In recent times, significant progress has been made towards achieving one set of universally accepted financial reporting standards. This movement has however made the challenges related to the convergence of the accounting standards more apparent than ever before.
Status of Global Convergence of Accounting Standards
International Financial Reporting Standards(IFRS) have already been adopted in many countries, and are in the process of being adopted in many other countries.
Some countries are working with the International Accounting Standards Board (IASB) to converge their own standards with IFRS.
Globally, the adoption of IFRS ranges from the total adoption of IFRS in some countries to the requirement for adoption of local Generally Accepted Accounting Principles (GAAP) in other countries. In between, countries display varying levels of commitment to IFRS including the adoption of local versions of IFRS, a requirement for certain entities to use IFRS, permission to use IFRS, and in some instances the use of local GAAP that is converging with IFRS.
As of June 2010,
- In North America, the US Securities & Exchange Commission accepts IFRS for non-US registrants, Canadian listed companies are required to use IFRS commencing January 1, 2011, while Mexico announced plans to move to IFRS in 2012;
- In Europe, the European Union (EU) requires companies listed in the EU countries to adopt IFRS beginning with their 2005 financial statements;
- In Central America, companies are required to use IFRS;
- Some South American countries require the use of IFRS, others require the use of IFRS as adopted locally, while others are moving towards convergence of local standards with IFRS;
- In Asia and the Middle East, some countries require reporting under local GAAP, some require the use of IFRS as adopted locally, while others are moving towards convergence of local standards with IFRS;
- In Oceana, local reporting entities are required to use IFRS as adopted locally; and
- In many African countries, listed companies are required to use IFRS.
Barriers to the Development of one Universally Accepted Set of Financial Reporting Standards
Convergence to one universally accepted set of standards has been delayed by many factors. One contributing factor is related to the fact that standard-setting bodies and regulatory authorities tend to have different views or apply different frameworks when developing standards.
Resistance to convergence can also come from strong industry lobbying groups and other stakeholders which would prefer to preserve the status quo.
Political pressure can also interfere with convergence by creating tension as the independence of accounting standards boards could become jeopardized and be brought into question.
Standards must be applied consistently and enforcement must be uniform, otherwise, a single set of standards may appear to exist but will lack desirable attributes such as comparability.
Which of the following statements is least accurate?
A. IFRS has already been adopted in many countries.
B. One potential barrier to convergence arises from the resistance of industry lobby groups who would be affected by any new standards.
C. It is not possible for political pressure to influence accounting standards boards.
The correct answer is C.
Political pressure can cast doubts on the independence of accounting standards boards. The other two statements are accurate.
Reading 23 LOS 23c:
Describe the status of global convergence of accounting standards and ongoing barriers to developing one universally accepted set of financial reporting standards