Current Issues in Financial Reporting

Answer

Current Issues in Financial Reporting

International accounting standardization is hinged on procedural and substantial concepts, some which draw their legitimacy from political considerations. The effectiveness of the accounting standards have been challenged by frequent financial failures that have been experienced in corporate circles, especially in the US (Financial Accounting Standards Board (FASB) 2018). The standards were introduced in the UK, which has also experienced similar outrage regarding the collapse of some of its top corporations, some of which went into receivership immediately after their published financial statements indicated that the companies were in perfect financial health.

In 2005, January 1, all stock exchanges and listed companies across the European Union officially commenced the application of International Financial Reporting Standards (IFRS) in their companies as outlined by International Accounting Standards Board (IASB) (Sawani n.d). The development of the IFRS revolutionized corporate governance of the global multinational corporations (Anderson and Edwards, 1998). Several countries have adopted the IFRS over a span of time depending on different reason and timings (Burlaud & Colasse 2011). Some of the plausible hypotheses that have been put forward for this variation are diverse and range from corporate environment, cultural differences, presence of natural resources and technological differences or political influence (Wang 2014). Martinez-Diaz (2005) stated that;

‘And yet, by ignoring the role of power and politics in standard-setting, this perspective seems to be missing a critical part of the story. Standard setting at the IASC/B is and has long been permeated by politics…’ pg. 4

In 2005, faced with the increasing popularity of the IFRS globally and the capital markets, Canada decided to adopt the IFRS. The decision provides some insights into the factors that prompted Canada to make the decision not to adopt GAAP but IFRS. The oil and gas industry greatly opposed the decision preferring that Canada should adopt the US Generally Accepted Accounting Principles (GAAP) as about 80% of the country’s exports are to the US while 60% of Canada’s investments are from the US. However, the country’s regulators finally decided to adopt the IFRS (Ramanna 2012). Two non-market factors that contributed highly to the decision are; a). Canada’s comfort with IFRS standards can be attributed to the strong historical and cultural ties that it enjoys with the UK  and b). Canada’s resilience to distinguish itself both economically and the continued implication by Canadian media on the countries inferiority complex position compared to the US economic superiority made it difficult to entertain any arrangement that may imply any suggestions that Canada may assume anything that may support such a stand like the adoption of US GAAP.

China’s experience with IFRS confirms that political compromises led to the success of the country’s harmonization process. Citing the country’s unique circumstances, China’s Ministry of Finance (MOF) proposed a customized IFRS position on IFRS. For example, Chinese government owns substantial stock in most of the country’s corporations and IFRS provisions demanded extensive party-related disclosure requirements. Based on onerous nature of IFRS compliance requirements, MOF successfully lobbied IASB to subject state owned enterprises to lower disclosures requirements in the country. Exemptions to related party disclosures confirms the MOF victory over IFRS hard positions and reflects the growing power that China has on IASB and its proven ability to influence the IFRS decisions in future (Ramanna 2012).

Tata Steel, an Indian multinational company with extensive European presence, is required to file its debts using its home country’s currency, that’s Indian rupees to enable smoother consolidated reporting purposes. IFRS requirement exposes the company’s financial statements to massive mechanical swings due to Rupees volatility. The processes affect net income of companies with such complications in India. The country’s decision to postpone its convergence projects can be related to such issues. Tata case study portrays the implications that some countries may face depending on their political powers.

The case of India and Russia can be used to illustrate how international politics can influence a country’s strategy on the IFRS convergence efforts. Two dimensional matrix characterize the IFRS position: First, one section of the matrix shows a country’s influence on political powers that oscillate around IASB and second is the country’s political power and its potential to shape IASB decisions. The US is a powerful IFRS constituent and also its most reluctant endorser. This contradictory position reflects the unique position that the US finds itself regarding IFRS and international politics. The EU recognizes the benefits of companies adopting the International Accounting Standards besides the Securities Exchange Commission agreed to recognize some accounting statements prepared using IFRS standards.

There are other several factors that can also be attributed to have influenced or delayed the choice of international standards. Some of the factors are educational, economic, legal or capital market influence. Other factors are professionalism and statutory control, uniformity and flexibility, conservatism and optimism and secrecy and transparency (Gray 1988). National accounting profession is impacted by capital markets and economic systems. Economic development influences accounting structure that would capture relevant performance and productivity in various economic sectors. The most comprehensive accounting structures are found in most developed countries. For example, Australia has a well-developed accounting practice compared to Libya (Sawani n. d).

Capital markets have been known to influence accounting practices. For example, most of the capital markets in Germany have been financed by creditors. Major reasons for publishing financial statements in Germany are to protect creditors whereas in the US it is the protection of investors (Sawani n, d).

The adoption of IFRS standards in the world has benefitted most corporations especially the multinational companies. The increasing global markets and the expansion of business environment together with the financial market complexities necessitate the creation of accounting standards that are acceptable throughout the world (Hopper, Lassou & Soobaroyen 2017). The major factors relating to IFRS opposition are largely associated to international political dynamics and business operations (Burlaud & Colasse 2011).

Legal factors also determine the level of influence on accounting standards development and implementation compared to cultural values (Sawani n, d). Most of the accounting models differ depending on the countries legal foundation whether the laws are based on common law or code law. The models are also influenced by the tax laws that reflect whether the country’s economy is based on socialism concepts or capitalism. For example on legal influence, some countries such as UK, US Canada and Australia that have constitutions that are founded on common law whereas France, Egypt, Germany and New Zealand constitutions are founded on code law. Developing nations have adopted the standards that their former colonizers have adopted. The accounting rules adopted by countries with common law foundations such as the US apply accounting rules not laws unlike countries like Taiwan with coded laws that have incorporated accounting concepts as part of their legal system.

                                                            Conclusion

The development and adoption of the IFRS has revolutionized the corporate governance of the global multinational corporations. Many countries have adopted the IFRS over a span of time depending over the last two decades. Different reasons have been forwarded for incorporating IFRS in most jurisdiction however some plausible hypotheses that have been fronted for some variations which range from corporate environment, cultural differences, presence of natural resources, technological differences, professionalism and statutory control, uniformity and flexibility, conservatism and optimism, secrecy and finally transparency. The two cases on China and India have demonstrated that political interferences have played a role in influencing some of IFRS decisions. However, the authenticity of political interference comes into focus when companies continue to fail despite the advanced improvement in digital technology and sophisticated record keeping. Very large corporations have failed in the US that prompted the introduction and enactment of several Acts of parliament to safeguard the investors from wanton losses. The collapse of Enron, WorldCom, Lehman Brothers and many more complicated issues for the FASB especially when the top economic bosses in the country fail to protect the investors from continued money losses.  On legal influence, some countries such as UK, US, Canada and Australia that have constitutions that are founded on common law unlike France, Egypt, Germany and New Zealand whose constitutions are founded on code law. Developing nations have adopted the standards that their former colonial masters have adopted. The accounting rules adopted by countries with common law foundations such as the US apply accounting rules not laws unlike countries with coded laws that have incorporated accounting concepts as part of their legal system such as Germany and Taiwan. The most comprehensive accounting structures are found in most developed countries where more research has been extended to capital and financial markets to improve the performance of corporations and the respective economies.