Sirloint

Presents

International Accounting

1. Prove how the development of accounting system may or may not be related with the notion of accounting as socially constructed idea. The article Financial Accounting: in communicating reality, we construct reality shows about a master, Don Juan, talked about the role of accounting to his apprentice, Ruth, by using an organization as the example in their discussion. This article gives a better perception about what accounting really is and the relation of the development of accounting system with the notion of accounting as socially constructed idea. Accounting defines assets as resources that owned by the company and have future economic benefit. But in fact, asset also can be the resource that is not owned by the company but also be able to bring indirect future economic benefit to the company; that is intangible asset which may be derived from the resource outside the company, for instance the environment. In the article, the master uses the river and the water which will eventually increase the market price of the organization when the organization is sold. Accounting often make something suddenly becomes real at the certain point of time, for example is the revenue recognition on the point of sale. In the article, the master explains the point of sale as the point of real-ization which has the numerous possibilities. Sometimes the goods are considered to leave the organization when the goods are completed, or when the customer is invoiced, or when the customer pays, or may be other possibilities. Accounting is actually all about socially constructed idea, or in other words it is what it is because it has always been it. In the article, the master uses the black holes & subatomic particles as the examples to explain it. People never really see black holes, but whenever people close eyes and think about black holes, they can have the image of a vortex somewhere up in the space. The concepts of true and fair are the same with the black holes. There are no such things of true and fair, nobody has the absolute perception of true and fair. By communicating reality, and when most people believe, we create the reality, since people think and consider truth based on the most peoples perception. This condition enables the company to create better or more beneficial reality for them through the financial statement and cover up the reality that may bring disadvantages for them. The concepts of accounting, history, black holes, subatomic particles, and the full picture are actually called so because by naming those so, it also

suggested all of those to be so, and when it is believed by most people, it becomes the way it is. The development of the accounting system is more likely also about concept that is believed by most people. The way people think is based on the perception of most people. Socially constructed idea means an idea as a result of the mindset of someone or some people with authority which is overspread without being opposed by any other parties with higher authority, and then is believed by many people and is adopted as a fact. One good example about the development of the accounting system is the preference of using the historical cost or the fair value. There is actually no better or worse in using historical cost or fair value. Both historical costs and fair value are merely a concept that was proposed by some people or groups, which then both of the concepts believed by society. Another good example is the accounting standards itself, currently two most popular are the U.S. GAAP and the IFRS. At first, people trusted to use the U.S. GAAP as the international accounting standards without any doubt. But when U.S. went bankrupt in 2007 and loss its superpower status, meanwhile the IASB ceaselessly had been promoting the IFRS as the international accounting standards for like centuries. That is when, then, the people started losing its trusts on the U.S. GAAP and began to look on the IFRS as a better standards. Both U.S. GAAP and IFRS are merely a standard which was developed by group of people with interests to promote their own righteousness to be acknowledged as the worlds perception. Every statements and reasons about IFRS as a better international accounting standard than U.S. GAAP are actually nothing more than an idea which is proposed by some people or group with their own interests. If the development of accounting system is not related with the socially constructed idea, most countries may still be using U.S. GAAP without any doubt. With all of that, the development of accounting system is strongly related and affected with the notion of accounting as socially constructed idea.

2. Explain the key rational that support and against the convergence of US GAAP and

International Financial Reporting Standards. The debates about IFRS to become the international accounting standard and replace the position of U.S. GAAP has been more frequent topic lately. The debates center around the claim that IFRS as the principle-based standard is more qualified to be the international standard than the U.S. GAAP as the rules-based standard. Meanwhile many countries has

