Accounting Standards in Different Countries.pdf

Running head: ACCOUNTING STANDARDS

Accounting Standards in Different Countries

Angela Davis

Liberty University

ACCOUNTING STANDARDS

Introduction

Following accounting standards is highly important for organizations, especially if the

organization is headquartered in a different country. “To achieve comparability between financial

statements prepared in different countries under different regulations, the Securities and

Exchange Commission (SEC) requires that foreign issuers must either use US Generally

Accepted Accounting Principles (US GAAP) or present reconciliations of net income and

accounting standards will prevent fraud and provide these financial statements to the appropriate

people. Different countries may already have accounting standards set in place depending upon

the specific countries law code. “A goal of the International Accounting Standards Committee

more beneficial to organizations and can potentially prevent any kind of illegal filing or

recording acts. This paper analyzes accounting standards in different countries.

Literature Review

“Over the years, most countries have developed a set of accounting principles that serve

as a common basis for reporting the financial status of companies operating within their borders”

(Ebaid, 2016). Although most countries have developed a set of accounting principles, it does not

mean that they would be able to be listed on the United States Securities Exchange. In order for a

company to be listed on the United States Securities Exchange they would need to follow the US

GAAP and reconcile their financial statements accordingly (Manzano, Conesa, and Hernandez,

ACCOUNTING STANDARDS

2007). The growth of the world economy has caused global accounting standards to create a lot

of pressure among companies worldwide. “The increasing and present pressure for global

accounting standards is a normal consequence of the accelerating integration of the world

economy. Historically, standardization of financial accounting has tried to follow the integration

of the markets, because the differences in international reporting practice can represent a heavy

barrier to efficient international investment, monitoring and contracting” (Angeloni, 2016).

disadvantage in terms of the number of foreign listings relative to foreign stock exchanges.

However, the SEC contends that it must protect US investors from inadequate disclosures by

foreign firms” (Manzano, Conesa, and Hernandez, 2007). The SEC is only trying to protect

situation that could be detrimental to the investor. They could invest millions of dollars and

because the company did not record their financials correctly, the investor could potentially end

up losing all that money. The policies put into place by the SEC are there for a reason and to

make sure that all companies are reporting financial statements correctly. A company in another

country that does not report financial information correctly is committing a crime and is making

unethical decisions. “At the present time, IFRS and US GAAP are the two most comprehensive

financial reporting frameworks in the world, with IFRS gaining more and more consensus”

(Angeloni, 2016). “Financial statements prepared under IFRS and under US GAAP have many

ACCOUNTING STANDARDS

similarities. Both are prepared using accrual accounting. In addition, IFRS and US GAAP both

require the same set of financial statements, consisting of: balance sheet (called “statement of

financial position” under IFRS), income statement, statement of cash flows, statement of

stockholders’ equity, and notes to the financial statements” (Angeloni, 2016). It is important that

companies use either IFRS or the US GAAP when reporting finances. Since foreign companies

are required to use US GAAP in order to be listed on the US Securities Exchange, it would be

quality. “Following the recent adoption of IFRS in many regions of the world, much attention is

being given to the association between accounting standards and accounting quality” (Ebaid,

2016). Researchers believe that IFRS provides more comprehensive financial reporting than

hence, facilitates the efficient access to capital worldwide given that IFRS are more capital

market oriented and more comprehensive, especially with respect to disclosures, than most local

GAAP” (Ebaid, 2016). IFRS was created to provide more accountability by bridging the gap of

information between the executives and investors. It requires the executives to take full

responsibility for all financial reporting. “When there is some consistency between national

accounting standards and international accounting standards, we may, at least, expect foreign

investors to have better understanding on financial statements” (Farazandehnia and Baghani,

2015). Companies that have financial statements that investors are able to understand better, will

ACCOUNTING STANDARDS

create a greater chance for an investor to invest into their company. If investors from the United

States only associate themselves with foreign companies that follow the US GAAP, it would be

of best interest for that foreign company to report financial information following the US GAAP.

