Student Business Report

Transcription

1 Student Business Report EXECUTIVE SUMMARY The requirement that Australian companies should report using local accounting standards rather than a harmonious set of global standards inevitably results in confusion when they report on their operating performance. Given the global nature of capital markets, the concept of a standard set of internationally applied Accounting Standards is enticing since additional outcomes of this action are expected to include increased investment in Australia and an improvement in global resource allocation. Further analysis of the issues surrounding the harmonisation of accounting standards, however, indicates that the results of this action are not so straightforward. Australia's adoption of IASC standards would not make its financial reports more comparable with the major capital markets of the world because capital markets such as the United Kingdom, Japan or the United States have not adopted IASC standards for domestic accounting reporting purposes. This fact brings in to question most of the benefits purported to flow to Australia through harmonisation; for instance, it is arguable that Australian financial reports will be more understandable to foreign investors than they are currently if they change to this standard. Moreover, it is doubtful that harmonisation will create any significant increase of foreign companies seeking listing on the Australian Stock Exchange because if adhering to a different set of accounting standards was the deterrent, this barrier still exists. In addition, financial reporting costs are unlikely to fall as many standards still exist world wide for multinationals and costs will rise for Australian only companies due to the change in standards. Other deterrents to harmonisation also exist. It has been suggested that the IASC standards are less relevant and suitable for Australia's particular environment in addition to being less rigorous and comprehensive than our current standards. Further, IASC standards have no legal backing, unlike Australian accounting standards. It is concluded that the benefits of accounting standard harmonisation will not be fully realised until there is more commitment to the IASC standards by major countries such as the United States, the United Kingdom, Japan and Canada.

2 TABLE OF CONTENTS EXECUTIVE SUMMARY 1 BACKGROUND 3 THE ISSUES ARISING FROM HARMONISATION OF ACCOUNTING STANDARDS 3 Comparability of financial reports 3 Investment across national borders 4 Financial reporting costs 4 Costs of developing national accounting standards 4 Quality of IASC accounting standards CONCLUSION 5 REFERENCES 6

3 BACKGROUND Advancements in technology and the removal of intra-country trade barriers through trade agreements such as APEC and ANZCER have led to increased competition and the need for companies to develop revenue sources outside their domestic market. More businesses, not just large multinationals, are entering the global business environment (Stanko, 2000, p.21), and this development has highlighted the fact that financial reports are not comparable between countries because of the vastly different accounting rules and standards under which they are prepared. It is argued that the global harmonisation of accounting standards would lead to more comparable financial reports and greater benefits associated with more efficient allocation of resources on a global scale. The International Accounting Standards Committee (IASC) was established in The aim of the committee was to develop Accounting Standards that applied internationally by seeking input from countries throughout the world (Deegan, 1999, p.41). The Australian Accounting Standards Board (AASB) is of the view that accounting standards "can no longer be developed in national isolation (Spencer, 1998, p. 20) and a globally-accepted set of accounting standards needs to be adopted. In addition, at the time of the formation of IASC, the AASB believed that the IASC standards presented the best option for globally-accepted standards especially since harmonisation with these standards could be achieved within a reasonable timeframe (Spencer, 1998, p.20). Australia's harmonisation program has been operating since Its objective is to change Australian standards so that they conform to IASC standards; however, they will not be identical to them (Spencer, 1998, p.20). In addition, the program aims to influence the development and change of the IASC standards. The harmonisation program is being jointly funded by the Australian government, the Australian accounting profession and the Australian Stock Exchange. ISSUES ARISING FROM HARMONISATION OF ACCOUNTING STANDARDS The main benefits of international harmonisation for Australian companies include the following: increased comparability of financial reports; the consequent removal of barriers to international capital flows; and increased understanding by foreign investors of Australian financial reports. Harmonisation should result in a more efficient allocation of resources on a global scale (Policy Statement 6 'International Harmonisation Policy', issue in April 1996 by the AASB and PSAB); however, despite the commitment of the AASB to the harmonisation of Australian Standards with IASC standards, there are mixed opinions about the benefits that accounting standard harmonisation would actually bring to Australian companies. Comparability of financial reports A major reason offered for the adoption of IASC standards is that it will lead to increased comparability of financial reports. Requiring companies to report using the local accounting standards rather than one harmonious set of global standards does result in much confusion when companies report on their operating performance; for example, in 1993, Daimler-Benz, a German company, reported a profit of DM 168 million when using German accounting rules but a DM 949 million loss under US accounting rules (Stanko, 2000, p.22). These widely varying results make it difficult for investors and lenders to assess their investment options. It also makes it difficult for companies to evaluate their competitors or their overseas suppliers (Stanko, 2000, p.21). Increased comparability of financial reports would obviously be a very desirable outcome of harmonisation; however, Australia's adoption of IASC standards would not make its financial reports more comparable with the major capital markets of the world. Capital markets such as the United Kingdom, Japan or the United States have not adopted IASC standards for domestic accounting reporting purposes (Dunk & Kilgore, 1999, p.36). The United States stock market regulator, the Securities and Exchange Commission, is still considering whether it will allow foreign companies to list on its exchange with reports prepared using IASC standards rather than local US standards. Over 225 differences have been identified between US, GAAP and the IASC Standards (Parker, 1997, p.48). As a result, even if the US were to undertake an IASC standard harmonisation program, it would still be some time before they were able to be comparable with reports prepared

