Question

There are various accounting standards used in different countries around the globe. Different observers have different opinions on why each country should have its own financial accounting standards or if the world should have one set of accounting standards for all counties. List at least four problems caused by accounting standards diversity around the globe. Discuss each of these reasons in short essay format. Why do we need international accounting standards? Why not simply let each country develop and use its own standards and let it go at that?

Answer 1

Different countries has different economic scenarios along with its own challenges. One set of accounting standards is not always acceptance to all the countries, hence own countries have converged accounting standards. While to gain effectively from globalisation, one must have uniform accounting principles and standards.
Problems caused by accounting diversity-:

(I) Challenge in preparation of consolidated financial statement -: Different financial statement preparation causes issues in preparation of financial statement. For example-: US GAAP and local GAAP has different disclosure in financial statement.

(II) Foreign Capital Market-: The Companies who has issued securities in foreign market need financial statement as per the respective country's stock exchange.

(III) Comparability of Financial Statement -: The financial statement of different GAAP is not comparable for analysis. Users of the financial statement can't do the full analysis of financial statement.

(IV) Lack of high quality financial information-: Some local GAAP does not mandate companies to provide to high quality data. For Example details with regard to borrowings, assets and liability maturity matrix etc.

Uniform accounting standards can remove the above mentioned problems and provide more meaningful information to the users, hence we need international accounting standards.

Developing accounting standard in each will again lead to the same problems. All the countries will develop accounting standards as per their preferences. Some of the problems faced by them are as follows-:

(I) Legal System-: In all countries accounting is governed by the corporation law or companies act. These laws prescribes formats for presentation of financial statement. And these laws are not always sync with the international accounting standards.

(II) Taxation-: Published financial statements are used for computing tax in different countries. So applicability of accounting standards is perceived and matched with taxation laws. Accordingly accounting standards are converged to manage the local business interest.

(III) Providers of Finance -: Banks and other providers of finance analyses financial statement for disclosures and other information. Shareholders are more concerned about profit where as banks are more concerned with solvency and liquidity.

(IV) Inflation-: Countries who have high rates of inflation has to adopt different accounting policies. Inflation affected countries has more write off adjustment for assets and liabilities.