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Topic: International Accounting

IFRS as Guide to Overcome International Accounting Issues

Composed by :

Dita Miranda Faisal (01031181621055)

FACULTY OF ECONOMY

MAJOR OF ACCOUNTING

SRIWIJAYA UNIVERSITY

2019
Table of Content

Chapter 1 Introduction ........................................................................................................ 1


1.1. Background ......................................................................................................... 1
1.2. Objectives of Paper ............................................................................................. 1
Chapter 2 Discussion .......................................................................................................... 2
2.1. International Accounting Overview .................................................................... 2
2.2. Characteristics and Benefits of IFRS .................................................................. 3
2.3. The IFRS Convergence ....................................................................................... 5
Chapter 3 Conclusion.......................................................................................................... 6
References ........................................................................................................................... 7
Chapter 1
Introduction

1.1. Background
In this era of globalization, economy and business activities rely on cross-
border transactions and the free flow of international capital. Investors are seeking
for investment opportunities across the world, meanwhile multinational
companies operate and have subsidiaries in multiple countries. However, there are
many factors causing differences in accounting practices in various countries.
Each country has its own set of accounting standards, for example Generally
Accepted Accounting Principles (US), Generally Accepted Accounting Practices
(UK), and Russian Accounting Principles (Russia). This makes accounting
terminology and methods are not consistent from country to country. There are
also other factors which may affect accounting practices and the way financial
reports are presented.
The situation explained above may lead to certain problems like foreign
currencies mistranslation and difficulties in consolidating the financial report of a
parent company with its subsidiaries from all over the world. These barriers affect
the accuracy and reliability of the financial reports, which lead to uncertainty
when it comes to the decision-making process for investors and other users of the
financial reports. Considering the rapid and ever-growing nature of cross-border
businesses and transactions, the need for international accounting standards
cannot be dismissed. These issues cannot be overcome if each country keeps
maintaining their own sets of national accounting standards.
As stated on the IFRS website, the G20 and other major international
organizations, as well as very many governments, business associations, investors
and members of the worldwide accountancy profession support the goal of a
single set of high quality, global accounting standards. International Financial
Reporting Standards (IFRS) are standards issued by the IFRS Foundation and the
International Accounting Standards Board (IASB) to provide a common global
language for business affairs so that company financial information is
understandable and comparable across international boundaries.

1.2. Objectives of Paper


The objectives of writing this paper are:
a. To briefly explain about the background and development of
international accounting system;
b. To explain about the how IFRS can be a guide to overcome issues in
international accounting; and
c. To explain about the process of IFRS convergence.

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Chapter 2
Discussion

2.1. International Accounting Overview


Nowadays, it is common for companies to expand their operation
overseas. However, the differences existing between various countries make the
accounting practices and financial reporting vary from country to country. Some
important causes of differences in accounting behavior between the countries are:
1) sources of finance, 2) the existing legal system, 3) the link between accounting
and taxation, and 4) cultural differences between societies.
a. Sources of finance
In Germany, France, Italy, Belgium, banks became the major supplier
of additional funds. Thus companies relied more on debt financing. On the
contrary, in the UK and in the US shareholders provided extra funds which
make the stock exchange more active.
b. Existing legal system
In common law countries (US, UK, New Zealand, etc.), accounting
regulation is in the hands of professional organizations in the private sector.
Meanwhile on the code law countries (Japan, Netherlands, France, Germany,
etc.) the company law is very detailed and accounting regulation is in the hand
of government.
c. Link between accounting and taxation
In some countries fiscal authorities use information provided in the
financial statements to determine taxable income. This may lead to the danger,
that financial reporting becomes tax influenced or even tax biased. In the UK,
the US and in the Netherlands the link between taxes and accounting is much
weaker. Separate accounts are filed for tax purposes. The measurement and
recognition rules are different from the valuation rules used in financial
reporting.
d. Cultural differences
Cultural factors influence the way people view something, thus it also
influences the reporting and disclosure behavior on the financial statements.
For example, in some countries, paying bribes and financial incentives is
viewed as an accepted way of doing business but in other countries, these kinds
of things are considered taboo, even might lead to fines and a jail sentence.
The expansive and cross-border nature of business and investment
activities demands for an international system of accounting which is able to
accommodate those differences above and fulfill the needs of international
businesses and financials. The important event in the modern stage of

