Why International Accounting Standards Are Used

IAF Students
IAF Students

Why International Accounting Standards Are Used

The continued reduction in barriers to global business goes beyond lowering tariffs and shipping products to international customers. Accountants with firms from London to Tokyo are confronted by differing documentation standards as they maintain their books. Following the end of the Cold War, there was a push by diplomats around the world to establish international accounting standards to simplify trade.

The International Accounting Standards Committee (IASC) was created in 1973 to establish global accounting rules to be observed by economics big and small. This committee was replaced by the International Accounting Standards Board (IASB), which has created standards observed by a growing number of countries. Since the 1970s, approximately 120 countries have adopted International Financial Reporting Standards (IFRS) from the IASC and IASB.

Countries like the United States have worked toward participation while maintaining separate standards due to the customs of their accounting professions. As an accounting professional, you need the skills and knowledge to stay nimble in a changing global economy. Aston University’s online MSc in International Accounting & Finance can train you in the latest accounting practices and standards in preparation for leadership roles. By understanding why international accounting standards are used, you can turn virtual classroom lessons into marketable skills.

Accounting rules the business world

Accounting provides the foundation for global business. A company’s accountants ensure compliance with tax laws, import and export regulations, and shareholder expectations. A good accountant is also a paragon of transparency, relying on impeccable math and bookkeeping to reveal the financial truth. Professional standards like the IFRS and Generally Accepted Accounting Principles (GAAP) in the United States recognise the complexities of accounting cycles across the world.  

The accounting cycle starts when a company sells a product or service to a customer. This sale creates a receipt for the customer, a deposit into a company’s coffers, and a balance against business expenses. Revenue created from company sales may be deposited in investments, poured into new expenses, or given to shareholders as dividends. Accountants are also tasked with reporting all of these numbers when tax returns are filed. Imagine these processes taking place in almost 200 countries and thousands of international firms on a daily basis and the need for accounting standards becomes clear.

An overlooked element of diplomacy

The accounting profession does not seem likely to come up much in international diplomacy. News stories about treaties and international agreements focus more on broad brushstrokes rather than finer details. Given the importance of international business, however, we should broaden our view of diplomacy to include bodies like the IASB. The board features 14 member countries including the United Kingdom, the United States, China, and Japan. The IASB and the predecessor IASC have convinced countries like Canada, Mexico, and South Korea to harmonise their accounting standards with IFRS since the early 1990s.

A longstanding issue on IASB’s agenda has been finding common ground with the GAAP standards used in the United States. In 1996, the U.S. Congress approved a law requiring the Securities and Exchange Commission (SEC) to study the feasibility of international accounting standards. By 2000, the SEC developed a conceptual framework for harmonising GAAP with IFRS. This framework was followed in 2008 by a proposed plan to implement IFRS with some optional elements for early adopters. The back-and-forth between IASB, the SEC, and other stakeholders has continued for over 20 years, showing the complexities of adopting new standards.

As you continue your accounting career, you will likely run into the very issues brought up during these conversations. You will need not only the historical knowledge but the leadership skills to help your employer navigate the ins and outs of international standards. Aston University designed its online MSc programme for early-career professionals taking the leap to management positions. In two years, you can become an expert in international accounting while developing important connections with colleagues.

Costs of differing standards

The World Trade Organization (WTO) calculated $18.3 trillion in global exports in 2014. Every dollar of this trade needs to be accounted for to maintain company bottom lines and adhere to tax regulations. The potential for a major loss becomes more significant as a company expands its reach and adds new customers. More likely, a poorly run business will leak money dollar by dollar through poor accounting. International accounting standards are primarily designed to ensure legal compliance but can also encourage companies to adopt cost-saving practices.

International businesses may lose money when they aren’t keeping track of changes on import tariffs or shipping fees. Changes in capital gains taxes and property taxes on properties in other countries can lead to penalties at tax time. A company’s attorneys and accountants also work hand in hand to ensure that documentation is in good shape for legal actions by customers and suppliers.

A common refrain from critics of a single global standard is that companies bear the costs of changing internal processes. International accounting standards lead to changes that can save more money in loss aversion than the upfront administrative costs. The Financial Accounting Standards Board in the United States says that common accounting standards provide savings to customers and companies by reducing variables in each transaction.

Finding a common language

The Harvard Business Review published an article in 2012 highlighting spoken language as another area of convergence in trade. The article highlighted international firms like Samsung and Microsoft that require English as the primary language for trade. With approximately 1.75 billion people speaking English around the world, these companies are working toward a common language to reduce confusion and costs. Global players are not bypassing multilingual employees or the languages of their home countries; rather, they are establishing an even playing field for trade that can pivot to other languages as necessary.

International accounting standards are designed to create best practices for the most common accounting issues. IASB and GAAP standards are not all-encompassing rules that address every contingency. As common standards achieve greater adoption, it is likely that amendments and exceptions will be necessary to address the evolution of the global economy. Aston University’s online MSc programme features courses in international business, corporate reporting, and accounting that give you the grounding to keep your team in line with changing rules.

 

Sources:

fasb.org/jsp/FASB/Page/BridgePage&cid=1176166128698&pf=true

fasb.org/jsp/FASB/Page/SectionPage&cid=1176156304264

ifrs.org/use-around-the-world/why-global-accounting-standards/

ifrs.com/updates/aicpa/ifrs_faq.html

cfainstitute.org/en/advocacy/issues/international-finance-reporting-stds

sec.gov/rules/concept/34-42430.htm

aicpa.org/advocacy/issues/us-intlacctprinconvergenceandifrs.html

hbr.org/2012/05/global-business-speaks-english

wto.org/english/res_e/statis_e/its2015_e/its15_merch_trade_product_e.pdf