International Accounting

SUNDAR B. N. ASSISTANT PROFESSOR
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INTRODUCTION
Accounting plays a vital role in society. As a branch of economics, it provides
information about a firm and its transactions to facilitate resource allocation decisions
by users of that information. If the information reported is reliable and useful, scarce
resources are allocated in an optimal fashion, and conversely, resource allocations are
less than optimal when information is less reliable and useful. International
accounting, the subject of this text, is no different in its intended role. What makes its
study distinctive is that the entity being reported on is either a multinational company
(MNC) with operations and transactions that cross national boundaries, or an entity
with reporting obligations to users who are located in a country other than that of the
reporting entity.
Recall that accounting entails several broad processes: measurement, disclosure,
and auditing. Measurement is the process of identifying, categorizing, and quantifying
economic activities or transactions. These measurements provide insights into the
profitability of a firm’s operations and the strength of its financial position. Disclosure
is the process by which accounting measurements are communicated to their intended
users. This area focuses on issues such as what is to be reported, when, by what
means, and to whom. Auditing is the process by which specialized accounting
professionals (auditors) attest to the reliability of the measurement and communication
process. Whereas internal auditors are company employees who answer to
management, external auditors are nonemployees who are responsible for attesting
that the company’s financial statements are prepared in accordance with generally
accepted standards.
An understanding of the international dimensions of the accounting processes
that were just described is important to those engaged in importing or exporting
activities, as well as those seeking to manage a business, or obtain or supply financing
across national borders. Even a company operating solely within the confines of a
single country is no longer insulated from the international aspects of accounting as
reliance on international vendors to contain production costs and remain globally
competitive is a common feature of contemporary business. Accounting amounts may
vary significantly according to the principles that govern them. Differences in culture,
business practices, political and regulatory structures, legal systems, currency values,
local inflation rates, business risks, and tax codes all affect how the MNC conducts its
operations and financial reporting around the world. Financial statements and other
disclosures are impossible to understand without an awareness of the underlying
accounting principles and business culture.
The importance of studying international accounting has grown over the years.
We begin with a brief history of this subject.

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HISTORICAL PERSPECTIVE
The history of accounting is an international history. The following chronology
demonstrates that accounting has been remarkably successful in its ability to be
transplanted from one national setting to another while allowing for continued
development in theory and practice worldwide.
To begin, double-entry bookkeeping, generally thought of as the genesis of
accounting as we know it today, emanated from the Italian city states of the 14th and
15th centuries. Its development was spurred by the growth of international commerce
in northern Italy during the late Middle Ages and the desire of government to find
ways to tax commercial transactions. “Bookkeeping in the Italian fashion” then
migrated to Germany to assist the merchants of the Fugger era and the Hanseatic
league. At about the same time, business philosophers in the Netherlands sharpened
ways of calculating periodic income, and government officials in France found it
advantageous to apply the whole system to governmental planning and accountability.
In due course, double-entry accounting ideas reached the British Isles. The
development of the British Empire created unprecedented needs for British
commercial interests to manage and control enterprises in the colonies, and for the
records of their colonial enterprises to be reviewed and verified. These needs led to the
emergence of accounting societies in the 1850s and an organized public accounting
profession in Scotland and England during the 1870s. British accounting practices
spread not only throughout North America but also throughout the British
Commonwealth as it then existed.
Parallel developments occurred elsewhere. The Dutch accounting model was
exported to Indonesia, among other places. The French accounting system found a
home in Polynesia and French-administered territories in Africa while the reporting
framework of the Germans proved influential in Japan, Sweden, and czarist Russia.
As the economic might of the United States grew during the first half of the
20th century, its sophistication in matters of accounting grew in tandem. Business
schools assisted in this development by conceptualizing the subject matter and
eventually having it recognized as an academic discipline in its own right on college
and university campuses. After World War II, U.S. accounting influence made itself
felt throughout the Western world, particularly in Germany and Japan. To a lesser
extent, similar factors are directly observable in countries like Brazil, Israel, Mexico,
the Philippines, Sweden, and Taiwan.
Despite this international heritage, in most countries accounting remained a
nationalistic affair, with national standards and practices deeply anchored into national
laws and professional regulations. (Examples of comparative accounting practices are
provided in Chapters 3 and 4.) There was little understanding of parallel requirements

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in other countries. Yet, accounting increasingly serveed people and organizations
whose decisions were increasingly international in scope.
Resolving the historical paradox of accounting has long been a concern of both
users and preparers of accounting information. In recent years, institutional efforts to
narrow differences in measurement, disclosure, and auditing processes around the
world have intensified. Adescription of this effort and the major players with an
important stake in attaining convergence of global accounting systems.
CONTEMPORARY PERSPECTIVE
While the effort to reduce international accounting diversity is important in its own
right, there are today a number of additional factors that are contributing to the
growing importance of studying international accounting. These factors stem from
significant and continuing reductions in national trade barriers and capital controls
together with advances in information technology.
National controls on capital flows, foreign exchange, foreign direct investment,
and related transactions have been dramatically liberalized in recent years, reducing
the barriers to international business. Changes in financial sector policy in both
developed and developing countries reflect the growing realization that information
and financial technology render capital controls ineffective. National governments
also realize that financial market liberalization affords them access to international
funds with which to finance national debts. As accounting is the language of business,
cross-border economic interactions mean that accounting reports prepared in one
country must increasingly be used and understood by users in another.
Advances in information technology are also causing a radical change in the
economics of production and distribution. Vertically integrated production is no longer
proving an efficient mode of operation. Real-time global information linkages mean
that production, including accounting services, is increasingly being outsourced, or
offshored, to whomever in the world can do the job, or portions of the job, best.1
Leading locations for offshore services today include Argentina, Brazil, Canada,
Chile, Costs Rica, Mexico, and Panama in the Americas; Australia, China, India,
Malaysia, New Zealand, Pakistan, the Philippines, Singapore, Thailand, and Vietnam
in Asia Pacific; and the Czech Republic, Egypt, Hungary, Ireland, Israel, Morocco,
Poland, Romania, Russia, Slovakia, South Africa, Spain and the Ukraine in Europe,
the Middle East, and Africa.2Adversarial, arm’slength relationships that have
characterized companies’ relations with their suppliers, middle persons, and customers
are being replaced by cooperative global linkages with suppliers, suppliers’ suppliers,
middle persons, customers, and customers’ customers.

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DEVELOPMENT OF INTERNATIONAL ACCOUNTING
Every nation’s accounting standards and practices result from a complex interaction of
economic, historical, institutional, and cultural factors. Diversity among nations is to
be expected. The factors that influence national accounting development also help
explain the accounting diversity among nations.
The following eight factors have a significant influence on accounting
development. The first seven are economic, sociohistorical, and/or institutional in
nature, and they have occupied most of the attention of accounting writers. The
relationship between culture (the eighth item) and accounting development ends the
discussion in this section.
Sources of Finance: In countries with strong equity markets, such as the United
States and the United Kingdom, accounting profits measure how well management is
running the company. Accounting is designed to help investors assess future cash
flows and the associated risks, and to value the firm. Disclosures are extensive to meet
the requirements of widespread public share ownership. By contrast, in credit based
systems, where banks are the dominant source of finance, accounting focuses on
creditor protection through conservative earnings measures to minimize dividend pay-
outs and retain sufficient funds for the protection of lenders. Because financial
institutions have direct access to any information they want, extensive public
disclosures are not considered necessary.
Legal System: The legal system determines how individuals and institutions interact.
The Western world has two basic orientations: code (or civil) law and common (or
case) law. Code law derives mainly from Roman law and the Code Napoléon.2 In
code law countries, laws are an all-embracing set of requirements and procedures.
Codification of accounting standards and procedures is natural and appropriate. Thus,
in code law countries, accounting rules are incorporated into national laws and tend to
be highly prescriptive and procedural.3 By contrast, common law develops on a case-
by-case basis with no attempt to cover all cases in an all-encompassing code. Statute
law exists, of course, but it tends to be less detailed and more flexible than in a code
law system. This encourages experimentation and permits the exercise of judgment.4
Common law derives from English case law. In most common law countries,
accounting rules are established by private sector professional organizations. This
allows them to be more adaptive and innovative. Except for broad statutory
requirements, most accounting rules are not incorporated directly into statute law.5
Code law accounting tends to focus on legal form, whereas common law accounting
tends to focus on economic substance. For example, leases are normally not
capitalized under code law. In contrast, under common law leases are capitalized when
they are, in substance, the purchase of property.
Taxation: In many countries, tax legislation effectively determines accounting
standards because companies must record revenues and expenses in their accounts to