4 using IASC standards. Importantly, even in countries where IASC standards have been adopted, very few have adopted the standards without amendment (Spencer, 1998, p.20). A further concern is that the harmonisation of accounting standards does not seem to be having the desired effect. A study of accounting practices of companies in France, Germany, Japan, the UK and the USA found that of the 26 major accounting measurement issues identified by the IASC since its formation, 14 reduced diversity of accounting practice between the countries; however 12 increased diversity (Emenyou and Gray cited by Dunk and Kilgore, 1999, p.37). This result suggests accounting standards do not appear to be becoming more comparable at all. Investment across national borders Harmonisation is supposed to lead to increased investment across national borders. It is argued that "investors are attracted to those markets they understand" (Sharpe, 1998, p. 16), and that foreign investors are unlikely to bother understanding Australian accounting standards (Sharpe, 1998, p.18). The conclusion of this argument is that to encourage foreign investment in Australia, Australian companies should prepare their reports using accounting rules these investors do understand, such as the IASC standards. As discussed above, however, major investment markets such as the US and Japan do not use IASC standards, so it is arguable that Australian financial reports will be no more understandable or comparable to these investors than if they were prepared with Australian accounting standards. Another common argument in favour of harmonisation is that it would increase the attractiveness of an Australian Stock Exchange listing to foreign companies" (Spencer, 1998, p.21). Unlike the US Securities Exchange Commission, however, which requires companies to prepare their financial reports in accordance with US accounting rules or provide a reconciliation to those rules, Spencer (1998) points out that the Australian Stock Exchange already allows non-domestic entities to lodge their financial reports using IASC standards if they meet certain criteria. Therefore, nonharmonisation with IASC standards is not currently a major impediment to foreign company listing. Spencer further argues that it is doubtful that harmonisation will create any significant increase of foreign companies seeking listing on the Australian Stock Exchange (1998, p.21). Financial reporting costs Proponents of harmonisation argue that it will lead to reduced costs of financial reporting for companies; however, it seems clear that this will only be a benefit for multinational companies, that is, companies operating in more than one country and currently required to prepare financial reports using more than one set of accounting standards. In addition, this benefit may not even arise if the multinational has not had to adhere to IASC standards in another country given the lack of adoption of these standards by major capital markets. It is likely that Australian companies operating only in Australia would incur additional costs through the changes necessary to their current accountancy system and through the retraining of staff in new procedures. Costs of developing national accounting standards The use of IASC standards is supposed to lead to decreased costs for countries producing their own standards; however, the flip side would logically seem to be decreased influence in setting those standards. Stoddart (2000) highlights how politics have influenced the accounting standard setting process in Australia. How much more likely is this to happen on a global scale where the stakes are higher? Sharpe (1981, p.18) notes that the IASC "makes extensive use of national standard setters, including them in the debate and benefiting from their expert opinion and research capabilities". Parker (1997, p.45) tells us that in pursuing Australia's objective to influence the development and change of the IASC standards, "Australian representatives to the IASC will raise issues at the IASC meetings... which would identify improvements... and may lead to the eventual revision of the IASC Standards as a result of the Australian feedback". Compare this with Cairns (2000) statement that "the IAS Committee should improve IAS by adopting superior UK requirements". Whose standards and opinions would prevail in such cases? As Australia would be a relatively small power in these stakes, it is theorised that the reduced costs of national standard setting would come at the cost of accounting standards that are less relevant and suitable for Australia's particular environment. Quality of IASC accounting standards It is argued by detractors of harmonisation that the IASC standards are not as rigorous and comprehensive as Australian accounting standards. The IASC standards allow variation in accounting policies in a greater range of circumstances than the standards of other major national

