Question

Some of the factors mentioned in their readings that contribute to the existing diversity with respect to financial reports are (1) legal systems, (2) taxes, (3) financial entities, (4) inflation, (5) economic and political aspects and (6) culture.

Select two of these factors that you consider to be the most problematic when trying to establish standards for international financial reporting. Defend your argument on why they can be considered big obstacles and in what way they can be overcome.

Answer 1

Factors that can be considered as most problematic while establishing standards for international financial reporting could be taxes and financial entities

Reason as to why taxes and financial entities could be considered big obstacles:

The tax system in general varies from county to country. The disclosure requirement as required by the local tax laws may not be in tandem with the disclosure requirements as per the international reporting requirements. Thus, it would be an obstacle as the entities would be required to comply with the disclosure requirements as per the local tax laws and as per the international financial reporting.

Financial Entities: Just like the taxes, the size and structure of the financial entities differ from one nation to other. What may seem to be a small entity in terms of size in one nation may not be same in the other nation and so would be disclosures as per the local reporting requirements. Thus, it would be an obstacle especially in cases where the reporting requirements as per the local reporting standards are much lesser than that of the international financial reporting.

Way to overcome the obstacles:

One such way to overcome the obstacles is to establish the standards for international financial reporting in a manner after considering the local tax laws and the various entity structure so that the entities can follow the reporting obligations accurately.