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claim them for tax purposes. In other words, financial and tax accounting are the same.
This is the case, for example, in Germany and Sweden.
In other countries, such as the Netherlands, financial and tax accounting are separate:
Taxable profits are essentially financial accounting profits adjusted for differences
with the tax laws. Of course, even where financial and tax accounting are separate, tax
legislation may occasionally require the application of certain accounting principles.
Last in, first out (LIFO) inventory valuation in the United States is an example.
Political and Economic Ties: Accounting ideas and technologies are transferred
through conquest, commerce, and similar forces. Double-entry bookkeeping, which
originated in Italy in the 1400s, gradually spread across Europe along with other ideas
of the Renaissance. British colonialism exported accountants and accounting concepts
throughout the empire. German occupation during World War II led France to adopt
its Plan Comptable (see Chapter 3). The United States imposed U.S.-style accounting
regulatory regimes on Japan after World War II. Many developing economies use an
accounting system that was developed elsewhere, either because it was imposed on
them (e.g., India) or by their own choice (e.g., countries of Eastern Europe that
modeled their accounting systems after European Union [EU] regulations). As
discussed more generally in Chapter 8, economic integration through the growth of
international trade and capital flows is a powerful motivator for the convergence of
accounting standards in countries around the world
Inflation: Inflation distorts historical cost accounting by understating asset values and
related expenses, and overstating income. Countries with high inflation often require
that companies incorporate price changes into the accounts. For example, Mexico
applies general price-level accounting when its cumulative three-year inflation rate
equals or exceeds 28 percent (an annual average compounded rate of 8 percent).6 In
the late 1970s, in response to unusually high rates of inflation, both the United States
and the United Kingdom experimented with reporting the effects of changing prices.
Level of Economic Development:This factor affects the types of business
transactions conducted in an economy and determines which ones are most prevalent.
The type of transactions, in turn, determines the accounting issues that are faced. For
example, stock-based executive compensation or asset securitization makes little sense
in economies with underdeveloped capital markets. Today, many industrial economies
are becoming service economies. Accounting issues relevant in manufacturing, such
as valuing fixed assets and recording depreciation, are becoming less important. New
accounting challenges, such as valuing intangibles and human resources, are
emerging.
Educational Level:Highly sophisticated accounting standards and practices are
useless if they are misunderstood and misused. For example, a complex technical
report on cost behavior variances is meaningless unless the reader understands cost
accounting. Disclosures about the risks of derivative securities are not informative

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unless they can be read competently. Professional accounting education is difficult to
achieve where general educational levels are low. Mexico is a country where this
difficulty has been overcome. In other situations, a country must import accounting
training or send its citizens elsewhere to get it, something that China is now doing.
Culture: Culture encompasses the values and attitudes shared by a society. Cultural
variables underlie nations’ legal systems and other institutional arrangements.
Hofstede identified four national cultural dimensions (or societal values): (1)
individualism, (2) uncertainty avoidance, (3) power distance, and (4) masculinity. His
analysis is based on data from employees of a large U.S. multinational corporation
operating in 40 different countries.9 Briefly, individualism (versus collectivism) is a
preference for a loosely knit social fabric over an interdependent, tightly knit fabric (I
versus we). Uncertainty avoidance is the degree to which society is uncomfortable
with ambiguity and an uncertain future. Power distance is the extent to which
hierarchy and an unequal distribution of power in institutions and organizations are
accepted. Masculinity (versus femininity) is the extent to which gender roles are
differentiated and performance and visible achievement (traditional masculine values)
are emphasized over relationships and caring (traditional feminine values).
INTERNATIONAL FINANCIALREPORTING
The purpose of accounting is to provide information that is useful for making business
and other economic decisions. For this reason, accounting is commonly referred to as
the language of business.
The important categories of information contained in accounting are operating
information, financial accounting information, management accounting information
and tax accounting information.
Since countries have their own set of socio-economic, political, legal, cultural,
technological and linguistic environment, financial reporting diversities are quite
eminent.
With diverse financial reports in hand, decision makers find it difficult to make
effective decisions. To overcome this difficulty and to have a more uniform and
harmonized financial reporting across the globe, the concept of INTERNATIONAL
ACCOUNTING has gained momentum.
International accounting is nothing but international aspects of accounting, including
such matters as accounting principles and reporting practices in different countries and
their classification patterns of accounting development; international and regional
harmonization, foreign currency translation, foreign exchange risk, international
comparisons of consolidation accounting and inflation accounting, accounting in
developing countries, performance evaluation of foreign subsidiaries.

7
An understanding of the international dimension of the accounting processes that were
just described is important to those seeking to manage a business or obtain or supply
of financing across national borders.
Accounting amounts may vary significantly according to the principles that
govern them. Differences in culture, business practices, political and regulatory
structures, legal systems, currency values, local inflation rates, business risks, and tax
codes all affect how the MNC conducts its operations and financial reporting around
the World. Financial statements and others disclosures are impossible to understand
without an awareness of the underlying Accounting Principles and business culture.
DEFINITION OF INTERNATIONAL ACCOUNTING
“International accounting would involve accounting for international transactions, the
operational aspects of international firms, comparison of accounting principles and
practices found in foreign countries and the procedures by which they were
established”.
“International accounting is that branch of accounting which analyses the
different accounting principles and practices prevalent around the globe, deals with the
specific technical problems encountered by individuals and MNCs in international
operations and as its ultimate goal, attempts to develop a universal system of
accounting that would receive acceptance the world over”.
International accounting may thus be defined as that “branch of accounting which
deals with the recording and translation of foreign transactions, preparation and
presentation of consolidated foreign financial statements and presentation of
international financial reporting in accordance with international GAAP and auditing
practices”.
IMPORTANCE OF INTERNATIONAL ACCOUNTING
1. It facilitates achieving harmonization of accounting practices across nations.
2. It helps in reaching out to global investors.
3. It helps in taking informed decisions.
4. It helps in mobilizing global resources
5. It helps in establishing uniformity in global financial reporting and disclosure
practices
6. It helps in the professionalization of accounting education world over.
7. It helps in inculcating ethics and transparency into accounting practices.

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SCOPE OF INTERNATIONAL ACCOUNTING
The scope of International accounting has been justified with 3 concepts:
A. Financial Accounting
B. Management Accounting
C. Social and Allied Accounting activities
A. FINANCIAL ACCOUNTING
1. Recording of foreign transactions:
International accounting essentially begins with the recording of foreign
transactions. A transaction, in relation to importing, exporting, foreign borrowings and
lending, and forward contracts, taking place between parties belonging to two different
countries, is said to be an international or foreign transactions.
As far as recording foreign transactions is concerned, two approaches i.e., single
transaction approach and the dual transaction approach are found to be popular.
The dates of the transaction such as
a) The initial transaction date
b) The interim reporting date
c) The settlement date
2. Foreign Currency Translation:
Foreign currency translation means, converting the financial figures which is
one country’s currency to other country's currency. Foreign currency translations
refers to the change in the monetary expression of the financial data contained in the
financial statements.
Ex. Figures of the balance sheet and income statement expressed in rupees when
restated in dollar equivalent or in other similar foreign currency.
Issues or steps involved in FCT:
a) Recognition and recording of foreign currency transactions
b) Recording of forward exchange contracts
c) Translation of foreign currencies
d) Understanding the international GAAP on foreign currency translation.
3. Accounting for foreign inflation:

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Price level changes refer to the increase or decrease in the purchasing power of
money. Purchasing power, in turn, refers to the ability of a given sum of money to buy
a certain amount of goods or services now in comparison to what the same of money
could have bought at a previous date.
4. Consolidation of Foreign Financial Statements:
Consolidated refers to the preparation and presentation of ‘integrated financial
statements’, popularly known as consolidated statements.
By incorporation the financial data of the subsidiary, to the extent of the
controlling interest, in the financial statement of the parent company with a view to
giving the stakeholders information as regards the economic resources being
controlled by the group.
5. Segment and Interim Reporting:
Segment reporting refers to the reporting of financial information in relation to
different business activities of the firm classified as business segment or geographical
segment.
Interim reporting refers to the presentation of financial statements of the
enterprise covering periods of less than a full financial year. The purpose of such
presentation of financial statements is to provide the decision makers with frequent
and timely information for taking investment and credit decisions, based on their
ability to predict full year’s financial results from the interim results.
B. Management Accounting
1. Analysis of Foreign Financial Statements:
Financial statement analysis refers to an information processing system
that is meant for providing financial data which are appropriate and useful to decision
makers who are concerned with evaluating the economic situation of the firm and
predicting its future course.
Techniques of financial statement analysis:
a) Economic Value Added (EVA)
b) Market Value Added (MVA)
c) Multiple Discriminate Analyses (MDA)
2.Multinational Transfer Pricing:
Transfer pricing relates to the pricing of goods and services that change hands
between entities engaged in inter firm trade. Transfer price is the price at which goods
or services are transferred between affiliated entities within an organization.

