International Standards Convergence Notes

International Standards Convergence

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Definition

International Standards Convergence means to harmonize national standards with IAS/IFRS

In other words

To create one set of rules for accounting si

o that there will be equal and same treatment of each and every element of accounting all over the world

Why is it important?

Businesses operate on a global scale and investors make investment decisions on a worldwide basis. There is thus a need for financial information to be presented on a consistent basis. The advantages are as follows.

• In a business that operates in several countries, the preparation of financial information would be easier as it would all be prepared on the same basis.

• For multinational companies, access to international finance would be easier as financial information is more understandable if it is prepared on a consistent basis.

• Consolidation of financial statements would be easier.

• If investors wish to make decisions based on the worldwide investments, then better comparisons between companies are required. Harmonisation assists this process, as financial information would be consistent between different companies from different countries.

• Similar accounting regulations would improve access to worldwide capital markets.

Lecture Notes

The reasons for differences in accounting practice

Following are the reasons for the failure of adopting IFRS

• Legal systems. In some countries financial statements are prepared according to a strict code imposed by the government.

• Professional traditions.Some countries have a strong and influential accounting profession and can rely on the profession to draft relevant standards.

• Nationalism. Individual countries believe that their standards are the best.

• Culture. Differences in culture can lead to differences in the objective and method of accounting.

• Religion may affect accounting practices for example, Islamic law forbids the charging or accepting of interest.

• Attitudes to risk. For example, in Japan high gearing is usual and is a sign of confidence in a company

The Financial Accounting Standards Board (FASB), and the IASB are involved in a joint project to harmonise their accounting standards. However, some differences remain.

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