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development of international system of accounting was creation of two
organizations: International Accounting Standards Committee (IASC) in 1973 and
International Federation of Accountants (IFAC) in 1977. These two organizations
had similar yet different goals: while IASC was responsible for developing
standards for accounting and reporting, IFAC functioned as a global organization
of accounting profession and dealt with problems of accounting and audit. These
two organizations promote worldwide improvement and harmonization of
accounting and auditing standards. Harmonization is a process that involves the
international coordination of different accounting standards and policies that are
the basis for financial reporting (Chand et.al., 2008).
Since its formation, IASC started developing the International Accounting
Standards (IAS). In 2000 IASC changed its name to International Accounting
Standards Board (IASB) and the standards developed by this entity were also
given a new name after 2001, which now we know as the International Financial
Reporting Standards (IFRS). IASC's 2001 name change to IASB was
accompanied by changes in the organization's objectives and structure; the focus
has shifted from accounting harmonization to accounting convergence.
Convergence, according to Whittington (2005), is defined as means of reducing
international differences in accounting standards by selecting the best practice
currently available, or, if none is available, by developing new standards in
partnership with national standard setters.

2.2. Characteristics and Benefits of IFRS


IFRS facilitates accounting convergence in order to make financial
information from different countries more compatible. As a set of accounting
standard, IFRS have several main characteristics, which are: 1) principal-based, 2)
fair value accounting, 3) dynamic, and 4) more disclosures.
a. Principal-based
IASB does not recommend any specific formats for preparing financial
statements, which gives companies the freedom to choose the presentation
format that best expresses their financial status as long as it complies with the
principles. This change from rule-based to principle-based means that
accounting is no longer full of detailed and rigid rules. IFRS facilitates
accounting convergence while still taking into account the unique business
environment and the needs of financial information users that vary from
country to country, by allowing the use of different accounting methods as long
as it still within the scope of the principles. Thus, professional judgment is
required on the application of the accounting standards.
b. Fair value accounting
Fair value is the price that will be received to sell an asset or price to be
paid to transfer a liability in regular transactions between market participants
on the measurement date. Often the historical book value of assets and
liabilities has only a remote association with market values, which permits

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management to manipulate reported earnings and to hide their lack of real
accomplishment.
Some IFRSs require or permit fair value measurements or disclosures.
FVA provides a more complete full disclosure which is identical with
transparency. Accounting transparency means that the financial statements
provide true, accurate, and complete information about the business activities
and the financial position of a firm. This will leaves smaller chance for
manipulation and makes the information on financial reports more relevant and
accurate for the users to assess the real financial condition of the company.
c. Dynamic
IFRS will dynamically change with the development of the business
environment and the information needs of users. For example, in 2014, IFRS 9
Financial Instruments introduced new impairment requirements to address the
criticism that during the financial crisis, the recognition of credit losses on
financial assets was ‘too late’.
d. More disclosures
IFRS requires more disclosure both quantitatively and qualitatively. For
example:

 IFRS 7 Financial Instruments: Disclosures requires disclosure of


information about the significance of financial instruments to an entity, and
the nature and extent of risks arising from those financial instruments, both
in qualitative and quantitative terms.
 IFRS 8 Operating Segments requires companies to disclose information
about their operating segments, products and services, the geographical
areas in which they operate, and their major customers.
From the characteristics explained above, we can see that the benefits
provided by IFRS are as follows:
a. IFRS Standards bring transparency by enhancing the international
comparability and quality of financial information, letting investors and other
market participants to get proper information to make economic decisions.
b. IFRS Standards increase the comparability of financial statements.
c. IFRS Standards strengthen accountability by reducing the information gap
between the people inside the company and the people outside the company.
d. IFRS Standards contribute to economic efficiency by providing quality
information on international capital markets; helping investors to identify
opportunities and risks across the world, thus improving capital allocation. It
also reduces financial reporting costs for multinational companies and costs
for financial analysis for analysts.