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Objectives of Transfer Pricing:
a) Appropriate evaluation of segment with management performance
b) Avoidance of foreign currency restrictions and quotas
c) Minimization of taxed and tariffs
d) Minimization of exchange risks
e) Avoidance of profit repatriation restrictions
f) Enhancement of shares of profits in joint ventures
3. Budgeting and performance evaluation of foreign subsidiaries:
Firms use budgeting and performance evaluation as tools for strategic planning
and control. For multinational corporations, it is essential that these budgeting and
performance evaluation tools are chosen appropriately so as to fit to the environment
of the countries of their own domicile and also of the foreign countries.
4. Management of Foreign Exchange Risk:
Exchange risk management aims at monitoring and managing the firm’s foreign
exchange exposure so as to maximize its profitability, cash flow and market value.
Foreign exchange exposure primarily assumes three forms:
a) Translation exposure: The potential of an increase or decrease in the parent
company’s net worth and reported net income due to fluctuations in the exchange
rates. It arises from Buying and selling on credit goods or services whose prices are
contractually denominated in foreign currency, Borrowing and lending funds in
foreign currency, Forward exchange contracts, Acquisition or disposal of assets
denominated in foreign currency, settlement of liabilities denominated in foreign
currency.
b) Transaction exposure: . In contrast, transaction exposure arises due to the
sensitivity of the firm’s contractual cash flows denominated in foreign currency to
exchange rate fluctuations.
c) Economic exposure: It refers to the extent to which the value of the firm would be
impacted by unexpected changes in the exchange rates. The managerial efforts to
manage economic exposure would be to formulate long term strategies so as to
enhance and preserve its value in the event of unexpected exchange rate fluctuations.
5. International Taxation:

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International taxation is a complex phenomenon that affects all the aspects of
multinational operations including foreign investments, transfer pricing, marketing of
product and services, cost of capital and capital structure.
It is therefore imperative for multinational corporations in particular to
understand the diversities that exist in relation to corporate tax laws in different
countries for better tax planning and decision making.
C. SOCIAL AND ALLIED ACCOUNTING POLICIES
1. Accounting for newer financial instruments:
IAS 39 a derivative is a financial instrument, by classifying option, swap,
future and forward.
2. Global joint venture:
IAS 31 deals with the accounting procedure of investments in joint ventures, by
classifying jointly controlled operations, jointly controlled assets, and jointly
controlled entities.
3. Environmental disclosures:
Environmental disclosures by companies have increasingly become a
matter of interest not only to the environmentalists but also to stakeholders like the
investors, employees, customers, regulatory agencies and the society at large.
4. Social disclosure: Social disclosure primarily aims at informing general public
about the social welfare measures taken by the firm and their effects on the society.
MAIN CAUSES OF DIVERSITY IN INTERNATIONAL FINANCIAL
REPORTING
Considerable differences exist across countries in the accounting treatment of many
items. For example, companies in the United States are not allowed to report property,
plant, and equipment at amounts greater than historical cost. In contrast, companies in
the European Union are allowed to report their assets on the balance sheet at market
values. Research and development costs must be expensed as incurred in Japan, but
development costs may be capitalized as an asset in Canada and France. Chinese
companies are required to use the direct method in preparing the statement of cash
flows, whereas most companies in the United States and Europe use the indirect
method.
REASONS FOR ACCOUNTING DIVERSITY
Why do financial reporting practices differ across countries?

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Accounting scholars have hypothesized numerous influences on a country’s
accounting system, including factors as varied as the nature of the political system, the
stage of economic development, and the state of accounting education and research. A
survey of the relevant literature has identified the following five items as being
commonly accepted as factors influencing a country’s financial reporting practices:
Legal System
There are two major types of legal systems used around the world: common law and
codified Roman law.
Common law began in England and is primarily found in the English-speaking
countries of the world. Common law countries rely on a limited amount of statute law,
which is then interpreted by the courts. Court decisions establish precedents, thereby
developing case law that supplements the statutes.
A system of code law, followed in most non-English-speaking countries,
originated in the Roman juscivile and was developed further in European universities
during the Middle Ages. Code law countries tend to have relatively more statute or
codified law governing a wider range of human activity.
What does a country’s legal system have to do with accounting? Code law
countries generally have corporation law (sometimes called a commercial code or
companies act), which establishes the basic legal parameters governing business
enterprises. The corporation law often stipulates which financial statements must be
published in accordance with a prescribed format. Additional accounting measurement
and disclosure rules are included in an accounting law debated and passed by the
national legislature. In countries where accounting rules are legislated, the accounting
profession tends to have little influence on the development of accounting standards.
In countries with a tradition of common law, although a corporation law laying the
basic framework for accounting might exist (such as in the United Kingdom), specific
accounting rules are established by the profession or by an independent
nongovernmental body representing a variety of constituencies. Thus, the type of legal
system in a country tends to determine whether the primary source of accounting rules
is the government or a nongovernmental organization.
In code law countries, the accounting law tends to be rather general and does
not provide much detail regarding specific accounting practices and may provide no
guidance at all in certain areas. Germany is a good example of this type of country.
The German accounting law passed in 1985 is only 47 pages long and is silent with
regard to issues such as leases, foreign currency translation, and cash flow statements.
4 When no guidance is provided in the law, German companies refer to other
sources, including tax law, opinions of the German auditing profession, and standards
issued by the German Accounting Standards Committee, to decide how to do their

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accounting. Interestingly enough, important sources of accounting practice in
Germany have been textbooks and commentaries written by accounting academicians.
Taxation: In some countries, published financial statements form the basis for
taxation, whereas in other countries, financial statements are adjusted for tax purposes
and submitted to the government separately from the reports sent to stockholders.
Continuing to focus on Germany, the so-called congruency principle
(Massgeblichkeitsprinzip) in that country stipulates that the published financial
statements serve as the basis for taxable income. In most cases, for an expense to be
deductible for tax purposes it must also be used in the calculation of financial
statement income. Well-managed German companies attempt to minimize income for
tax purposes, for example, through the use of accelerated depreciation, so as to reduce
their tax liability. As a result of the congruency principle, accelerated depreciation
must also be taken in the calculation of accounting income. In the United States, in
contrast, conformity between the tax statement and financial statements is required
only with regard to the use of the last-in, first-out (LIFO) inventory cost flow
assumption. U.S. companies are allowed to use accelerated depreciation for tax
purposes and straight-line depreciation in the financial statements. All else being
equal, because of the influence of the congruency principle, a German company is
likely to report lower income than its U.S. counterpart. The difference between tax
and accounting income gives rise to the necessity to account for deferred income
taxes, a major issue in the United States in recent years. Deferred income taxes are
much less of an issue in Germany; for many German companies, they do not exist at
all. This is also true in other code law countries such as France and Japan.
Providers of Financing: The major providers of financing for business enterprises are
family members, banks, governments, and shareholders. In those countries in which
company financing is dominated by families, banks, or the state, there will be less
pressure for public accountability and information disclosure. Banks and the state will
often be represented on the board of directors and will therefore be able to obtain
information necessary for decision making from inside the company. As companies
become more dependent on financing from the general populace through the public
offering of shares of stock, the demand for more information made available outside
the company becomes greater. It simply is not feasible for the company to allow the
hundreds, thousands, or hundreds of thousands of shareholders access to internal
accounting records. The information needs of those financial statement users can be
satisfied only through extensive disclosures in accounting reports. There can also be a
difference in financial statement orientation, with stockholders more interested in
profit (emphasis on the income statement) and banks more interested in solvency and
liquidity (emphasis on the balance sheet). Bankers tend to prefer companies to practice
rather conservative accounting with regard to assets and liabilities.
Inflation: Countries experiencing chronic high rates of inflation found it necessary to
adopt accounting rules that required the inflation adjustment of historical cost

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amounts. This was especially true in Latin America, which as a region has had more
inflation than any other part of the world. For example, throughout the 1980s and
1990s, the average annual rate of inflation rate in Mexico was approximately
50 percent, with a high of 159 percent in 1987. 7 Double- and triple-digit inflation
rates render historical costs meaningless. Throughout most of the latter half of the 20th
century, this factor primarily distinguished Latin America from the rest of the world
with regard to accounting. 8 Adjusting accounting records for inflation results in a
write-up of assets and therefore related expenses. Adjusting income for inflation is
especially important in those countries in which accounting statements serve as the
basis for taxation; otherwise, companies will be paying taxes on fictitious profits.
Political and Economic Ties: Accounting is a technology that can be relatively easily
borrowed from or imposed on another country. Through political and economic links,
accounting rules have been conveyed from one country to another. For example,
through previous colonialism, both England and France have transferred their
accounting frameworks to a variety of countries around the world. British-style
accounting systems can be found in countries as far-flung as Australia and Zimbabwe.
French accounting is prevalent in the former French colonies of western Africa. More
recently, it is thought that economic ties with the United States have had an impact on
accounting in Canada, Mexico, and Israel.
Correlation of Factors:Whether by coincidence or not, there is a high degree of
correlation between legal system, tax conformity, and source of financing. As
Exhibit 2.4 shows, common law countries tend to have greater numbers of domestic
listed companies, relying more heavily on equity as a source of capital. Code law
countries tend to link taxation to accounting statements and rely less on financing
provided by shareholders.
PROBLEMS CAUSED BY ACCOUNTING DIVERSITY
Preparation of Consolidated Financial Statements;
The diversity in accounting practice across countries causes problems that can be quite
serious for some parties. One problem relates to the preparation of consolidated
financial statements by companies with foreign operations. Consider General Motors
Corporation, which has subsidiaries in more than 50 countries around the world. Each
subsidiary incorporated in the country in which it is located is required to prepare
financial statements in accordance with local regulations. These regulations usually
require companies to keep books in local currency using local accounting principles.
Thus, General Motors de Mexico prepares financial statements in Mexican pesos
using Mexican accounting rules and General Motors Japan Ltd. prepares financial
statements in Japanese yen using Japanese standards. To prepare consolidated
financial statements in the United States, in addition to translating the foreign currency

