The effort to achieve a single set of global accounting standards has gained significant momentum in the recent past. The logic behind the development of a single set of high-quality global accounting standards for the world’s integrating capital markets has become more evident especially with the collapse of major corporations in the recent past which calls for the need for evaluation of existing national and international accounting practices. All the major economies of the world are aiming at the adoption of the international financial reporting standards within their economies to enhance quality. Indeed, the international convergence efforts have been endorsed by the members of G20 who in September 2009 called on IASB among other international accounting bodies to implement their convergence projects as soon as possible (IFRS 2011). Several developing countries have also adopted the standards issued by the international accounting standards in a bid to develop high-quality standards indigenous accounting standards.
Adopting international accounting standards will enable both developing and industrialized nations to access the benefits associated with high-quality financial reporting which include increased efficiency in the capital markets, improved relations with development agencies, easier and cheaper access to international capital as well as enhanced economic development (Hanif 2009). Also, the adoption of IAS will enhance consistency in financial reporting since adherence to IAS standards will promote uniformity which improves understandability and the perceived credibility of financial disclosures.
Studies have revealed that the adoption of international accounting standards by business organizations substantially benefits shareholders by considerably reducing the cost of equity capital (Hanif 2009). Also, high-quality accounting standards benefit investors through a reduction in the cost of capital which is facilitated by enhanced information transparency and improved information comparability. Uniformity in accounting standards facilitates the availability of financial information that is more comparable across firms in different countries which in turn enables investors to estimate risks and further enables firms to assess their performance on a global scale. The convergence of accounting principles is going to result in economic expansion and enhance a country’s competitiveness through the attraction of foreign investors and foreign capital and further result in simplified financial reporting which will in turn reduce the operating costs.
However, shifting a country’s entire accounting framework in the adoption of an international accounting framework is associated with several challenges. This is especially due to the huge differences in the accounting frameworks which results in substantial consumption of resources which may impose additional costs to a country. The adoption of international standards requires huge amounts of investment necessary for the implementation and training of staff members. Consequently, such a move implies increased costs for businesses which may negatively impact profitability. This often results in poor perception among investors which presents a country with a major challenge of convincing investors on the positive implications of international standards.
Differences in institutions’ structure and arrangement across nations cast doubts on the effectiveness of international accounting standards on the global market (Hanif 2009). Substantial variations in institutions and the external environment limit the effectiveness of standards applications across nations. Therefore, the universal accounting standards may not be able to cater evenly to the dynamic differences and political conditions across different countries which may negatively impact the economy of such countries. In this light, government regulators and the international accounting standards foundation should work together to ensure that such challenges are overcome.
Reference List
Hanif, M., 2009. Accounting: For Ca Ipcc Exam, New Delhi: Tata McGraw-Hill.
International Financial Reporting Standards, 2011. IFRS Foundation official website, online. Web.