Financial Convergence Taking Place Around The World And How It Is Taking Place (Essay Sample)

Part A
“For users of published financial statements, the international convergence of national and international accounting standards into one set of internationally recognized and applied financial reporting standards, promised great benefits but it was never going to be achieved on a global scale.”
Introduction
As globalization takes centre stage, it can be seen that more and more elements of the world converge to a common point. This is also true for national and international standards of accounting. As global markets and more importantly the capital markets of the world become more integrated, there is a need for efforts to develop a single and uniform set of accounting and auditing standards which are globally accepted and allow the facilitation of a single set of rules and guidelines for the whole world (Nguyen & Gong, 2012). The users of financial information involved in the capital markets need a set of international standards which allow the information to be consistent on a global basis, uniform for regulatory regimes and rules and are of high quality. In order to develop a set of globally accepted and uniform set of accounting standards, FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board) have looked to converge their two accounting standards together.
This has meant that GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) are set to converge over time into a set of standards which are much more homogeneous (Zhang & Liu, 2010; Jorda & Sarabia, 2015). Convergence of the standards has meant that there is an elimination of differences which used to exist between the two standards with the use of a program which will make sure that any differences that exist between the two standards are eliminated over a certain time frame. The convergence would also mean that new treatments and guidelines are introduced which did not exist in a standard beforehand in order to allow for a smoother phase of convergence to take place. There are still a few challenges that are in place which have complicated the process of convergence.
Benefits of Convergence
There are many benefits of convergence which can be obtained by the participants of the capital markets. The output which can be obtained from the new accounting standards can be used by a variety of capital market stakeholders who will be able to understand the information in a better manner as they can understand and translate the information by themselves (Sarala & Vaara, 2010; Telo, 2013). As more and more countries sign on to becoming part of either accounting board and start the journey of convergence, they will be able to comprehend the information being presented to them and will be able to analyze them rather than having to convert it into their own standards. Translating or converting the information can mean that much of the information will be lost in translation. As globalization takes place and Multinationals start to move across borders, accounting complexities will decrease as companies will be able to compile, publish and interpret the information they are presenting.
This reduces the administration cost of compilation and consolidation and allows for comparison to take place between the different countries and departments operating around the world. It allows investment and performance appraisal to be carried out while staff and accounting personnel can move across countries with little complication. The Financial Stability Forum and its 12 Key Standards show that convergence is needed to allow for a more resilient financial system to exist all over the world (Schroeder et al., 2011).
This leads to long term advantages as the investors have more confidence and understanding of the financial information being presented to them. This allows all the market participants to make informed decisions and invest more efficiently in the country they are investing in. As financial and administrative complications decrease, the risk and cost associated with the companies and investment also decreases. Long term planning can also gain as companies are able to analyze the information and are able to act on them in terms of mergers, acquisitions and investment to be carried out.
Challenges to Convergence
Still there are certain obstacles and challenges that do exist which do not allow for a wide scale application of convergence to be carried out. These challenges are a hindrance to the process of convergence and do not allow the applicability to be carried all over the world. These obstacles can be seen as being the differences that exist between the accounting treatments being carried out by the countries already. The differences which exist are too large and need much more effort before convergence can be achieved. Certain countries have a focus on looking to maximize the fair value and shareholders’ value of the company while other countries look to favor measures which understate the company’s value by following conservative practices.
The need for conserving the value and income of the company is to understate the tax expense and allowance for creditors to be carried out. This means that a fundamental difference of valuation exists which needs to go through a rethink in order to allow for the difference to be overcome (Qu & Zhang, 2010; Douglas & Craig, 2011). The conservative outlook of certain countries has to be kept in mind while aggressive and shareholder oriented of the other have to be reconciled and a compromise has to be reached. This means that an attitude change and law based change has to be carried out which takes into account the two extremes that exist in the world. Global standards can look to lessen the gap but an overhaul is needed in order to bridge the gap fully. In addition to that, there are also certain cultural requirements and needs which need to be kept in mind. Even if a uniform standard is chosen and applied, these cultural differences will still exist.
Cultural differences are in place due to the business environment and social code of the country. Even if a single standard is applied, the culture difference would mean that people will mould the financial statements and have a leaning towards their cultural requirements and needs. These are some of the differences which make global application difficult if not impossible. Cultural leanings can also be rooted in a sense of nationalistic pride and nationalism (Griffith, 2010). Countries might want to apply the standards but their nationalistic sense can triumph any standard and they will want to impose their national identity or cultural sensibility over the standard which can make applicability difficult. Lastly, there is no international financial or regulatory body which can impose a single standard or a program of convergence on all countries. As there is no overruling authority, the convergence can be delayed, suspended or can even be rejected by either of the bodies which are involved in the convergence process.
As the whole process is based on the cooperation and compromise of the two accounting boards, non-cooperation from either can mean that a stalemate or deadlock exists in the process which can stunt the whole process. Having a regulatory body overseeing the whole process can mean that some form of progress is taking place but as there is no such body, the process is on the discretion of the two boards and can be applied or implemented based on their choice.
There are also problems and issues which can be leveled at the process of convergence which also prove to be detrimental to the process of convergence as well. The process of convergence is like using a band aid for a surgery as it tries to apply a simple solution to a complex problem. Standards have been developed over a long period of time and cannot be changed or modified very easily. These standards are also flexible and can be applied based on the need but applying one standard reduces their functionality and flexibility. Application of a uniform standard challenges the national sovereignty and identity of a country and companies are not able to have a fair representation of their position and they would like to present them. This is also seen as western dominance of accounting policy being implemented throughout the world as they have a say in the convergence process while large accounting firms also get to practice their control and are able to expand their market share under the veil of convergence (Barlish et al, 2013).
Lastly, there is a need to retrain the accountants once any new development takes place and using a single set of standard means that if ...