15
financial statements into U.S. dollars, the parent company must also convert the
financial statements of its foreign operations into U.S. GAAP. Each foreign operation
must either maintain two sets of books prepared in accordance with both local and
U.S. GAAP or, as is more common, reconciliations from local GAAP to U.S. GAAP
must be made at the balance sheet date. In either case, considerable effort and cost are
involved; company personnel must develop an expertise in more than one country’s
accounting standards.
Access to Foreign Capital Markets:
A second problem caused by accounting diversity relates to companies gaining access
to foreign capital markets. If a company desires to obtain capital by selling stock or
borrowing money in a foreign country, it might be required to present a set of financial
statements prepared in accordance with the accounting standards in the country in
which the capital is being obtained. Consider the case of the semiconductor
manufacturer STMicroelectronics, which is based in Geneva, Switzerland. The equity
market in Switzerland is so small (there are fewer than 8 million Swiss) and ST’s
capital needs are so great that the company has found it necessary to have its common
shares listed on the Euronext-Paris and BorsaItaliana stock exchanges in Europe and
on the New York Stock Exchange in the United States. To have stock traded in the
United States, foreign companies must either prepare financial statements using U.S.
accounting standards or provide a reconciliation of local GAAP net income and
stockholders’ equity to U.S. GAAP.
This can be quite costly. In preparing for a New York Stock Exchange (NYSE)
listing in 1993, the German automaker Daimler-Benz estimated it spent $60 million to
initially prepare U.S. GAAP financial statements; it expected to spend $15 million to
$20 million each year thereafter. 9 The appendix to this chapter describes the case of
Daimler-Benz in becoming the first German company to list on the NYSE. As noted in
Chapter 1, the U.S. SEC eliminated the U.S. GAAP reconciliation requirement for
those foreign companies using IFRS to prepare their financial statements. However,
foreign companies not using IFRS continue to provide U.S. GAAP information.
Comparability of Financial Statements
The third problem relates to the lack of comparability of financial statements between
companies from different countries. This can significantly affect the analysis of
foreign financial statements for making investment and lending decisions. In 2003
alone, U.S. investors bought and sold nearly $3 trillion worth of foreign stocks while
foreign investors traded over $6 trillion in U.S. equity securities. 10 In recent years
there has been an explosion in mutual funds that invest in the stock of foreign
companies. As an example, the number of international stock funds increased from
123 in 1989 to 534 by the end of 1995. 11 T. Rowe Price’s New Asia Fund, for
example, invests exclusively in stocks and bonds of companies located in Asian
countries other than Japan. The job of deciding which foreign company to invest in is

16
complicated by the fact that foreign companies use accounting rules different from
those used in the United States and those rules differ from country to country. It is
very difficult if not impossible for a potential investor to directly compare the financial
position and performance of an automobile manufacturer in Germany (Volkswagen),
Japan (Nissan), and the United States (Ford) because these three countries have
different financial accounting and reporting standards. According to Ralph E. Walters,
former chairman of the steering committee of the International Accounting Standards
Committee, “either international investors have to be extremely knowledgeable about
multiple reporting methods or they have to be willing to take greater risk.” 12 A
lack of comparability of financial statements also can have an adverse effect on
corporations when making foreign acquisition decisions. As a case in point, consider
the experience of foreign investors in Eastern Europe. After the fall of the Berlin Wall
in 1989, Western companies were invited to acquire newly privatized companies in
Poland, Hungary, and other countries in the former communist bloc. The concept of
profit and accounting for assets in those countries under communism was so different
from accounting practice in the West that most Western investors found financial
statements useless in helping to determine which enterprises were the most attractive
acquisition targets. In many cases, the international public accounting firms were
called on to convert financial statements to a Western basis before acquisition of a
company could be seriously considered.
There was a very good reason why accounting in the communist countries of
Eastern Europe and the Soviet Union was so much different from accounting in
capitalist countries. Financial statements were not prepared for the benefit of investors
and creditors to be used in making investment and lending decisions. Instead, financial
statements were prepared to provide the government with information to determine
whether the central economic plan was being fulfilled. Financial statements prepared
for central planning purposes have limited value in making investment decisions.
Lack of High-Quality Accounting Information
A fourth problem associated with accounting diversity is the lack of high-quality
accounting standards in some parts of the world. There is general agreement that the
failure of many banks in the 1997 East Asian financial crisis was due to three factors:
a highly leveraged corporate sector, the private sector’s reliance on foreign currency
debt, and a lack of accounting transparency. 13 To be sure, inadequate disclosure did
not create the East Asian meltdown, but it did contribute to the depth and breadth of
the crisis. As Rahman explains: “It is a known fact that the very threat of disclosure
influences behavior and improves management, particularly risk management. It
seems that the lack of appropriate disclosure requirements indirectly contributed to the
deficient internal controls and imprudent risk management practices of the
corporations and banks in the crisis-hit countries.” 14 International investors and
creditors were unable to adequately assess risk because financial statements did not
reflect the extent of risk exposure due to the following disclosure deficiencies:

17
 The actual magnitude of debt was hidden by undisclosed related-party
transactions and off-balance-sheet financing.
 High levels of exposure to foreign exchange risk were not evident.
 Information on the extent to which investments and loans were made in highly
speculative assets (such as real estate) was not available.
 Contingent liabilities for guaranteeing loans, often foreign currency loans, were
not reported.
 Appropriate disclosures regarding loan loss provisions were not made.
INTERNATIONAL ACCOUNTING HARMONIZATION
So far we got some ideas of the very real historical differences between accounting
thinking and practice across the world. Since accounting is essentially a
communication process, such differences are not helpful in the context of
multinational and international business.
Either reporting entities need to prepare multiple sets of financial statements
under different bases or users have to familiarize themselves with, and understand, a
variety of different accounting preparation systems. Both alternatives are time
consuming and costly, and can easily lead to confusion and
error???????????????????????????
Reduction in such differences, and ideally, the elimination of such differences,
is desirable. It is also extremely difficult.
Harmonization is the process by which differences in financial reporting practices
among countries are reduced, with a view to make them comparable and decision
useful across the countries.
Harmonization is a process of increasing the compatibility of accounting
practices by setting bounds to their degree of variation.
“Harmonization” is a process for improving the compatibility (suitability) accounting
practices by setting limits on how large-prkatik practices may vary. Harmonization of
standards will be free of conflicts of logic and can improve the comparability
(comparability) of financial information from different countries. Efforts to harmonize
accounting standards have been started long before the establishment of the
International Accounting Standards Committee in 1973. International accounting
harmonization is one of the most important issues faced by the makers of accounting
standards, capital market regulators, stock exchanges, and those who prepare or use
financial statements.

18
“Harmonization” is a process to improve the compatibility (suitability) accounting
practices by setting limits on how large these practices may vary.
Need for Harmonisation:
1. Harmonisation ensures high quality financial reporting.
2. Harmonisation ensures a reliable financial reporting and disclosures.
3. Harmonisation enables a systematic reviews along with evaluation of performance
of a multinational corporate unit having subsidiaries in various countries where in
each country has its own set of GAAP.
4. Harmonisation adds to the global credibility of a corporate unit.
5. Harmonisation makes the comparison of the corporate unit against the domestic and
international peers more easier.
6. Harmonisation provides a level of playing ground where no country is advantaged
or disadvantaged by its GAAP.
7. Sometimes Harmonisation can prove to be crucial to the economic development of
a country.
MAJOR FORCES LEADING TO HARMONIZATION
The need of international harmonization cannot be ignored. As the overall objective is
immense in its nature. International harmonization affect critical areas, due to which
regions such as ASEAN, have concentrated to stimulate it
Business Trend and Landscape: The process of harmonization is significantly
needed by multinational companies, international accounting firms and domestic
firms. As the stakeholders of such enterprises are vastly benefited. For instance, one of
the features of harmonization is to provide comparability of international finance
information. This would assist businesses in the most convenient manner. Similarly,
Choi and Meek (2005) identified that, accounting harmonization would save time and
money that is currently being spent to consolidate divergent financial information
when more than one set of reports is required to comply with the different national
laws or practice.
In addition, IAS/IFRS policy adoption enables economic entities from various places
to participate in financial globalization as they can speak mutual accounting and
financial language.

