Globalization and International Accounting

Abstract

This article focuses on international accounting. It provides a description and analysis of the principle international accounting standards as developed by the International Accounting Standards Board (IASB). The push for a harmonization and convergence of international accounting and financial reporting methods and practices is addressed. The relationship between international accounting standards and economic globalization is explored. This article discusses the issues related to the United States' adoption of international accounting standards.

Overview

Accounting systems, which include accounting concepts, reporting practices, and principles, reflect the culture, philosophy, goals, and objectives of their users. Modern accounting systems are increasingly international in scope and standards. Economic globalization has created the demand for shared international accounting principles, standards, and practices. International accounting refers to accounting practices that cross national boundaries or is conducted in a location other than the firm's home country. International accounting encompasses “multinational enterprises, global movements to shape the direction of accounting, and comparative accounting requirements and practices” (Prather-Kinsey & Rueschhoff, 2004). The stakeholders of international accounting, including shareholders, corporations, and governments, require accurate and comparable economic data to make economic decisions and govern (Speidell & Bavishi, 1992). Comparable systems of transnational financial reporting facilitate international investment.

Globalization & the Harmonization of Accounting Practices. A lack of harmonization between national accounting laws characterized accounting practices in the twentieth century. Cultural and philosophical differences have historically been the norm in national accounting systems. Nations have based their accounting systems on culturally-specific consolidation practices and long-term investments. Differences in accounting concepts, reporting practices, and principles remain common between nations. For example, the United States' Financial Accounting Standards Board promotes the U.S. generally accepted accounting principles (US GAAP). Countries such as Japan and Canada, which conduct significant trade and investment with the United States, supplement their national accounting systems with US GAAP. The European Union has mandated the adoption and use of International Financial Reporting Standards (IFRS). Diversity in international accounting practices challenges global markets and global trade. Significant differences in international accounting concepts, reporting practices, and principles compromise the ability of national businesses and industries to compete in international markets (Wells & Thompson, 1995). The lack of harmonization in international accounting practices is creating friction and roadblocks in the process of economic globalization.

Economic Globalization. Economic globalization results from the end of financial barriers, political changes, and new communication technology. The global economy is characterized by growth (in populations and in output and consumption per capita), interdependence of nations, and international management efforts. Indicators of global growth and interdependence include the huge increases in communication links, world output, international trade, and international investment since the 1970s. The global economy is built on global interdependence of economic flows linking the economies of the world. The global economy is characterized by economic sensitivity. National economic events in one region often have profound results for other regions and national economies. National economies exist not in isolation but in relationship and tension with other economies worldwide.

The global economy includes numerous economic phenomena and financial tools shared between all countries. The new global economy is characterized and controlled through global management or governance efforts. International organizations, both public and private, work to establish norms, standards, and requirements for international financial governance. These international organizations, including the International Accounting Standards Board (IASB), G-20, Financial Stability Forum, the International Organization of Securities Commissions Organization for Economic Co-operation and Development (OECD), and the Basle Committee on Banking Supervision, develop and encourage implementation of economic standards, principles, best practices, and economic architecture (Preston, 1996).

Convergence. Increased international financial activity necessitates the alignment and harmonization of national accounting practices. In the twenty-first century, the main trend in international accounting is convergence and harmonization. In the field of international accounting, convergence refers to the standardization of national accounting standards. International accounting harmonization (IAH) is a goal shared by governments, international accounting organizations, and businesses. Accounting harmonization refers to the reduction of difference in accounting practices among countries. An international accounting harmonization system (IAH system) would create a common denominator for measuring, recording, and reporting business transactions, liabilities and equities. The process of developing an IAH system will involve the selection of either Fair Value Accounting (FVA) or Historical Cost Accounting (HCA) as the shared common denominator for all international accounting practices (Barlev & Haddad, 2007).

The forces of globalization and global markets make international accounting standards necessary and advantageous for most countries. The harmonization of accounting concepts, reporting practices, and principles will allow for a level field of economic competition for all nations. The major international accounting organizations are working together with nations to build a framework for global financial reporting that is sensitive to the diversity of cultural environments worldwide. In addition, the new international accounting framework will be developed to respect differences in the following accounting values: Professionalism, statutory control, uniformity, flexibility, optimism, and transparency (Marrero & Brinker, 2006).

The following section provides a description of the principle international accounting standards as developed by the International Accounting Standards Board. This section serves as a foundation for later discussion about the issues related to the United States' adoption and accommodation of international accounting standards.