5 standard-setters (Spencer, 1998, p.22). The result of this flexibility in the IASC standards is that even while complying with the standards, companies could still report the same events in different ways. The reports would still not be globally comparable. As argued earlier, the IASC standards are developed through complex compromises between powerful global factions (Spencer, 1998, p.22). They will never be developed specifically for Australia's environment nor will they take into consideration any changes in that environment. Moreover, there may be instances where the position of an IASC Standard does not present best international practice (Parker, 1997, p.46). As a result, the standards Australia would adopt would be a compromise between the IASC position and the best international practice as developed by major national standard-setters such as the US, the UK and Canada. A further problem related to harmonising with the IASC standards is that they have no legal backing, unlike Australian accounting standards which have legal status through Corporations Law. This means that the implementation of IASC standards is dependent upon voluntary compliance by IASC constituencies. This has led to what has been termed IASC-lite standards (Ravlic, 1999, p.49), where IASC standards are modified to suit local conditions. This is seen as diluting the credibility of IASC standards (Ravlic, 1999, p.49), and further ensures that these standards are not comparable across countries. The US Securities and Exchange Commission (SEC) has not yet endorsed IASC standards to allow cross border listings in global markets. The SEC has stated that the IASC standards need to be of high quality and rigorously interpreted and applied before it will support them (Sharpe, 1998, p.18). Therefore, it may be seen as premature for Australia to harmonise with IASC standards if such a major market and global player has questions about their quality. CONCLUSION Pursuing harmonisation of Accounting Standards with IASC standards may eventually be beneficial for Australia but currently will not bring all the benefits expected. Recent developments such as restructuring the IASC to form the International Accounting Standards Board which has assumed accounting standard setting responsibilities and the strong presence of US standard setters in the Board are hoped to help convince the US of the benefits of harmonisation (Perry, 2001). If the United States does adopt IASC standards, its influence would probably be great enough to convince other countries to adopt harmonisation. If the US adopts IASC standards and if the quality of IASC standards are improved to make them less diverse, we believe that eventually accounting reports would become more globally comparable and allow the benefits theoretically associated with harmonisation to be reaped. Until that happens, however, we feel that the costs of harmonisation with the IASC standards outweigh its benefits to Australia.

6 REFERENCES Calms, D. "On the convergence handbook - Should IASs replace GAAP?' (December 2000) Deegan, C. Australian Financial Accounting, McGraw-Hill, Australia, 1999 Dunk, A. & Kilgore, A. "IASC Harmonisation: One step forward, two steps back?", Australian CPA, March 1999, pp International Accounting Standards Board website, Ng, A. "Harmonisation and China: Problems aplenty", Australian CPA, June 1999, pp Parker, C. "Looking for Harmony: the Australian approach", Australian Accountant, May 1997, pp Perry, M. "Prominent figures from around the world appointed to IASC as body" (7 Feb, 2001) Ravlic, T. Japan looks to higher Standards, Australian CPA, November 1999, pp Sharpe, M. "Looking for Harmony: Building a Global framework", Australian Accountant, March 1998, pp Spencer, K. The View from the AASB: take it easy, get it right, Australian Accountant, March 1998, pp Stanko, BB. The case for international accounting rules, Business and Economic Review, Jul-Sep. 2000, pp Stoddart, EK. (2000) Political Influences in changes to setting Australian Accounting Standards, Critical Perspectives on Accounting, 11, pp