19
Cross border Listing:Cross border listing permit companies to issue their common
shares on a different stock exchange, across border. ASEAN stock exchange specifies
the need to provide interim financial reports and forecast information. Such
coordination of stock exchange within ASEAN enhances the prospective of
accounting harmony. Similarly, the growing competitiveness among capital markets as
a source of finance, ASEAN is striving for the need of accounting harmonization in
order to develop efficient financial reporting within this region. The flow of capital
across national borders is linked arbitrage opportunities in different markets. Capital
flow also considers the movement of capital from developed to developing or under-
developing countries. Furthermore, cross border flow of products and services
demands for free trade, while eliminating the restrictions and tariff barriers. There
have been numerous tensions between countries over international trade, for instance,
natural resources and national trade. For example, the export of fish between Vietnam
and European community regarding intervention of flows of products. In such
disputes, calculation of production cost is at the center which affect the world price
eventually.
Tiron-Tudor & Muller (2009) argued that the disputes of fish dumping derived from
different accounting treatment of cost factors in IFRS. This eventually calls for the
need of accounting harmonization. The influence of IAS in Malaysia, Singapore and
Thailand reveals to what extent these economies admire harmonization.
Impact to Globalization: Globalization which escalated by the end of twentieth
century has enabled people to travel, communicate and do business internationally,
with the aid of technological advancements. In order to encourage foreign direct
investments (FDI), with the increasing globalized environment, ASEAN concurred
that international harmonization would be one of the vital approaches which will
stimulate disclosure requirements imposed on MNCs. Graham &Neu (2003), proposed
that, globalization impacted the free flow of capital, product, information, policy and
people. Thus, globalization has influenced all socio-economic aspects of the world.
Accounting is considered as a social phenomenon, therefore it will be affected either
directly or indirectly within this process.
Similarly as identified by Turner (1983), and Aitken & Islam (1984), enhancing
common financial reporting language so that financial statements will provide the
same message on both sides of the Pacific and the Atlantic. For instance, Malaysia is
one of the world’s largest exporters of semiconductor devices, electrical goods, and
information and communication technology products. In order to encourage globalized
business environment, Malaysia adopted IFRS in 2010.
Annual Reports:In the year 1997, 205 out of 300 companies’ annual reports were
accessed among Australia, Hong Kong, Malaysia, Singapore, and Indonesia. Out of
this number, only 130 could be used as research material, as other 75 annual reports

20
were rejected, mainly due to incomplete disclosure, wrong year, or no English
translation Chik& Ahmad (1992).
From the above statement, we can deduce that, there was a severe need of accounting
harmonization, primarily for financial reporting. As it was difficult for accounting
professional firms to scrutinize them, then how could one individual or investor can
trust and invest in such companies.
Emergence of MNCs:This is primary and single factor responsible for the need of
harmonisation. MNCs share more than 1/3 of world output. So every nation of the
world is directly or indirect affected by MNC’s.
Increased need of harmonisation is there because of the following:
(i) MNC’s desire for foreign capital.
(ii) MNC’s desire for reducing accounting and reporting costs.
Regional, Political and Economic Harmonisation:Regional, Political and Economic
Harmonisation is also compelling accounting professionals for the need of increased
harmonisation in accounting practices. Unification of Germany, United Europe are the
examples of regional, political and economic co-operation.
Developed Countries like USA, Japan look in developing nations like India for Capital
investment. Undeveloped countries approach developed nations for financial help.
Due to economic dependence business has increased manifold. Every country is trying
for political and economic harmonisation.
Global Integration of Capital Markets:International flow of capital has given rise to
the concept of global investors. On the other hand listing of foreign companies in
domestic stock exchanges has given birth to the global integration of capital market.
Global investors are interested in cross border financial reporting. Informational needs
of global investors have compelled accounting professionals and institutes to work for
harmonisation.
It has therefore, been a long felt need that companies world over communicate using a
common accounting language. Country specific principles are so varied that the
aspiration for a globally integrated capital market can be fulfilled only through a
uniform financial reporting code.
For instance, the US, the U.K., Japan. Australia and the European Union should accept
the same set of accounting standards, audit rules, disclosures and capital market
regulations.

21
PROFIT OF INTERNATIONAL HARMONIZATION
A recent article also supports the existence of a “global GAAP” harmonized. Some of
the benefits mentioned include:
1. Into global capital markets and investment capital can move across the globe
without a hitch. High-quality financial reporting standards that are used
consistently throughout the world will
2. Improve the efficiency of capital allocation.
3. Investors can make better investment decisions; portfolio will be more diverse and
less financial risk.
4. Companies can improve decision making strategies in the areas of mergers and
acquisitions.
5. The best ideas arising from the standard pat-making activity is spread in
developing global
6. Standards of the highest quality.
BARRIERS TO INTERNATIONAL HARMONIZATION
Conflict of Interest: There are several users who have their own motives to pursue
for accounting harmonization, which eventually pressurize multinational corporations
to offer financial reports in more harmonized way. Radebaugh and Gray (1997) named
the parties as governments, trade unions, employees, investors, bankers and lenders,
general public, and accountant and auditors, multinational corporations.
I. Multinational Enterprises (MNEs): They are concerned with the international
accounting due to their operations across countries. As they encounter with
various accounting principles in each country due to their subsidiaries.
II. Management: This party manages MNEs, due to which they are highly
concerned regarding accounting standards as they have to construe significant
decisions, involving international acquisition and merger.
III. Accountants: As this group is the one preparing and using accounting
information, they have to be updated internationally. They are profoundly
involved in the standard-setting processes, which influence international
accounting and reporting behavior.
IV. Government: Their desire is regarding comparability either on national level or
international level. As government requires sufficient information from MNEs
to monitor their activities while also formulating policies in order to stabilize
their economy.
V. Trade Unions and Employees: These parties influence the business activity as
well as national policies. They require information regarding performance and
future prospects, which also involves employee benefits.
VI. Investors: They need disclosures for financial position, performance and
prospects of MNEs on a global level, while also demanding the comparability.

22
VII. Bankers and Lenders: This group provides capital; therefore they need
comparable information, financial position and future prospects.
VIII. International Accounting Firms: This party includes auditing firm; thus
requiring similar accounting practices to provide enhanced results while also
intensifying their relations with their clients and tax authorities (Lawrence,
1996).
As mentioned above, these groups have different motives towards accounting
harmonization, which indirectly influences the economies to follow specific routes. As
mentioned earlier, mainly in ASEAN, economies have a high degree of harmonization
based on capital markets. This is mainly due to the fact that, bankers and investors
require need disclosure requirements to lend or invest. This eventually becomes an
obstacle, as the economy will only be willing to adopt harmonization for their own
agenda, while on the other hand ignoring other harmonization factors, such as,
environmental or social regarding ASEAN.
Regulators: As identified by Brown and Tarca (2005), rule-making is not the same as
rule-enforcing. IASB is a standard-setter not a standard-enforcer. According to Ball
(2006), IASB has not shown any interest in disallowing or dissuading “weak-
adopting” or “free-rider” companies or countries from using the IFRS brand name as a
signal of quality. If enforcement cannot be obtained on a global level, then IASB’s
mission would not be successful. IASB is not backed by any national government. It
has to rely on goodwill of auditors, stock exchanges, and its regulators, government
departments and agencies, and other private-sector bodies to ensure the compliance
and integrity of the accounting standards (Saw, 2011). Even if such standards are
implemented for global approach, there is still lack of international regulator that
would be given enforcement powers.
Political: Nationalism reveals political obstacle towards harmonization. Countries are
suspicious of relinquishing control of their accounting regulations to outsiders,
specifically when their own accounting regulations are replaced with those of other
nations. Nobes and Parker (2004) suggest that nationalism may lead to unwillingness
to accept accounting standards developed by other countries.
In some countries, mainly ASEAN, companies and individuals desire to preserve the
inadequacies and ineptitudes triggered by the alterations in accounting in order to
benefit from it.
For instance, the secrecy offered by Swiss banking and accounting. Developing
nations and those which have been colonies of imperial powers are particularly
sensitive to intrusions Ali (2005).