Applications

International Accounting Standards. The International Accounting Standards Board, known prior to 2001 as the International Accounting Standards Committee (IASC), is one of the main international organizations responsible for setting international standards for accounting and reporting practices. The International Accounting Standards Board uses a framework that defines terms used in financial accounting statements worldwide for the measurement of financial positions. The International Accounting Standards Board describes the terms of assets, liability, equity, income, expenses, in the following ways:

• Assets refer to resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
• Liabilities refer to present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
• Equity refers to the residual interest in the assets of the entity after deducting all of its liabilities.
• Income refers to the increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity.
• Expenses refer to decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or liabilities that result in decreases in equity (“Framework,” 2008, p. 1-2).

International Financial Reporting Standards. The International Accounting Standards Board publishes and distributes its standards in reports under the name International Financial Reporting Standards (IFRS). Prior to 2001, the International Accounting Standards Committee (IASC) issued its reports under the name International Accounting Standards (IAS). The International Accounting Standards Board has honored and adopted the International Accounting Standards Committee's numerous International Accounting Standards. Nations committed to international financial activity are increasingly adopting International Financial Reporting Standards and International Accounting Standards. Common International Financial Reporting Standards include the following:

• First-time Adoption of International Financial Reporting Standards: The IFRS includes directives for the first time adoption of its standards. In particular, the IFRS dictate the content and timing of a business entity's first IFRS financial statements.
• Share-based Payment: The IFRS includes directives and standards for three types of share-based payment transactions including: Equity-settled share-based payment transactions, cash-settled share-based payment transactions, and transactions in which a business entity acquires goods or services. Equity-settled share-based payment transactions refer to transactions in which the business entity receives goods or services in exchange for equity instruments. Cash-settled share-based payment transactions refer to transactions in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services. Transactions in which a business entity acquires goods or services refer to transactions in which the terms of the arrangement include options for payment in goods and services.
• Business Combinations: The IFRS considers a business combination the conglomeration of separate entities or businesses into one reporting entity. The IFRS stipulates that business combinations be accounted for through the application of the purchase method.
• Insurance Contracts: The IFRS defines an insurance contract to be a contract under which “one party accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder.” Insurance contracts involve the insurer, the policyholder, and the insured event. Insurance contract disclosure is required to help stakeholders understand the amount in the financial statement that results from insurance contracts and the amount of future cash flows anticipated from insurance contracts.
• Non-current Assets Held for Sale and Discontinued Operations: The IFRS considers a non-current asset held for sale to be an asset carrying an amount that that will be recovered principally through a sale transaction rather than through continued use. Non-current assets held for sale are required to be available and ready for immediate sale in their current condition. Business entities claiming that they have significant non-current assets held for sale must be actively marketing and publicizing these items for sale.
• Exploration for and evaluation of Mineral Resources: The IFRS considers exploration and evaluation expenditures to be expenditures that are “incurred by an entity in connection with the exploration for and evaluation of mineral resources before technical and commercial feasibility” of extracting mineral resources is able to be demonstrated.
• Disclosures: According to the IFRS, disclosures are the financial instruments used to evaluate a business entity's financial position and performance. A business entity's disclosures must include information on the nature and extent of risks that it faces.
• Operating Segments: The IRFS dictate how a business entity should report financial information about its operating segments and reportable segments. Operating segments refer to components of an entity “about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.” Reportable segments refer to specific operating segments that meet specific needs or criteria.

Common International Accounting Standards include the following:

