Custom «Global Accounting Standards Analysis» Essay Paper

Accounting standards are designed to help companies and investors along with other stakeholders to benefit from a market opportunity and while doing so ensuring that there is fairness and transparency in operations. However, every country has developed a set of accounting standards that significantly differs from that of other countries in several parameters.

The International Accounting Standards Board, with an aim of developing an international market, has advised countries to follow a common set of accounting principles called International Accounting Standards. However, due to a complex environment, differing market conditions, and level of development in an economy, these IAS cannot be adopted as they are. They need to be analyzed and applied after thoroughly considering the determinants of national accounting standards.

The first part of this paper highlights the current status of International accounting standards and the determinants of national accounting standards. In the second part, we closely consider a particular country (here India) and analyze the country differences in accounting standards.

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Despite its complex market conditions, India is playing an active role in harmonizing the international standards being a full-fledged member of the International Federation of Accountants. A leading daily, The Hindu Business Line, has reported that companies operating in India can now get listed on London Stock Exchange (The Hindu Business Line, 2005). This shows the convergence of Indian accounting standards with global accounting rules.

International Accounting Standards

The International Accounting Standards (IAS) is instituted by the International Accounting Standards Board (IASB), which is a body comprising of regulatory representatives from over 79 nations. Since its inception, the committee has formulated approximately 30 IAS. These IAS takes into consideration the International Financial Reporting Standards that proposes harmonization of accounting standards across various nations (Accounting in the International Business, 2000).

These rules are not mandatory to be abided by nations. Each nation takes its own accounting standard into consideration along with the determinants of National Accounting Standards, tries to find the best practices of the IAS, and merges them into their national accounting standards. The nations represented in the IASB follow a voting process to bring about an IAS. The level of acceptance of IAS is slowly increasing as seen by the level of improvement shown by many countries towards accepting most of the international accounting principles (Ding, Hope et al., 2005).

Determinants of National Accounting Standards

The determinants of National Accounting Standards are explained below in detail:

a)      Relationship between Business and Providers of Capital

The individuals representing a business organization borrow capital from investors, banks and other financial institutions for establishing their enterprise and for working capital expenditures, and they, in turn, provide returns to the capital in the form of dividends or interests to the shareholders and lenders respectively. Information in the form of balance sheets, profit, and loss statements are also provided by the firms to the stakeholders. The national accounting standards are affected by the approach the firm should follow to provide the financial information of the company.

b)      Level of Inflation

Depending on the level of inflation in an economy, accounting principles for cost accounting are impacted. Nations with stable inflation mostly follow the historic cost principle, while economies with fluctuating inflation adopt the current cost accounting method into consideration.

c)      National Culture

A nation’s culture plays an important role in devising accounting rules. Behavior and risk taking attitude influence the way in which a nation can devise strong accounting rules with strict compliance (for low risk taking countries) or believe in voluntary compliance by firms (for high risk taking countries).

d)      Level of Economic Development

The level of economic development is an important determinant of NAS. A country with higher level of growth and development, educated workforce, and strong capital markets lead to well-designed accounting standards with more transparency in reflection of financial performance.

e)      Political and Economic Ties with other Countries

Nations converge on trade or export-import business to form unions or groups so that the rules benefit them mutually, leading to stronger economies. Countries that have joined hands together may follow common national accounting standards e.g., EURO Zone.

Case Focus – India

Adopting International Accounting Standards

India has constituted a committee to discuss and evolve their accounting standards with an eye of converging them with IFRS. The National Advisory Committee on Accounting Standards (NACAS) in consultation with ICAI analyses the determinants of national accounting standards from time to time. Various modifications are done to the Indian Accounting Standards so that the financial statements can be more transparent and accurate in nature.

To enable international adapted accounting principles, two groups have been prepared by NACAS (Ministry of Corporate Affairs, 2009). One group has responsibility of reviewing current accounting standards and making suitable modifications in them. The second group concentrates on implementation challenges in adopting all IFRS principles.

Country Difference in National Accounting Standards and IAS

India is taking proactive approach towards integrating the national accounting with the international accounting standards. ICAI is a member of the International Federation of Accountants (IFAC) (United National Conference on Trade and Development, 2006), and hence the basis of Indian accounting standards are strongly influenced by IASB. The divergence of the Indian Accounting standards and IAS are due to the following factors:

Level of economic development in India

India is one of the major developing economies in the world today. In the last decade, India’s growth rate ranged between 6 and 8 on a year-to-year basis. RBI has the onus to regulate the monetary flow in the country and also take care of foreign exchange reserves. The Banking Regulation Act and SEBI’s guidelines determine the practices in accounting to be followed by Indian Companies.

(Reserve Bank of India, 2011-12)

Culture

The culture of India is very complex owing to its varied languages, customs, practices, etc. India is the second most populated country in the world, and hence the accounting principles followed by India are considered as a major determinant of the harmonization or divergence of accounting principles adopted internationally. The guidelines issued by the regulators and ICAI mandate the countries to follow Code of Ethics as per the Chartered Accountants Act, leading to strong compliance by the companies operating in India. Also, any malpractice or divergence to the accounting standards will lead the ICAI to take appropriate disciplinary action against the companies.

Relationship between Business and Providers of Capital

The investor market in India is very favorable with domestic and foreign investors showing their interest in investing in the Indian markets. India’s workforce is regarded as cost-effective and efficient, hence proving to be the outsourcing capital of the world. At the same time, Indian companies with their excellent profit record are also investing in mergers and acquisitions with foreign companies. The legal regime currently prevalent in India is giving rise to differences between national and international accounting. Compliance between them is currently being ensured through full disclosures in appendices, etc.

Inflation

On the inflation front, the central government is taking measures to bring it to normal levels. However, given the international demand – supply gap, the inflation is currently in the higher range. On the exchange rate, Indian companies are mandated to show the effect of foreign currency changes on the current fixed asset costs, whereas the IAS suggests showing the gain or loss on foreign currency fluctuations on the Income statement, hence leading to the differences.

Political and Economic Ties with Other Countries

India has strong political and economic ties with US, UK, China, Russia, Germany, Japan and other major countries. However, because there are markets in India that are not as mature as they are in other developed nations, ICAI has not propagated the fair value approach in determining the prices of goods and services in the market.

Also considering the cost of complying with the IFRS standards, it is expected that India would take both cautious and conscious approach of merging the national accounting standards with international accounting rules.