23
MAJOR INTERNATIONAL ORGANIZATIONS PROMOTING
HARMONIZATION OF ACCOUTING
Six organizations have become a major player in the determination of the international
accounting standards and in promoting international harmonization of accounting:
1. International Accounting Standards Board (IASB)
2. Commission of the European Union (EU)
3. International Organization of the Capital Market Commission (IOSCO)
4. International Federation of Accountants (IFAC)
5. Intergovernmental Working Group of Experts on the United Nations International
Standards of Accounting and Reporting (International Standards of Accounting and
Reporting – Isar), part of the United Nations Conference in Trade and Development
(United Nations Conference on Trade and Development-UNCTAD)
6. Accounting Standards Working Group in the Organization of Economic
Cooperation and Development OECD Working
INTERNATIONAL ACCOUNTING STANDARD BOARD
The IASB is an independent accounting standard-setting body, based in London. It
consists of 15 members from nine countries, including the United States. The IASB
began operations in 2001 when it succeeded the International Accounting Standards
Committee. It is funded by contributions from major accounting firms, private
financial institutions and industrial companies, central and development banks,
national funding regimes, and other international and professional organizations
throughout the world. While the AICPA was a founding member of the International
Accounting Standards Committee, the IASB's predecessor organization, it is not
affiliated with the IASB.
Founding members retained significant influence, including:
Australia, Canada, Germany, Japan, Mexico, The Netherlands, United Kingdom
and United States
• Replaced IASC in 2001
• IFRS Foundation appoints board of 16 members
– 13 full and 3 part-time
– Board approves standards, exposure drafts, and interpretations
• Shift in emphasis from harmonization to global standard-setting or convergence
• Main aim is to develop a set of high-quality financial reporting standards for
global use

24
Objectives of IASB towards Harmonization:
 To develop a single set of high quality, understandable, enforceable and
globally accepted international financial reporting standards (IFRS) through its
standard-setting body, the IASB
 To promote the use and rigorous application of those standards.
 To take account of the financial reporting needs of emerging economies and
small and medium-sized entities(SME) and
 To bring about convergence of national accounting standards and IFRSs to high
quality solutions
IASB Framework
 Created to develop accounting standards systematically
 Framework for Preparation and Presentation of Financial Statement adopted by
IASB in 2001 from IASC
 Scope of Framework
 Objective of financial statements and underlying assumptions
 Qualitative characteristics that affect the usefulness of financial
statements
 Definition, recognition, and measurement of the financial statements
elements
 Concepts of capital and capital maintenance

25
The Structure of the IASB
Principles-BasedApproach to International
FinancialReporting Standards
 IASB follows a principles-based approach to standard setting vs a rules-based
approach
o Standards establish general principles for recognition, measurements, and
reporting requirements for transactions
o Limits guidance and encourages professional judgment in applying
general principles to entities or industries
INTERNATIONAL FINANCIAL REPORTING STANDRADS (IFRS)
International Financial Reporting Standards (IFRS) is a set of accounting standards
developed by an independent, not-for-profit organization called the International
Accounting Standards Board (IASB).
The goal of IFRS is to provide a global framework for how public companies prepare
and disclose their financial statements. IFRS provides general guidance for the
preparation of financial statements, rather than setting rules for industry-specific
reporting.

26
Having an international standard is especially important for large companies that have
subsidiaries in different countries. Adopting a single set of world-wide standards will
simplify accounting procedures by allowing a company to use one reporting language
throughout. A single standard will also provide investors and auditors with a cohesive
view of finances.
Currently, over 100 countries permit or require IFRS for public companies, with more
countries expected to transition to IFRS by 2015. Proponents of IFRS as an
international standard maintain that the cost of implementing IFRS could be offset by
the potential for compliance to improve credit ratings.
IFRS is sometimes confused with IAS (International Accounting Standards), which
are older standards that IFRS has replaced.
History of IFRS
IFRS originated in the European Union, with the intention of making business affairs
and accounts accessible across the continent. The idea quickly spread globally, as a
common language allowed greater communication worldwide. Although only a
portion of the world uses IFRS, participating countries are spread all over the world,
rather than being confined to one geographic region. The United States has not yet
adopted IFRS, as the GAAP is viewed as the "gold standard".
Currently, about 120 countries use IFRS in some way, and 90 of those require them to
fully conform to IFRS regulations.
IFRS is maintained by the IFRS Foundation. The mission of the IFRS Foundation is to
"bring transparency, accountability and efficiency to financial markets around the
world." Not only does the IFRS Foundation supply and monitor these standards, but it
also provides suggestions and advice to those who deviate from the practice
guidelines.
What is IFRS?
International Financial Reporting Standards (IFRS) are a set of accounting standards
developed by the International Accounting Standards Board (IASB) that is becoming
the global standard for the preparation of public company financial statements.
How widespreadis the adoption of IFRS around the world?
Approximately 120 nations and reporting jurisdictions permit or require IFRS for
domestic listed companies, although approximately 90 countries have fully conformed
with IFRS as promulgated by the IASB and include a statement acknowledging such
conformity in audit reports.1 Other countries, including Canada and Korea, are

27
expected to transition to IFRS by 2011. Mexico will require IFRS for all listed
companies starting in 2012. Japan has introduced a roadmap for adoption that it will
decide on in 2012 (with a proposedadoptiondate of 2015 or 2016) and is permitting
certain qualifying domestic companies to apply IFRS from fiscal years ending on or
after March 31, 2010. Still other countries have plans to converge their national
standards with IFRS.
What are the advantages of converting to IFRS?
By adopting IFRS, a business can present its financial statements on the same basis as
its foreign competitors, making comparisons easier. Furthermore, companies with
subsidiaries in countries that require or permit IFRS may be able to use one
accounting language company-wide. Companies also may need to convert to IFRS if
they are a subsidiary of a foreign company that must use IFRS, or if they have a
foreign investor that must use IFRS. Companies may also benefit by using IFRS if
they wish to raise capital abroad.
What could be the disadvantages ofconverting to IFRS?
Despite a belief by some of the inevitability of the global acceptance of IFRS, others
believe that U.S. GAAP is the gold standard, and that a certain level of quality will be
lost with full acceptance of IFRS. Further, certain U.S. issuers without significant
customers or operations outside the United States may resist IFRS because they may
not have a market incentive to prepare IFRS financial statements. They may believe
that the significant costs associated with adopting IFRS outweigh the benefits.
What is the difference between convergenceandadoption?
Adoption would mean that the SEC sets a specific timetable when publicly listed
companies would be required to use IFRS as issued by the IASB. Convergence means
that the U.S. Financial Accounting Standards Board (FASB) and the IASB would
continue working together to develop high quality, compatible accounting standards
over time. More convergence will make adoption easier and less costly and may even
make adoption of IFRS unnecessary. Supporters of adoption, however, believe that
convergence alone will never eliminate all of the differences between the two sets of
standards.
Presently there are 8 international financial reporting standards(IFRS), 29 international
accounting standards (IAS), 15 IFRIC interpretations and 11 SIC interpretation.
OBJECTIVES OF IFRS
 To standardize accounting methods and procedures
 To lay down principles for preparation and presentation
 To establish benchmark for evaluating the quality of financial statements
prepared by the enterprise
 To ensure the users of financial statements get creditable financial information

28
 To attain international levels in the related areas
WHY IFRS
India is one of the over 100 countries that have or are moving towards IFRS
convergence with a view to bringing about uniformity in reporting systems globally,
enabling businesses, finances and funds to access more opportunities.
Indian companies are listed on overseas stock exchanges and have to recast their
accounts to be compliant with GAAP requirements of those countries. Foreign
companies having subsidiaries in India are having to recast their accounts to meet
Indian and overseas reporting requirements which are different.
Foreign Direct Investment (FDI), Overseas Financial Institutions Investors (FII) are
more comfortable with compatible accounting standards and companies accessing
overseas funds feel the need for recast of accounts in keeping with globally accepted
standards.
ICAI has decided to implement IFRS in India. The Ministry of Corporate Affairs has
also announced its commitment to convergence to IFRS by 2011.
IFRS to whom applicable
 Compliance with IFRS in Indian is restricted to Public entities which include
those companies and entities listed on any stock exchange or have raised money
from the public, or have a substantial public interest, or public sector
companies. IFRS in India would cover the following public interest entities in
the first phase.
 Listed companies
 Banks, insurance companies, mutual funds and financial institutions
 Turnover in proceeding year >Rs. 1Billion
 Borrowing in proceeding year >Rs. 250 Million
 Holding or subsidiary of the above
 IFRS is not applicable to SMEs as of now
When IFRS
 IFRS for public entities in India is applicable from 01/04/2011.
 The opening IFRS balance sheet at the date of transition to IFRS- 01/04/201,
which is the start date for full comparative information presentation in IFRS.