• Presentation of Financial Statements: The IAS specifies that annual financial statements must include a balance sheet, an income statement, a statement of changes in equity, and a cash flow statement.
• Inventories: The IAS specifies that inventories be evaluated using a first-in, first-out, or weighted average cost formula.
• Cash Flow Statements: The IAS requires business entities to issue cash flow statements with information about cash and cash equivalents. The IAS defines cash flows as inflows and outflows of cash and cash equivalents. Cash includes cash on hand and demand deposits. Cash equivalents refer to short-term, liquid investments with a stable and known value.
• Accounting Policies, Changes in Accounting Estimates and Errors: The IAS dictates procedures for accounting policies, changes in accounting, and prior period errors. Accounting policies refer to “the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.” Changes in accounting estimates refer to adjustments of the carrying amount of an asset or a liability. Prior period errors refer to omissions and misstatements in a business entity's financial statements from one or more prior reporting periods. Errors include mathematical mistakes, accounting problems, oversights, and misrepresentations.
• Income Taxes: The IAS controls the accounting practices used for income taxes. Income taxes refer to all domestic and foreign taxes that are based on taxable profits. The IAS related to income taxes focus on recognition, measurement, and allocation. The IAS includes very detailed instructions for the reporting of financial information about leases in financial statements.
• Leases: The IAS separates leases into the two categories of operating leases and finance leases. An operating lease refers to a lease that does not transfer the risks and rewards associated with ownership. In contrast, a financial lease refers to a lease that transfers all the risks and rewards associated with ownership.
• Revenue: The IAS considers revenue to be the “gross inflow of economic benefits during the period arising in the course of the ordinary activities of a business entity when those inflows result in increases in equity.” The IAS specifies that revenue must be evaluated and measured at the fair value of the item. Fair value refers to “the amount for which an asset could be exchanged or a liability settled.”
• Borrowing Costs: The IAS considers borrowing costs to be the interest and other costs incurred by an entity in connection with the borrowing of funds. The IAS specifies that borrowing costs must be recognized and reported as an expense during the fiscal period in which they occur.
• Interests in Joint Ventures: The IAS dictates the accounting practices involving interests in joint ventures. This standard applies to the accounting of joint venture assets, liabilities, income, and expenses. The IAS defines joint ventures as a “contractual arrangement whereby two or more parties undertake an economic activity that is under joint control.” There are three main types of joint ventures: Jointly controlled operations, jointly controlled assets, and jointly controlled entities.
• Earnings per Share: The IAS controls how earnings per share are to be reported. The IAS applies to ordinary shares and potential ordinary shares. Ordinary shares refer to “an equity instrument that is subordinate to all other classes of equity instruments.” Potential ordinary shares refer to financial instruments or other contracts that may entitle its holder to ordinary shares.
• Investment Property: The IAS controls the accounting practices applicable to investment property. Investment property refers to property held to earn rentals or capital appreciation. The IAS specifies how investment property can be valued and derecognized.

In addition to the standards described above, the IAS provides accounting and reporting directions and specifications about numerous other topics and fields. Examples include agriculture; employee benefits; accounting for government grants; disclosure of government assistance; incorporating the changes in foreign exchange rates; property, plant and equipment; related party disclosures; reporting on retirement benefit plans; consolidated and separate financial statements; financial reporting in hyperinflationary economies; interim financial reporting; impairment of assets; contingent liabilities; contingent assets; intangible assets; and construction contracts.

Shared, harmonized, and comparable international accounting standards, as described above, are a necessary feature or tool of economic globalization. The pace of adoption of international accounting standards will vary between countries, as described in the next section, but the existence and growing relevance of international accounting standards will not.

Issues

The United States & International Accounting. The United States stands apart from most other industrialized countries in the pace of its adoption of shared international accounting standards. In 2002, the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) began the FASB/IASB convergence project with the signing of the Norwalk Agreement. The Norwalk Agreement, also referred to by the FASB and the IASB as a roadmap for convergence and a memorandum of understanding, is a pledge between the accounting organizations to work toward a shared set of global accounting standards. The FASB and IASB are working to develop converged standards on the following topics: Business combinations, consolidations, revenue recognition, and post-retirement benefits.

Since beginning their efforts in 2002, the FASB and IASB have developed updated international accounting standards called the International Financial Reporting Standards (IFRS). In 2005, the European Union mandated that businesses adopt the IRFS. The IRFS are replacing national accounting standards worldwide. In the United States, the U.S. Generally Accepted Accounting Principles (US GAAP) dictates accounting standards and practices. Countries that do significant trade and investment with the United States often supplement their own national accounting practices with US GAAP. By 2018 in the United States, the Security and Exchange Commission (SEC) was still debating whether or not to replace the U.S. GAAP with the IRFS. The accounting industry in the United States would undergo a paradigm shift if or when the SEC allows U.S. businesses to satisfy accounting and reporting requirements through IFRS practices and reports.

Training & Education. The issue of training and education is slowing the United States' adoption of IFRS. For example, the majority of financial auditors in the United Sates do not currently have sufficient IFRS technical experience to audit companies reporting in IFRS. When the standards switch occurs, the Certified Public Accountant (CPA) examination will have to be revised to include testing of items based on IFRS. Colleges and universities will need to train their professors and revise their curricula to begin to teach IFRS. Ultimately, when the United States fully adopts the IFRS, the United States will have to transition with patience and significant aid to private industry. When the SEC mandates IFRS for U.S. registrants, the SEC will likely institute a multi-year period during which businesses and universities could educate their personnel about IFRS, integrate IFRS into the curriculum and licensing exams, and update their existing accounting systems (Gupta & Linthicum, 2007).