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2.3. The IFRS Convergence
Initially, IFRS received many refusals because each country has unique
national background, also different business environment and needs of the
financial reports users. International accounting standard was deemed to be
making accounting standards inflexible. There were also some problems in
implementing IFRS, some of them are: 1) the problem of translation, because
IFRS is written in English and there will be difficulties such as using a same
phrase for different contexts and a phrase which does not have its match in
another language, 2) nonconformity between IFRS and the national law, 3) there
was a concern that IFRS will make accounting standard more thick and complex.
Even though there were many criticisms and difficulties at first, now there
are many supports for international accounting standards. The G20 and other
major international organizations, as well as many governments, business
associations, investors and members of the worldwide accountancy profession
support the goal of a single set of high quality, global accounting standards. Also,
some international funding organizations and international capital market
supervisory bodies require the using of international accounting standards.
The stages of IFRS adoption can be done through five stages, which are:
1) not adoption at all, 2) referenced, which is only referencing certain IFRS
standards and composing it with their own language, 3) piecemeal, which is only
adopting some of IFRS standards, 4) adapted, which is adopting all of IFRS but
doing some adjustment to the country’s condition, and 5) full adoption, which is
adopting all the content of IFRS and translate it word by word.
In America, almost the majority of Latin America and Canada adopt IFRS.
Even all of the countries in Europe have fully adopted IFRS. Asian and Oceania
countries like South Korea, Malaysia, Australia, and New Zealand have fully
adopted IFRS. China does not use IFRS but use a standard that substantially
similar to IFRS. North Korea, US, Vietnam have not adopted IFRS. But recently
US have started a GAAP-IFRS convergence project, and Vietnam is also
considering adopting IFRS.
Indonesia started adapting IFRS since 2012 (PSAK-IFRS). The adoption is
partial adoption. Indonesia is part of IFAC, which must be subject to the
Membership Obligation Statement, one of which uses IFRS as an accounting
standard. IFRS convergence is also one of the Indonesian government's
agreements as a member of the G-20 forum.

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Chapter 3
Conclusion

In this era of globalization, economy and business activities rely on cross-


border transactions and the free flow of international capital. Investors are seeking
for investment opportunities across the world, meanwhile multinational
companies operate and have subsidiaries in multiple countries. However, each
country has their own accounting standards. There are also many factors causing
differences in accounting practices in various countries, mainly are: existing legal
system, link between accounting and taxation, and cultural differences. Therefore,
the demands for an international system of accounting which is able to
accommodate those differences above and fulfill the needs of international
businesses and financials cannot be dismissed.
The important event in the modern stage of development of international
system of accounting was creation of two organizations: International Accounting
Standards Committee (IASC) in 1973 and International Federation of Accountants
(IFAC) in 1977. Since its formation, IASC started developing the International
Accounting Standards (IAS). In 2000 IASC changed its name to International
Accounting Standards Board (IASB) and the standards developed by this entity
were also given a new name after 2001, which now we know as the International
Financial Reporting Standards (IFRS).
IFRS facilitates accounting convergence in order to make financial
information from different countries more compatible. As a set of accounting
standard, IFRS have several main characteristics, which are: 1) principal-based, 2)
fair value accounting, 3) dynamic, and 4) more disclosures. The benefits provided
by IFRS are: transparency, comparability, accountability, and efficiency.
Even though there were many criticisms and difficulties at first, now there
are many supports for international accounting standards. Many countries have
adapted IFRS, some fully and some partially. Indonesia started adapting IFRS
since 2012 (PSAK-IFRS). The adoption is partial adoption. This has implication
that the accountants nowadays need to hone their knowledge and practice their
professional judgment so they can interpret and utilize the accounting principles
provided by IFRS.

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References

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https://doi.org/10.1016/S1045-2354(02)00139-9
Chand, P., Patel, C., & Day, R. (2008). Factors causing differences in the financial
reporting practices in selected South-Pacifc countries in the post-convergence
period. Asian Academy of Management Journal, 13(2), 111–129.
G, W. (2005). The adoption of international accounting standards in the European
Union. European Accounting Review, 14(1), 127–153.
Immanuela, I. (2009). Adopsi Penuh Dan Harmonisasi Standar Akuntansi
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vysokých školách neuniverzitního směru (pp. 1–7).
Nataliya, M. (2013). History of origins and development of system of
international accounting. JOURNAL OF EUROPEAN ECONOMY, 12(4),
487–497.
https://en.wikipedia.org/wiki/International_Financial_Reporting_Standards
https://ebrary.net/670/accounting/global_accounting_issues
https://smallbusiness.chron.com/benefits-international-accounting-standards-
74934.html
https://www.ifrs.org/use-around-the-world/why-global-accounting-standards/
www.iasplus.com/en/standards/ifrs/