29
Impact of IFRS
IFRS implementation affects several areas of the business entity, such as presentation
of accounts, the accounting policies and procedures, the way legal documents are
drafted, the way the entity looks at its assets and their usage, as well as the its
communications with its stakeholders and also the way it conducts its business.
This fundamental and pervasive nature of impact of IFRS makes it imperative that
sufficient planning and thought is given to this aspect and choices made at the
transition stage itself, as they determine the effect on the company and its operation.
A detailed analysis of all aspect of impact and change as well as all legal
documentation become necessary
INTERNATIONAL ACCOUNTING STANARDS COMMITTEE (IASC)
The IASC is an independent private body.
It was formed in 1973 in the 10th International Congress of Accountants held at St.
Louis by leading accounting bodies of ten Nations.
Objectives of IASC towards Harmonization:
1. To formulate and publish in the public interest accounting standards to be
observed in the presentation of financial statements
2. To promote financial statements worldwide acceptance and observance
3. To work generally for the improvement and Harmonization of regulations
4. To improve the accounting standards and procedures relating to the presentation
of financial statement
INTERNATIONAL FEDERATION OF ACCOUNTS (IFAC)
IFAC was formed in 1977. It is a body of national professional accounting
organizations represented by accountants employed in public, private and
government institutions including educational, to frequently interface with the
profession.
IFAC has over two million accountants from as many as 150 member organizations in
over 100 countries.
IFAC basically issues International Standards on Auditing (ISA) in order to
harmonize international auditing practices.
Objectives of IFAC towards Harmonization:

30
 It works towards reducing differences in the requirements to qualify as a
professional accountant in the member countries.
 It issues code of ethics for professional accountants in line with their
independence, objectivity and integrity.
 It works for providing the govt worldwide international public sector standards
for improving their financial management and reporting practices.
Standards of IFAC Board :
1. International Auditing and Assurance Standards Board (IAASB)
2. International Public Sector Accounting Standards Board (IPSASB)
3. International Ethics Standards Board for Accountants (IESBA)
4. International Accounting Education Standards Board (IAESB)
INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSION
(IOSCO):
IOSCO was formed in 1983 from the transformation of its ancestor the “Inter-
American Regional Association” (1974) into a truly international cooperative
body.
The decision is to expand the organization beyond the America was made at the
annual gathered in Quito, Ecuador in April 1983.
IOSCO is represented by over 115 securities regulatory agencies of the world, having
a coverage of 85% of the world’s capital markets.
Objectives of IOSCO towards Harmonization:
1. To promote highstandard of regulation in order to maintain efficient and
sound market
2. To establish standards and effective surveillance of international security
transaction
3. To promote the integrity of the market by a rigid application of enforcement
of the standards
4. To exchange information on their respective experiences to promote the
development of domestic market.

31
UNITED NATION (UN)
United Nation was formed after World War II, to provide leadership in fostering peace
and stability around the world. Currently UN has 193 members.
UN provides food and medical supply, educational facilities and training and financial
sources to poor member’s nations.
The UN has been interested in the field of international accounting since the early
1970 whena group of eminent persons looking into the activities of MNCs found
that to prepare financial reporting.
Objectives of UN:
1. To serve as the international body for the discussion of accounting and reporting
issues
2. To make a positive contribution to national and regional standard setting
3. To take into account the interest of developing country in the field of
information disclosure
ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
(OECD)
OECD was formed in 1960 by 24 developed nations in order to serve as a forum for
officials of these nations to meet the discuss problems of mutual interest and
harmonize their policies in important international issues.
OEEC / OECD goal was to help European governments recognized their
economic inter dependence.
Role of OECD in Accounting Harmonization
1. Support current efforts by international regional and national bodies towards
harmonization of accounting practices
2. Function as a forum for exchanging of view of on UN effort on accounting and
discloser standards
3. Provide technical clarification to the terms used in disclosed guidelines
4. In 1976 OECD has issued a code of conduct entitled “Declaration on International
investment and Multinational enterprises” for financial reporting by MNCs.

32
ASSOCIATION OF SOUTH EAST ASIAN NATIONS FEDERATIO OF
ACCOUNTANTS (AFA)
The ASEAN regional organization was formed in 1977 as a regional accounting body
comprising five South East Asian countries – Indonesia, Malaysia, Philippines,
Thailand and Singapore.
In 1979, AFA issued the first accounting standard and in 1980 the first
auditing standard, with a view to bringing greater harmony in the accounting and
auditing practices in ASEAN countries.
Objectives of AFA:
1. To provide an organization for the ASEAN accountants as profession in the
region
2. To establish an ASEAN philosophy on the accounting profession
3. To establish a medium for closer relations, regional cooperation and assistance
among ASEAN accounts
4. To work in cooperation with ASEAN business regional groupings whose
economic development efforts may be completed by ASEAN accountants
CONCEPTUALFRAMEWORK
International Financial Accounting Standards (IFRS), formerly known as International
Accounting Standards (IAS) are the Standards, Interpretations and Framework for the
Preparation and Presentation of Financial statements adopted by the International
Accounting Standards Board (IASB). IAS was issued in 1973 and 2001 by the board
of the Internal Accounting Standards Committee (IASC). On April 1 2001 the new
IASB took over the responsibility of setting International Accounting Standards from
IASC. It has since then continued to develop standards called as the new standards
IFRS.
Structure of IFRS
IFRS are as principles based set of standards that establish broad rules and also dictate
specific treatments. International Financial Reporting Standards comprises of
 International Financial Reporting Standards (IFRS) - standards issued after
2001
 International Accounting Standards (IAS) - standards issued before 2001
 Interpretations originated from the International Financial Reporting
Interpretations Committee (IFRIC) - issued after 2001
 Standing Interpretations Committee (SIC) - issued before 2001

33
Meaning of Convergence with IFRS
Convergence with IFRS implies to achieve harmony with IFRSs and to design and
maintain national accounting standards in a way that they comply with the
International Accounting Standards. The transition would enable Indian entities to be
fully IFRS compliant and give an "unreserved and explicit statement of compliance
with IFRS" in their financial statements.
In the new format core accounting principles will still apply and simply is an
additional piece of accounting equation. The new IFRS are nothing but the new
International Accounting Rules.
Many of the standards forming part of IFRS are known by the older name of
International Accounting Standards (IAS). IAS was issued between 1973 and 2001 by
the Board of the International Accounting Standards Committee (IASC). On 1 April
2001, the new IASB took over the responsibility for setting International Accounting
Standards from the IASC. During its first meeting the new Board adopted existing IAS
and SICs. The IASB has continued to develop standards calling the new standards
IFRS. It is simply an addition to the existing accounting rules.
Beneficiaries ofconvergencewith IFRS
The researchers point out several beneficiaries to the convergence of Indian GAAP
with IFRS. Some important ones are discussed as below.
1. The Investors. Convergence with IFRS makes accounting information more
reliable, relevant, timely and comparable across different legal frameworks and
requirements as it would then be prepared using a common set of accounting standards
thus facilitating those who want to invest outside India. Convergence with IFRS also
develops better understanding of financial statements globally and also develops
increased confidence among the investors
2. The Industry. The other important set of beneficiary as the researchers perceive is
the industry which in the event of convergence with IFRS will be benefited because
of, one, increased confidence in the minds of the foreign investors, two, decreased
burden of financial reporting, three, it would simplify the process ofpreparing the
individual and group financial statements, four, it leads to lower costof preparing the
financial statements using different sets of accounting standards.
3. Accounting Professionals. Although there would be initial teething problems,
convergence with IFRS would definitely benefit the accounting professionals as the
later would then be able to sell their expertise in various parts of the world.

34
4. The corporate world. Convergence with IFRS would raise the reputation and
relationship of the Indian corporate worldwith the international financial
community. Moreover, the corporatehouses back in India would be benefited because
of ,one, achievement of higher level of consistency between the internal and external
reporting, two, because of better access to international market, three, convergence
with IFRS improves the risk rating and makes the corporateworld more competitive
globally as their comparability with the international competitors increases.
5. The Economy. All the discussions made above explains how convergence with
IFRS would help industry grow and is advantageous to the corporatehouses in the
country as this would bring higher levelof consistencybetweenthe internal and
external reporting along with improving the risk rating among the international
investors. Moreover the international comparability also improves benefiting the
industrial and capital markets in the country.
Challenges in the Convergencewith IFRS facedby India
Looking at the various benefits, the policy makers in India have now realized the need
to follow IFRS and it is expected that a large number of Indian companies would be
required to follow IFRS from 2011. There are a number of challenges that India is
likely to face while dealing with convergence with IFRS. In fact convergence with
IFRS is not just a technical exercise but also involves an overall change in not only the
perspective but also the very objective of accounting in the country. The researcher
points out certain key areas that require close attention while dealing with conversion
from Indian GAAP to IFRS.
It has to be realized that this conversion is not just the any technical exercise. Even
after the later gets introduced, the preparers, users and auditors will continue to
encounter practical implementation challenges. This is because the consequences of
the same would have far wider financial reporting issues and extend to various
significant business and regulatory matters like, structuring of ESOP schemes, training
of employees, tax planning, modification of IT system, compliance with debt
covenants and so on. Another important challenge is to ensure that their investors
understand the shift from Indian GAAP to IFRS.
It is a common belief that there are only a few differences between Indian GAAP and
IFRS as the former is inspired by the later. Although it is true but this does not mean
that the efforts required for conversion would get minimal. This is because the areas
where the differences lie are deep routed for example, fixed assets accounting,
presentation of financial statements, accounting of financial instruments and foreign
exchange, group accounts etc. Indian GAAP is still a long way behind IFRS.

