Adopting A Label Heterogeneity In The Economic Consequences Around IAS IFRS Adoptions

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Adopting a Label: Heterogeneity in the Economic Consequences around IAS/IFRS Adoptions

Introduction

Accounting is an important practice in an organization as it ensures the survival and

the success of the organization. Accounting helps organization in measuring the performance

of their policies and strategies as wells as guiding them in making corrective measures.

Different organizations have different methods and policies of performing the practice, which

consequently, yield different results. In addition, the standards of accounting differ from one

country to the other depending on the set rules and principles. However, accountants felt the

need of having a universal set of rules and principles that would help in establish a common

reporting ground. This led to the development of the International Accounting standards

(IAS), which is a set of common internationally accepted standards of accounting. This made

it possible for comparison between different financial records because they now shared the

similarities of a common format (Chalmers and Jayne 155).

Connected with the International Accounting Standards is the International financial

Reporting standards (IFRS). IFRS is a language of reporting of accounting records, which

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makes it possible for the comparison of different accounting records and information even in

the international field. Globalization and the emergence of new world markets have led to the

need of a common method of preparing financial statements and reporting. For instance,

globalization has led to the development of trade blocks for example, the European Union

(Chalmers and Jayne 185). Member countries would like to compare their performances, and

that would only be possible through analysis of financial statements. Therefore, common

accounting principles and techniques becomes an absolute necessity in such countries.

Adoption of the IAS/IFRS by different organizations in the world has its own economic

consequences. It has brought with it some economic benefits as well as leading to the

emergence of economic problems in some instances.

Purpose of the paper

Organizations had different options and ways of adopting and implementing the

international standards of accounting and reporting. They could either decide for themselves

whether to adopt the standards (voluntary) or the government forced them to adopt the new

international standards (mandatory). This paper looks at the economic consequences of the

adoption of these international standards. It will also focus on how organizations in different

countries adopted the international standards. There were those organizations that adopted the

standards because it was the current issue, which can be termed as adopting a label. There

were also organizations that adopted the international standards of accounting and reporting

because they had a strong believe and motive of enhancing transparency in their operations

(Schutt 134).

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This paper will look at the different impacts of the method of adoption of the

international standards of accounting and reporting. It is obvious that the method and quality

of adoption determine the performance of a policy or a rule. The actions of the two groups,

that is, those who adopted a label and those whose concern was to enhance openness and

transparency in their organizations will have different effects on the economy (United Nations

234). The paper will also outline the benefits that come with the adoption of the standards and

the problems that may arise due to the adoption of these international standards of accounting

and reporting. However, the paper will not only look at the consequences of the adoption of

the IAS/IFRS but rather the differences in the adoption methods and hence different impacts.

The best thing about any international financial accounting standards of accounting is

that they give organizations the opportunity to make voluntary decisions on whether to adopt

the standards or ignore them. This is why some firms will adopt the international standards,

not because they will use them but because everyone else is applying them. These firms will

adopt the International Financial Reporting standards but will not change their operating

procedures to take care of the new methods of accounting and reporting (adoption as a label).

However, there are those firms that will adopt the IAS/IFRS because their major concern is to

give the firm a competitive advantage in the market through the enhancement of transparency

and openness.

A review of the effects of the adoption of the IAS/IFRS in different countries shows

that there are visible differences between the consequences of the adoption of the standards

among the label adopters and those that are serious. Organizations whose main drive for

adoption is the quest for transparency have reduced exposure to the risk of uncertainty and

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hence increased market liquidity. Analysis of the financial reports that firms prepare at the

end of the financial year can help one in identifying the label adopters and the serious

adopters of the IAS/IFRS. Serious adopters will have more open financial statements that do

not hide any important facts.

Background and historical information about the international Reporting and Accounting

Standards

The United States bears the greatest responsibility of developing the accounting

standards. On 1

April, 2001, the International Accounting Standards Board (IASB) replaced

the existing International Accounting Standards Committee (IASC). The need for

international accounting and reporting standards had begun as early as1973 where the

accounting departments of various countries teamed up to come up with common methods

and principles of accounting and reporting. The establishment of the International Federation

of Accountants (IFAC) in 1981 was a major milestone in the development of IAS/IFRS. The

IFAC and IASC were responsible for the development of the accounting standards during the

time (Chalmers and Jayne 132).

The ISAC and IFAC established many accounting standards between the year 1973

and 2000. The establishment of a committee of checking the practicality of the international

standards was also a major step in the development history of the international standards. By

the beginning of the year 2000, many stock exchange firms in the world had recognized the

use of International Accounting Standards. It was until the year 2001 when the (IASB)

International Accounting Standards Board assumed its full responsibility. By June the same

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year, the board had published its first set of International Financial Reporting standards. The

European Union required her member countries to adopt the international accounting

standards by the year 2005 (Chalmers and Jayne 98). All companies in the United Kingdom

had to present their financial statements using the international standards and principles.

IASB (International Accounting Standards Board) is still in existence upto to today.

The board consists of fifteen members who are appointed by the Board of Trustees. The board

is independent of the government and has distinct roles and responsibilities. Its main functions

include: developing common objectives of preparing financial statements, advising firms on

the important characteristics of accounting information, coming up with the basic components

or elements that firms should consider in the preparation of their financial standards, and the

advising firms on the methods of capital maintenance. The Board stresses that the importance

of financial statements is to help in determining the financial position of a firm by looking at

its financial position.

