent. The
discussions between the EC and the IASB got unfriendly and heated, and the members
of IASB frequently became targets for personal attacks. But they still remained steadfast
in their beliefs and did not relent to the pressure.

The Issue with ECB was managed by carving-out the provisions of IAS39 that was of
major concern to them. But the hedge accounting issue was not addressed or amended
before the deadline and this led to bad relations between the EC and the IASB for a
long time.

4. Provide a brief summary of the US response to IFRS.

The Securities Exchange Commission in the US was created following the stock market
crash in 1929. The SEC was given the responsibility to create accounting regulations
and they delegated this responsibility to the US accounting profession to develop these
standards. They came up with the Generally accepted accounting principles or GAAP.
When IFRS was introduced and the global markets started to accept IFRS as their
accounting principles, the US still held back from accepting IFRS over the GAAP. They
claimed that their accounting standard system was far superior to IFRS. In 2001-2002,
when a string of accounting standards affected the US, many people blamed the GAAP
and their loopholes for the opportunity they provided to conceal their fraudulent
reporting. In 2002, the Sarbanes Oxley act was established to protect investors from
fraudulent reporting, and this act commanded that the SEC in the US look into how they
can move into a more principle based system and how they can adopt IFRS.

The immediate consequence of this was the convergence project in September 2002,
which was an agreement between the FASB and the IASB to reduce the differences
between the US GAAP and the IFRS. This was called the Norwalk agreement and the
ultimate objective of this agreement was that the US would agree to adopt IFRS in full.
In some cases the FASB would adopt the IFRS perspective on accounting and on some
issues the IASB would adopt standards that are very similar to ones that already exist in
GAAP. On new issues, they would collaborate to come up with new projects together.

Although the long term aim is for IFRS to be globally recognized and applied, the full
adoption of it by the US seems quite distant. The US has not let their domestic firms use
the IFRS to prepare their financial statements as of yet, but they have, in 2007,
permitted foreign firms, who already prepare their statements in IFRS, to stop
reconciling their financial statements to the GAAP. And although this did necessitate
that the IFRS as a global standard would be accepted anytime soon, it is still a step
towards that direction.

REFERENCES

Ifac.org. (2017). Does IFRS Have a Future in the US? | IFAC. [online] Available at:
https://www.ifac.org/global-knowledge-gateway/business-reporting/discussion/does-ifrs-
have-future-us [Accessed 10 Mar. 2017].
Ifrs.org. (2017). Convergence between IFRS Standards and US GAAP. [online]
Available at: http://www.ifrs.org/use-around-the-world/global-convergence/convergence-
with-us-gaap/Pages/convergence-with-us-gaap.aspx [Accessed 10 Mar. 2017].

Hamid, S., Craig, R. and Clarke, F. (1993). Religion: A Confounding Cultural Element in
the International Harmonization of Accounting?. Abacus, 29(2), pp.131-148.

J. Pollock, A. (2007). Has the FASB Outlived Its Usefulness?. American Enterprise
Institute. [online] Available at: https://www.aei.org/publication/has-the-fasb-outlived-its-
usefulness/ [Accessed 11 Mar. 2017].

Deegan, C. (2009). Financial accounting theory. 1st ed. North Ryde, N.S.W.: McGraw-
Hill.

McGregor, W. 2012 "Personal reflections on ten years of the IASB", Australian

Accounting Review, Vol. 22, Issue 3, pp 225-238.