35
Moreover in spite of any number of arguments in favor of convergence with IFRS
deviations are bound to exist due to various conceptual, practical, legal and
implementation challenges that cause unavoidable reasons for departures from IFRS.
The first and foremost challenge is that of maintaining consistency with the legal and
the regulatory requirements prevalent in India. For example, Accounting Standard
(AS) 25 (Interim financial Reporting), does not require disclosure and presentation of
interim financial statements in India because here at present Clause 41 of the Listing
Agreement prescribes a format of presentation of quarterly and/or half yearly financial
results and also requires various disclosure to be made therein. Similarly, (AS) 21
defines 'control' as ownership of more than half of the voting power of an enterprise or
control over the composition of the governing bodyof an enterprise. This definition of
control is based on definitions of holding company and subsidiary company as per
Companies Act 1956. However, IAS 27 defines controlas "the power to govern the
financial and operating policies of an enterprise so as to obtain benefits from its
activities".
Another important reason for departure from IFRS may be the macro environment of
the country where it is applied. For example in view of the fact that various markets in
the country are not supposed to possess the necessary depth and breadth , there has
been reluctance in India to adoptFAIR VALUE approachin measurement of various
assets and liabilities where as IFRS is based on the fair value approach.
It is predicted by the think tanks of the country that a sudden convergence with IFRS
may cause hardships to the Indian industry. The industry therefore requires to be
prepared for adoption of IFRS for which modifications are required to be made in the
Accounting Standards. Forexample the revised version of AS 15 permits deferment of
expenditure incurred on account of termination of services arising in a voluntary
retirement scheme for transitional period in view of the fact that the Indian industry
was undergoing structural changes at the time when this standard was introduced. As
against this, IAS 19 does not allow the deferment of such expenditure even as a
transitional measure.
The conceptualdifferences are also likely exist that may cause departure from IFRS.
For example AS 29 does not specifically deal with constructive obligation whereas
IAS 37 deals specifically with this in the context of creation of a provision. The effect
of this is that in some cases provisions will be required to be recognized at an early
stage.
Everybody is reluctant to change and this is a universal fact. Unhelpful attitude of
corporateworld poses another challenge in convergence with IFRS standards.
Similarly implementation challenges also crop in the convergence with IFRS because
of complexities of the recognition and measurement requirements and the extent of

36
disclosures required by IFRS on different types of entities that are public interest and
other than public interest entities. Again the criteria regarding which entities should be
considered as public interest entities for the purposeof application of IFRS may prove
to be another critical issue that may poseimplementation problems. These and other
such issues posechallenges in convergence with IFRS. A movement was initiated by
an International bodycalled 'International Organization of Securities Commissions
(IOSCO)to harmonize diverse disclosure practices followed in different countries
There are significant differences between IFRS and Indian-GAAP. In fact, Indian
Accounting Standards have not kept pace with changes in IFRS. This is because
Indian Standards remain sensitive to local conditions, including the legal and
economic environment.
Risks involved in Introducing IFRS in India
 The researchers feel that the biggest risk in converging Indian GAAP with IFRS
is the fact that the accounting entities underestimate the complexity involved
in the process. Instead it should be recognized well in advance that teething
problems would definitely creepin. Converting to IFRS will increase the
complexity with the introduction of concepts suchas present value and fair
value. Similarly there are some recognition and measurement issues that would
create quite a lot of controversy
 Implementing IFRS has increasedfinancial reporting risk due to technical
complexities, manual workarounds and managementtime taken up with
implementation.
 Another risk involved is that the IFRS do not recognize the adjustments that
are prescribedthroughcourt schemes and consequently all such items will be
recorded through income statement
 In IFRS framework, treatment of expenses like premium payable on
redemption of debentures, discount allowedon issue of debentures,
underwriting commissionpaid on issue of debentures etc is different than
the presentmethod used. This would bring about a change in income
statement leading to enormous confusion and complexities.
 IFRS will introduce changes in the very concepts and definitions of in a few
areas like change in the definition of 'equity'. This would result in tax benefits
of hybrid instruments where 'interest' is treated as receiving a dividend.
 At the ground level, it will be difficult for the small firms and the accounting
companies to keeppace with the process ofconvergence with IFRS and it
will be more challenging for them. Basically the idea is that it should be made
mandatory for the companies to prepare consolidatedfinancialstatements
which would require them to provide information about their unlisted
companies as well under IFRS. This may however result in increased
challenges to the small and medium firms in the country.

37
 IFRS financial statements are significantly more complex than financial
statements basedon Indian GAAP.This complexity threatens to undermine
the usefulness ofIFRS financial statements in making decisions. Therisk is
that the preparation of financial reports will become just a technical compliance
exercise rather than a mechanism for communicating performance and the
financial position of companies.
 Laws and pronouncements are always country specific and no country can
abandon its ownlaws altogether. It will always be checked to see if the IFRS
pronouncements fit for application in a particular country and its environment.
In fact it is not yet very clear whether IFRS would be directly adopted or will they
converge into Indian GAAP. This also shows our unpreparedness towards the
convergence process.
Suggestionsfor increasedconvergence
The researchers put forward certain suggestions to enable harmonization in published
company annual reports at the international level
1. Political pressureon International Accounting Standards Board (IASB) should be
avoided from various interest groups like private sectorand government agencies.
2. IASB should publicize standards developed by it and get supportfrom the
accounting profession, member countries and corporate management all over the
world.
3. IASB should encourage member bodies to adoptIFRS and formulate and
reformulate their rules that they are in line with IFRS
4. Legislation should be passed to the effect that in case of any changes or
amendments in IASB, the local standards, if any, should be brought in line with these.
5. Local stockexchange can be used for cooperating in taking action against
companies that fail to comply with the IFRS.
6. Governing bodies of the various accounting professioncan also be used to apply
disciplinary procedures in caseof nan-convergence with IFRS.
KEY CHALLENGES IN ADOPTING IFRSs IN EMERGING ECONOMIES
Accounting Standard-setters in emerging economies are facing various challenges in
adopting IFRSs suchas the following
 Non-compatible legal and regulatory environment
 Economic environment

38
 Level of preparedness
 Education needs of preparers/auditors
ICAI’s Decision to Converge with IFRS
 In view of global developments and expected benefits of convergence with
IFRS, in 2007, ICAI decided to converge with IFRS
 The Ministry of CorporateAffairs, Government of India, also supported the
initiative of ICAI to converge with IFRS
 Roadmap to implementation of IFRS-converged standards in phase-wise
manner, beginning from accounting periods commencing on or after 1st April
2011, has been laid down by the MCA
ICAI’s initiative to achieve Convergence
Formulation of IFRS-convergedAccounting standards is the most significant
milestone to achieve convergence
 Accounting standards corresponding to all IAS/IFRS are being formulated
 This process is nearing completion
 Status of preparation of IFES-converged standards is given in subsequent slides
 It is expected that all the standards would shortly be ready for notification by
the government
Processfollowedin formulation of IFRS-convergedstandards
 IFRS are viewed
 As far as possible, no change is made unless absolutely essential keeping in
view the Indian conditions and circumstances
 Optional treatments prescribed under IFRS are removed keeping in view Indian
environment to bring about comparability
 Conceptual issues, if any, are identified and taken up with the IASB
Status of preparation of IFRS convergedstandards as for as ICAI is concerned
S No. Standards Status
1
Standards cleared by
council 36
2 Exposure Draft issued Nil
3 Standards before ASB 2
Total 38

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Status of preparation of IFRS convergedstandards as for as NACAS is
concerned
S
No. Standards Status
1 Standards cleared by NACAS 23
2
Standards considered by NACAS and specific
issues to be resolved 9
3
Standardsto be placed before NACAS at its next
meeting 4
Total 36
All IFRICs and SICs contained in the above standards will be considered by NACAS
separately
MCA’s INITIATIVE FOR CONVERGENCE
Press Releaseissuedby MCA indicating
 Two separate sets of Accounting Standards u/s section 211(3C) of the company
act, 1956
 Indian accounting standards converged with IFRS applicable to the
specified class of companies in three phases
 Existing notified Accounting Standards applicable to companies not
covered by above including Small and Medium Companies (SMCs)
 Roadmap for application of IFRS converged Accounting Standards
 Roadmap for Banking and Insurance Companies
 Constitution of following core Group and Sub group:
 Core group headed by Secretary, MCA
 Sub-group 1 headed by Mr. Y.H. Malegam
 To finalise the roadmap for achieving convergence
 To get the changes in laws and regulations
Sub-group 2 headed by Mr. MahandasPai to address industry-specific issues

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