The costs of adopting the international standards of accounting and reporting

Adoption of the international standards of accounting and reporting has its own costs

and problems. To begin with, it may give firms a false sense of belief that they are in line with

global demands. Firms that follow the standards may think that they are performing according

to the demands of globalization and forget that there are other issues that they are supposed to

take care of, rather than depending on accounting and reporting only. Furthermore,the

adoption of the international standards is based on the assumption that the standards will be

generally acceptable in different countries. Therefore, firms which have adopted the

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international standards tend to focus less on the management of their net earnings. They spend

less time in the management of their earnings exposing the firms to the risk of failure, which

adds to the costs of a firm.

Firms have their own intentions and specifications of accounting. Most firms would

want to adopt accounting principles that simplifies their accounting information for easy

understanding among their different stakeholders. This implies that the firms have to prepare

two sets of accounting statements if they adopt the international standards. The firms will

need accounting statements for their stakeholders as well as those that adhere to the

international standards. This adds to the costs of the firm due to the hiring of qualified

accountants. Countries have different personnel and skills to help them in the adoption of the

international standards. Therefore, it is impractical for different countries to adopt the same

standards despite their accounting infrastructural differences. This implies that the

implementation of the international standards can lead to absolute failure.

There is also ambiguity as to who should track the relevance and the applicability of

the international accounting principles. This is because many countries have not considered

their local requirements before adopting the international standards. This leads to confusion

among different stakeholders in the business scene. Lack of a common stance between

different stakeholders in the process of accounting leads to weaknesses in the structures of

businesses, which may even lead to business failure. These are among the costs and problems

that are factors of the adoption of the international accounting and reporting standards in

different countries.

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Benefits of the adoption of the international standards of accounting

The benefits of the adoption of the international standards of accounting and reporting

outdo the problems and limitations above. This is because the standards have come at a time

when the world needs them due to globalization. The main contribution of the standards

towards adding to the benefits of an organization is because the standards fight for openness

and transparency in all aspects of the organization (Walton 56). To begin with, the adoption of

the standards increases the trust that stakeholders have for the organization. For instance, the

requirement of transparency makes sure that managers act for the best interest of the

organization and shareholders. It also increases the confidence that suppliers, lenders and

other stakeholders have for the organization. This implies that firms have more access to

sources capital and supply of logistical requirements.

Investors can also use the financial statements of other institutions that are outside

their countries as a guide to help them achieve their dreams. Adoption of the standards gives

investors a wide source of information for their decisions. Therefore, these standards help

local investors in competing with other international investors, which raises the productivity

of a country. Transparency in the preparation of financial statements makes them more

reliable as a guide in decision making of an organization. The statements can be used in the

signing of contracts with lenders, financial institutions, suppliers and shareholders.

Common accounting standards eliminate the differences between different countries’

methods of accounting. This means that it is possible for investors to maximize utility out of

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an existing business opportunity. Therefore, investors have a wide source of capital and other

factors of production due to cross border transfers of resources. Adoption of the international

standards of accounting and reporting has been known for its contributions towards increasing

the liquidity of the capital markets. The increased liquidity of capital markets reduces the risks

of investment, lowers the cost of investing and acquiring capital, which are the drivers of

economic growth and development.

It is clear up to this point that local accounting standards and principles suffer from the

deficiency of lack of clear guidelines and rules that define the process of accounting. It

implies therefore, that different accountants in the same country can come up with absolutely

different interpretation of the same set of accounting data. The adoption of the international

standards establishes a common way of preparing the financial statements that eliminates the

previous differences. Furthermore, adoption of the international standards has helped the

developing countries in their development cycles (Walton 123). This is because the countries

always strive for transparency and openness in all their undertakings. One of the major

problems that have been hindering development of third world countries is the lack of

integrity and openness among private officials. These benefits show that the adoption of the

international standards came at a time when the world needed them due to the demand of

international cooperation and globalization.

Conclusion

Globalization is an emerging issue in the approach to the world business.

Organizations must strive to meet the demands of globalization for them to survive in the

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competitive business scene. This means that firms must compare themselves with other

international firms that are of the same type. The comparison cannot be possible if firms use

different methods and principles of preparing their financial statements. The need for a

common method of preparing financial statements led to the development of the IAS and

IFRS that are sets of rules and principles of accounting and reporting and which are accepted

internationally.

Countries had to adopt the new international standards in their accounting regulations

in order to be in line with the current demands. However, there are those countries that

adopted the standards because everyone else was doing it and others whose main interest in

adopting the standards was to enhance openness and transparency. The economic

consequences of the adoption of the IAS/IFRS depend on the motives of the countries

adopting the standards. The paper has looked at the consequences of the adoption of the

international standards of accounting and reporting as well as the factors that led to the

development of the international accounting and reporting standards. These consequences are

in terms of the costs and benefits that come with the adoption of the new standard of

accounting.

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Works Cited

Chalmers, Keryn, and Jayne M. Godfrey. Globalisation of Accounting Standards. Cheltenham

[u.a.: Elgar, 2007. Print.

Palea, Vera. Ias/ Ifrs: The Economic Consequences of Increased Disclosure : the Effects of

the Ias/ Ifrs Adoption in the European Union on Banks Cost of Equity. Milano: F.

Angeli, 2006. Print.

Practical Implementation of International Financial Reporting Standards: Lessons Learned :

Country Case Studies on Ifrs. New York: United Nations, 2008. Print.

Schutt, Andreas. Corporate Governance Based on Business Reporting in Accordance with

Ias/ifrs Accounting: A Critical Analysis of What Information Ias/ifrs Accounting

Provides for a Holistic Business Reporting and Its Usefulness for Value Based

Management. Mu

nchen: GRIN Verlag GmbH, 2008. Internet resource.

Walton, Peter J. An Executive Guide to Ifrs: Content, Costs and Benefits to Business.

Chichester, West Sussex, UK: Wiley, 2011. Print.

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