started to adopt IFRS as their national standard, The United States itself still stand firm with its GAAP. It is impossible to set IFRS as the international accounting standard if the United States as country with the greatest economic influence still refuse applying IFRS as the national standard. This condition has led to the so-called solution effort to overcome the dual standard issue which is the convergence of U.S. GAAP and IFRS. The convergence of U.S. GAAP and IFRS is meant by the United States to keep up with the development of accounting without leaving its national standard, U.S. GAAP. The articles from the CPA Journal present this issue from the perspective of the IASB and also from the SEC, as the two biggest organizations that have been promoting the set up of one global accounting standard for like centuries. This condition has caused the development of opinions as responds to the conversion from U.S. GAAP to IFRS, or the convergence of U.S. GAAP and IFRS. There have been claims of some benefits that may be realized from the conversion from U.S. GAAP to IFRS. According to Sir David Tweedie as the ex-Chairman of IASB, the conversion from U.S. GAAP to IFRS is beneficial for the Multinational Company since they do not have to conduct a consolidation of the financial report. But in fact, IFRS, however, still allow adaptations for some European companies to have it more compatible. It shows that no matter what the reason behind it, the IFRS is adjustable in certain conditions. If the IFRS has fully implemented in the United States, it is inevitable that there will come a time when some U.S. companies still will have to make adaptations and eventually still have to conduct a consolidation of the financial report. Another questionable benefit in the conversion from U.S. GAAP to IFRS is the possibility to create one global accounting standard. In fact, with the differences among the countries in terms of politic, economic, and society, some standard distinctions in one country to another are necessary. The possibility to create one global accounting standard actually is as much as the possibility to have one global government. The most popular incentive reason is the statement that IFRS as principle-based offers more security than U.S. GAAP as rule-based. This statement actually arose from the failure of U.S. GAAP to prevent the major accounting scandal such as Enron and WorldCom. U.S. GAAP has been an implemented accounting standard for decades and has experienced many developments and revisions, but still with all of those years of history records, U.S. GAAP was failed to prevent such a major accounting scandal. This fact shows that there is no such a perfect standard, no matter how many development and revisions have been made eventually the rift for a scandal to be happened is still exist. The question now is what makes few-years-IFRS as principle-based will be able to assure that, if IFRS become the

international accounting standard, there will be no other major accounting scandal. The benefits that may be realized with the conversion from U.S. GAAP to IFRS are merely just claims and full with uncertainty. The opinions that support the convergence of U.S. GAAP and IFRS are more factual and realistic. The conversion of U.S. GAAP and IFRS actually only brings unnecessary additional large costs with uncertain benefits of implementing IFRS. The conversion to IFRS not only will cause financial loss but also the time for the transition period. These disadvantages make the convergence of U.S. GAAP and IFRS becomes rationally better choice. Another reason to support the convergence rather than the conversion is that the socalled principle-based standard, IFRS, does not provide specific detailed guidance for some business industry, whereas some business industries need specific detailed guidance in its accounting activity. The business industry in the United States still needs the specific detailed guidance from the rule-based standard, U.S. GAAP. This condition lead to the convergence of U.S. GAAP and IFRS, which is able to bring the U.S. companies get closer with the international accounting standard without discard the specific detailed guidance from the U.S. GAAP. The most crucial reason not to support the conversion to IFRS is that there is still lack of study guidance about IFRS. It is still quite difficult to study and fully understanding the definitions and implementation of the standards in the IFRS. Furthermore, most of graduated accounting students learned accounting based on U.S. GAAP. The convergence of U.S. GAAP and IFRS can have better result and respond, since it will be at least more familiar and understandable than IFRS. The convergence of U.S. GAAP and IFRS is actually more preferable because there is no clear evidence that IFRS is superior to U.S. GAAP.

3. After reading the working paper written by Ramanna and Slatten, and the articles done by Clements, Niell, and Stovall, discuss why it is difficult to empirically analyze the effect of culture to the decision to adopt IFRS.

The spreading of IFRS in its effort to be the international, even global, accounting standards has resulted various responds from countries around the world. Those various responds are related with the adoption of IFRS as the national accounting standard in many countries to make it compliance with so-called the international accounting standard. These various responds has led to some researches in order to analyze the reason behind the