Companies that are using IFRS for financial reporting may also attract investors, however, just

because IFRS may improve transparency, strengthen accountability, and provide a more efficient

access to capital, does not mean that companies are reporting with more quality. Ebaid (2016)

Countries

Several countries find that US GAAP is too conservative than the accounting standards

that are preferred within that specific country. A study was conducted to determine how different

suggests that US GAAP are likely to be more conservative than those for the UK”. Differences

between the UK and US GAAP include goodwill, deferred taxes and intangible assets. “The

differences between UK and US GAAP have been reported as material and growing in recent

years. The most frequent and material adjustments have been the accounting treatment of

goodwill, deferred taxes and intangible assets” (Manazano, Conesa, and Hernandez, 2007).

Results also indicate that although US GAAP is more conservative than in Sweden, US GAAP is

less conservative when it comes to Australian financial reporting in regards to the impact on

profits but is more conservative in regards to the impact on shareholders’ equity. Mexico

ACCOUNTING STANDARDS

Argentina, and Chile have found that US GAAP is more conservative than local GAAP. “Study

finds that differences in accounting principles cause extreme variations in reported net income,

shareholder’s equity and equity return for some developing countries (Mexico, Argentine and

Chile). They observe that local GAAP are less conservative than US GAAP. The greatest

disparities occur for the Mexican firms. An adjustment for income taxes is the category they find

to be used most frequently and the one that caused the greatest adjustments” (Manazano, Conesa,

deferred taxes, compensation and intangible assets” (Manazano, Conesa, and Hernandez, 2007).

These results from the study indicate that companies located in developing countries, such as,

Mexico, Argentina, and Chile, would be more prone to use local GAAP for financial reporting.

to US GAAP. Although these companies in developing countries may look more profitable when

reporting according to their local GAAP, they should consider using US GAAP in order to attract

more foreign investors.

“To get into this distribution of wealth, Egypt is willing to exchange their national

accounting standards for IFRS where it is believed that countries adopting IFRS have higher

reporting transparency and comparability, greater chances to attract more investment, increase

financial surplus and achieve higher economic growth rates” (Ebaid, 2016). Egypt sees

reforming their accounting standards as an asset to their companies because they are able to

ACCOUNTING STANDARDS

bring in more foreign investors for reporting their financial information by IFRS standards.

Egypt’s accounting standards are referred to as Egyptian Accounting Standards (EAS) and has

looked to find an equal ground between their standards and IFRS. “As a part of reforming the

accounting system to improve decision-making, attract investment and enhance the level of

confidence of foreign investors in Egyptian capital market, the Egyptian government pursued a

policy of harmonization between Egyptian Accounting Standards (EAS) and IFRS” (Ebaid,

the study reveal that accounting quality has decreased in post-adoption period compared to pre-

adoption period. These results are consistent with prior research suggesting that the adoption of

IFRS, which are generally perceived to be of higher quality than domestic standards, does not

code-law country like Egypt, it may not be as beneficial and effective.

Business Enterprises. “A significant success on China’s path towards the implementation of an

2003). However, China’s measurement of revenue is recorded differently according to the ASBE

ACCOUNTING STANDARDS

principles than the IAS. “The valuation of revenues according to the amount stipulated in the

sales contract (see ASBE: Revenue, sentence 6) is a central accounting principle, whereas

revenue should be measured at the fair value of the consideration receivable according to IAS

18.9” (Opper, 2003). The way revenue is measured can be subject to manipulation. According to

Opper (2003), “such a loophole is particularly easy to exploit in the case of transactions between

related parties, for example transactions between companies that are part of the same business

Conclusion

provide information that are useful to existing and potential equity investors, lenders and other

creditors in making the appropriate decisions about providing resources to the entity” (Angeloni,

2016). It is important for organizations who wish to be recognized by the US securities exchange

necessity for non-US companies to reconcile their financial statements with US GAPP in order to

be listed on a US securities exchange” (Manzano, Conesa, and Hernandez, 2007). Accounting

standards that are accepted throughout all countries would be more beneficial to all organizations

because they would all be recording the same way. Companies that choose to not report finances

appropriately could lead investors to believe that the company is profiting more money than they

actually are. Although other countries may want to use their own accounting standards, they need

to realize that they are taking risks by lying to their investors if they report any finances

incorrectly. Accounting standards should be general across all regions.

ACCOUNTING STANDARDS

References

Angeloni, S. (2016). Cautiousness on convergence of accounting standards across countries.

Corporate Communications: An International Journal, 21(2), 246-267.

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Barth, M. E., Landsman, W. R., & Lang, M. H.. (2008). International Accounting Standards and