Question

Patricia Duong, having recently obtained her MBA, has been hired by one of the last of the large investment banking firms. As part of her responsibilities, she is required to make recommendations on investing in securities of foreign companies. During her lunch hour, Patricia runs into a colleague and complains about the difficulties she encounters with the lack of comparability in the financial statements of firms from different countries. She is puzzled by the inability of national accounting standard-setting bodies to agree on and implement a uniform accounting regime globally since, in her view, this would represent a win-win situation for all concerned. Pretend you are the individual that Patricia is talking to. Explain why only one uniform accounting and reporting standard may not necessarily represent a win-win situation for all concerned. Discuss the advantages and disadvantages of having diverse accounting standards that are the product of each country's national environment. Discuss the issues raised when a country or region adopts some, but not all of the International Financial Reporting Standards. In your opinion, should convergence be pursued?

Answer 1

1, If we talk about the financial reporting practices, it gives significant weigt to the geography in which the comapny's framework/Jurisdictions resides. Meaning; each county won't be the same in terms of its rules, regulations, macro economics etc. The risk factors also varies significantly in the different economy. When standard setting bodies like SEC, PCAOB etc lays downs different reporting standards; they do consider these aspect and gives heavy weights to it. As financials statement reflects the performance with respect to the economic factors. For e.g. using discounting rate in hyper inflationery economy to measure a value will never be same as other economy. Hence to have all uniform reporting practices is vert hypotethical phenomena.

2. Advantages of Diverse Accounting Practices : i) it reflect the macro factor relating to the geography in which it operates. ii) It gives significant justification to the geography's macro factors like discounting rate, risk premiums in measurement of Component of financials statements. Like manner; it gives importance on disclosure according to the prevailing business and economic drivers. iii) It is presented in the currency of country of operatins which removes the theoratical execises of converting into one single currency. iv) Thes would help the users of financials statement to have comprehensive understading about company's perfomance w.r.t. its macro factors so that they can drive their decisions accordingly. v) No one economy uniform in its own; these would clearly reflect in the different financials.

Disadvantages of Different accounting practices : i) Requires the significant efforts in coversion to enable the cross boarder deals/transaction/investor. Sometime conversion become theoratical exercise. ii) One need to have thorough knowldge of different reporting practices. It becomes really difficuly when one has less unknown reporting standards like South African GAAP. iii) To enable to take decision and use financial statement, one need to excercise and develop many presumptions which generally does't comes from the company itself. Which could act as significant risk of getting it bad.

3. When company adopts particular reporting pracitces for e.g. IFRS is adopted by India it becomes vulnerables as fair value measurement in Indian economy for Industry like Equity Market or Real Estate markes which is highly volatile could haywire the entire financials statements. It can always reflects unusual fair value adjustments in financials statements (FS) from period to period.

4. Convergence is a very good option. Where, country simply converged it existing standards to a one which gives better insights to the user of FS. In covergence, one can have as many carve outs as possible to reflect and adjust different economy. For e.g. When Indian Accounting standards was converged with IFRS; it was done with lots of carve out. Like, not putting option of Fair Value model in Investment Property and allowing only Cost model. (Accordingly risk of volatality hampering FS is removed.)