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Globalization and International Accounting Standards

Updated on April 16, 2018

Introduction

Globalization is an inevitable force in the modern economy. With the prevalence of international trade agreements such as NAFTA as well as the increasing amount of companies looking to do business in foreign countries, international business and global cooperation have become an unmistakable trend in today’s global climate. As the world embraces globalization as a part of the international business sphere, it is understandable that global accounting standards must follow suit to accommodate for this global transition. In order to make the accounting process more efficient across borders and to make global reporting more simplified, many of the world’s nations have adopted International Financial Reporting Standards, or IFRS. A notable exception here is the United States, which uses US Generally Accepted Accounting Principles (US GAAP). With the growing influence of global business practice and the need to be efficient with financial reporting across borders, it is worth exploring how the rest of the accounting world views US accounting standards as well as the benefits of IFRS and whether the US would benefit from joining the rest of the world and using IFRS.

US GAAP and the Rest of the World

In contrast with IFRS, which is a more concept-based set of standards, US GAAP is seen as more rules-based, which seemingly gives companies the opportunity to structure its transactions to meet the requirements for a particular accounting treatment (Van der Meulen, et al., 2007). There has been much doubt cast over whether US GAAP is a reliable system, especially after the Enron scandal in late 2001.

Perhaps in relation to this skepticism is the decision by the US Securities and Exchange Commission (SEC) to allow foreign companies to use IFRS for financial reporting without reconciling the information to US GAAP. This exemption has shown its impact on foreign companies since its implementation in 2007: the IFRS filing allows investors to use a more simple and sophisticated financial reporting method, and multinational corporations have reported higher revenues since they were allowed to use the principle-based revenue recognition approach characteristic of IFRS (Fosbre, et al., 2009).

Though it seems that the rest of the world has all but discarded the US GAAP method of reporting, other countries are nonetheless deeply concerned with the prevalence of the SEC in matters of accounting standards. Because the SEC regulates some of the world’s largest capital markets, world regulators believe that the move towards global accounting standards will make the SEC more powerful and could bring in more laws regulating accounting standards in other countries (Fosbre, et al., 2009). In the context of the global economy, the US and its accounting standards have seemed to have been set aside so IFRS can be implemented, while at the same time, the SEC and other US regulatory bodies are seen as necessary yet somewhat dangerous to international accounting standards.

The Benefits of IFRS

Set aside the advancement of accounting harmonization and general global acceptance that IFRS brings, this set of standards has multiple characteristic benefits of its own. One of the most distinguishing traits of IFRS is its principle-based nature, as opposed to the rules-based nature of US GAAP. Under this approach, standards do not address every issue that arises, but remains ambiguous about things such as record keeping and measurement; in addition, IFRS generally leaves it to the firms to make accounting decisions so long as they do not breach the principles laid out by IFRS.

This principles-based approach to accounting standards makes for a considerably flexible regulatory regime. Systems like IFRS have proven to be more effective than any rules-based system: a stricter regime that imposes uniformity and restricts the amount of information that can be extracted from observation of different accounting policies, and therefore performs much more poorly than a principles-based regime (Carmona and Trombetta, 2008).

The adoption of IFRS would prove to be beneficial to accountants and the accounting profession itself. Under a rules-based system such as US GAAP, accountants have ample information on implementation guidance. This makes the profession under these standards largely mechanical and requiring a mindset much different from what IFRS requires. Accountants and auditors under a principles-based system are required to have a solid understanding of business and economics and must have a comprehensive understanding of the fundamentals of economic events before they can determine the accounting treatment to give (Carmona and Trombetta, 2008). The benefits that IFRS offers to a country are far-reaching and can provide some much-needed reform to the accounting profession in addition to harmonization with the rest of the world.

Conclusion: Should the US adopt IFRS?

It is widely believed that the FASB and US GAAP will become a part of the International Accounting Standards Board (IASB) and accept IFRS as the standard for international accounting, and FASB will take on a diminished role in the global economy (Fosbre, et al., 2009). If globalization is to continue in the smoothest and most productive way possible, it is essential that the US move ahead with adopting IFRS as soon as possible. This would bring ease and harmony to accounting across borders and provide the accounting profession with the worldly sense that it deserves and with the mindset needed for accountants to interact in the context of international business and global cooperation.

References

Fosbre, Anne B., et al. “The Globalization of Accounting Standards: IFRS Versus US GAAP.” Global Journal of Business Research, 2009.

Carmona, Salvador, and Marco Trombetta. “On the global acceptance of IAS/IFRS accounting standards: The logic and implications of the principles-Based system.” Journal of Accounting and Public Policy, vol. 27, no. 6, 2008, pp. 455–461.

Van der Meulen, Sophie, et al. “Attribute Differences between U.S. GAAP and IFRS Earnings: An Exploratory Study.” The International Journal of Accounting, vol. 42, no. 2, 2007, pp. 123-142.

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