Policy Regimes. Ultimately, the issues associated with the United States' adoption of international accounting standards relate to larger issues of independence and governance. The United States must decide to what degree the nation will exchange national economic governance for global economic governance. The global economy is managed and coordinated by international organizations or policy regimes. According to Preston (1996), policy regimes refer to the “arrangements and understandings that facilitate international harmonization and coordination of economic, environmental, and political” affairs. As Preston writes, policy regimes tend to be cooperative, mutually-beneficial alliances. There are four main types of international policy regimes:

• Global and comprehensive regimes refer to regimes that can “encompass the entire globe and any sphere of international activity.”
• “Regional and associative regimes refer to agreements and understandings of less than global scope and with varying levels of comprehensiveness within their geographic limits.”
• “Functional economic regimes refer to arrangements that might be global in geographic impact but with explicitly limited functional scope.”
• “Environmental regimes refer to agreements involving natural Resources” and the natural environment.

Major international policy regimes that manage and control the global economy include the United Nations, International Monetary Fund, World Trade Organization, the World Bank, and the Organization for Economic Co-operation and Development. Regional policy regimes, such as NAFTA and the European Union, also have great control and influence over the global economy. Policy regimes are characterized by their scope, purpose, organizational form, decision and allocation modes, and strength.

• Scope refers to the “sphere of international economic or business activity covered by the regime.”
• Purpose refers to the specific objectives intended.
• Organizational form refers to the institutional structure and membership.
• Decision and allocation modes refer to the role of voting or other group decision-making processes.
• Strength refers to the “extent to which members conform to the norms and guidelines of the regime” (Preston, 1996).

The United States will continue to negotiate its relationship to international accounting standards, policy regimes, and international governance as part of the nation's involvement in international economic activity and economic globalization.

Conclusion

In the final analysis, international accounting is a tool that allows for financial transactions, decision-making, and participation in global markets. International accounting standards reflect the cultures, philosophies, goals, and objectives of their users. In today's global economy, international accounting is becoming increasingly harmonized to accommodate and facilitate international financial activity.

Terms & Concepts

Accounting Systems: An overall approach to accounting concepts, reporting practices, and principles.

Assets: Resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity (“Framework,” 2008, p. 1-2).

Convergence: Standardization of national accounting standards.

Disclosures: The financial instruments used to evaluate a business entity's financial position and performance.

Fair Value: The amount for which an asset could be exchanged or a liability settled.

Harmonization: The reduction of difference in accounting differences among countries.

Equity: The residual interest in the assets of the entity after deducting all of its liabilities (“Framework,” 2008, p. 1-2).

Expenses: Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or liabilities that result in decreases in equity (“Framework,” 2008, p. 1-2).

Income: The increases in economic benefits during the accounting period in the form of inflows or enhancements of assets of decreases of liabilities that result in increases in equity (“Framework,” 2008, p. 1-2).

International Accounting: Accounting practices that cross national boundaries or are conducted in a location other than the firm's home country.

International Accounting Standards Board: The international organization responsible for setting international standards for accounting and reporting practices.

Liabilities: Present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits (“Framework,” 2008, p. 1-2).

Policy Regimes: The arrangements and understandings that facilitate international harmonization and coordination of economic, environmental, and political affairs (Preston, 1996).

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Suggested Reading

Cummings, J., & Chetkovich, M. (1978). World accounting enters a new era. Journal of Accountancy, 145, 52-61. Retrieved October 1, 2007, from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=4576932&site=ehost-live

FASB and ASBJ discuss global convergence. (2007). Strategic Finance, 89, 19. Retrieved October 1, 2007, from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=26271070&site=ehost-live

Fleming, P. (1991). The growing importance of international accounting standards. Journal of Accountancy, 172, 100-106. Retrieved October 1, 2007, from EBSCO online database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=4575528&site=ehost-live

Guillaume, O., & Pierre, D. (2016). The convergence of U.S. GAAP with IFRS: A comparative analysis of principles-based and rules-based accounting standards. Scholedge International Journal of Business Policy & Governance, 3(5), 63–72. doi:10.19085/journal.sijbpg030501. Retrieved February 26, 2018, from EBSCO online database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=117662254&site=ehost-live&scope=site