adoption of the IFRS. The researches are conducted based on the different point of view including economic, politic, and culture. Among all of other aspects, it is proven that the most difficult to be analyzed is from the culture aspect. Based on the working paper written by Ramanna and Slatten and also the articles done by Clements, Niell, and Stovall, the main reason of the issue is that no direct relation between the effect of culture to the decision to adopt IFRS. Culture is one of aspects that play greatest role in every decision making activity. Culture is actually the value that arises from the behavior, knowledge, and belief of the society which set the way of judgment in particular society. However, based on the past researches, the effect of culture does not have relation with the decision to adopt the IFRS as accounting standard, at least not directly. Every decision done by management always is affected by the culture, whether it is directly or indirectly. Culture does play a great role in business, since culture affects consumer behavior, local demand, buying decisions, and brand image, which then construct the market characteristic. In its role in the business entity, culture then determines management styles, management responds, and management decisions. Culture eventually creates the path for the growth of business entity from the very beginning, started from its market penetration until the initial public offering. Culture plays a great role in terms of management styles and decisions, organizational behavior, employment, and also the development of its products and services. The organizations networking style also is affected by the culture, which then determines the types of partners the organization deals with. The partners of a business entity include the management and employees within the company, other business entities which have cooperation with the company, and also the stockholders of the company. The decision to adopt IFRS, whether based on networking reason or internal decision, is derived from the partners of the organizations which is affected with the culture. This indirect relation is the most likely to be the reason of the difficulties to empirically analyze the effect of culture in the decision to adopt IFRS. In conclusion, the main reason behind the issue is that there is no relation between the effect of the culture to the decision to adopt IFRS, at least not directly. When the relation of two variables is indirect and goes through many link of events, it becomes very difficult, if not impossible, to empirically analyze it. The effect of the culture is actually centered around the construction of market characteristic which also affect the types of the business entity and its management styles. The type of the business entity and the management styles then affect

the choice in construct the organizations networking including the partners of the organizations, which then determine the decision to adopt the IFRS or not. In conclusion, the decision to adopt IFRS or not in a country does not have the relation with the effect of the culture in the country.

4. Compare and contrast the IFRS requirements among European Union countries, specifically in France, Germany, and the U.K. What difficulties may be caused by the requirement differences (if any) when we compare the financial statement of two or more company in the same country or in the different country? What may be the rationales to apply IFRS as compulsory accounting standards to only certain types of companies? Explain your answer

The IFRS requirements in France, Germany, and the U.K. France Listed companies Required Germany Required United Kingdom Required

consolidated statements Listed

financial

companies

Prohibited

Permitted, but for informational purposes only

Permitted

individual

company

financial statements Nonlisted companies consolidated statements Nonlisted companies individual company Prohibited financial Permitted

Permitted

Permitted

Permitted, but for informational purposes only

Permitted

financial statements

The IFRS requirements in France, Germany, and United Kingdom have both similarities and differences. The consolidated financial statements for the listed companies are required to use IFRS by all of the three countries. As for the consolidated financial

statements for the nonlisted companies are permitted to use IFRS by all of them. It means that for the nonlisted company is allowed to adopt IFRS for their consolidated financial statements, but not compulsory. For the individual company financial statements each of them has different requirements. In France, the individual financial statements both for listed and nonlisted companies are prohibited to use IFRS. In Germany, the individual financial statements both for listed and nonlisted companies are permitted to use IFRS, but only if it is for informational purposes only. In the United Kingdom, the individual financial statements both for listed and nonlisted companies are permitted to use IFRS. There are various requirements for the IFRS adoption among the European countries, particularly among France, Germany, and United Kingdom. The differences of the IFRS requirements both among the countries and among the types of companies cause difficulties in the comparison of financial statements. The requirement differences not only create limitation, but also create confusing and uncertain condition to compare financial statements. The only type of companies that can conduct the financial statement comparison is the listed companies with its consolidated financial statement, and it is only can be compared with the similar companies. As for the others, it is very difficult to conduct financial statements comparison, since besides the consolidated financial statement of the listed company that for sure using IFRS, each of others companies is only given status whether prohibited to use IFRS or permitted to use IFRS. It means that the other types of companies have the possibilities whether to use IFRS or U.S. GAAP or their own national accounting standard. For example, if any company wants to conduct financial statement comparison of the consolidated financial statement with the nonlisted company in Germany, it will be very confusing and full of uncertainty, since nonlisted company in Germany may use IFRS or U.S. GAAP or German Accounting Standard (GAS). There are still other possibilities for others companies facing similar issue, both among countries or among the different types of companies. This condition is the result of the requirement differences and also the lack of clarity in the statement regarding the accounting standard options. The main reason to make the adoption of IFRS become compulsory for only certain types companies is to avoid any significant disadvantage changes in the economic structure. For example if Germany fully adopts IFRS in all types of companies, then it will affect the Germanys national economic structure and could be harmful for the countrys national income which relies on its taxation. However, the differences in accounting standard among

the countries are needed to be exist since every country has its own systems and policies that should not be dismissed. IFRS may become the international accounting standard, but it will be very difficult, if not impossible, to be a global accounting standard which is required uniformity accounting practice among countries. The main reason to make the adoption of IFRS become compulsory for only certain types of companies is to protect the national economic infrastructure from any significant changes that could be disadvantageous.