Over the last old ages, the International Accounting Standards Board ( IASB ) and the Financial Accounting Standard Board ( FASB ) are working on the constitution of a set of international accountings criterion to cut down fluctuation in accounting pattern and present a grade of uniformity into fiscal coverage which will take to a better comparison between companies and therefore, will increase the grade of confident in the market.
In 2005, the execution of the International Financial Reporting Standards ( IFRS ) , created by the International Accounting Standards Board ( IASB ) , for all companies listed on all stock exchanges in the European Union ( EU ) brings a chief alteration in the rating of assets. Indeed, IFRS constrains these companies to use the Fair Value Accounting ( FVA ) techniques to measure the value of an increasing assortment of assets. The IASB defines the Fair Value as being “ aˆ¦ the sum for which an plus or liability could be exchanged between knowing, willing parties in an arm ‘s length dealing ” . ( IASB 1999-IAS19, preface, Perry and Nolke, 2006 )
The major issue with this rating technique concerns the IAS 39, covering with acknowledgment and measuring of fiscal instruments ( well revised in 2003 ) . For companies that invest, borrow or use derived functions significantly raises the criterion larger than any old criterion in all countries of accounting. For early adoptive parents, the criterion changes the manner they account for their fiscal instruments and it involves important alterations in systems, processs and certification. Some alterations in IAS 39 affect preparers of histories under IFRS, in countries such as the categorization of assets, derecognition and other cardinal countries. ( FocusIfrs.com )
These alterations impact the balance sheets of fiscal establishment which are more sensitive to the fluctuation in the just monetary value. Furthermore, the Global Crisis highlighted this delicate inquiry of the just rating of fiscal instrument as political organic structures seems to believe that it has contributed to increase the effects of the crisis on Bankss, fiscal markets and the overall economic system ( Bengtsson, 2011 and Walliser, 2012 ) .
The thesis is non aimed to analyze which rating method is the best in the populace ‘s involvement but to do an overview of different theories of accounting ordinance in a planetary context with a focal point on the IASB.
In order to be able to place these different theories, this literature reappraisal will discourse the old research paper on this topic. The first portion focuses on the creative activity of a individual set of accounting criterions while the 2nd 1 is about the controversial construct of just rating of fiscal instrument.
The creative activity of a individual set of accounting criterions
Why the European Union want a individual set of accounting criterions
Harmonizing to Thorell and Whittighon ( 1994 ) fiscal accounting is a tool of communicating between the company and the remainder of the universe. However, fiscal accounting is regulated by different regulations in conformity with the state where they come from. Each state has its ain National Accounting Standards and they differ from one state to another, making some troubles for investors and companies who are runing internationally and/or have portions that are traded on fiscal markets and who have to fulfill the information needs for investors in different states.
Presents, a figure of factors have conducted to the demand of a common set of accounting criterions. Carmona and Trombetta ( 2008 ) , mentioning to other surveies ( Flower, 2004 and Ball, 2006 ) gave some illustrations like the political integrating ( particularly in the European Union ) or the globalisation of fiscal markets. Akman ( 2011 ) added that the addition in transverse state capital transportations and foreign direct investings evolved the necessity of extinguishing or minimising the differences in accounting criterions to heighten comparable fiscal information globally. A common set of accounting criterions would besides let a free flow of fiscal information required for the construct of a common market which would allow a free mobility of capital, labor and endeavor, every bit good as trade, across the boundary lines between member states. The thought of a common market is a cardinal aim of the European Union and, every bit good as the world-wide integrating of the fiscal markets or illustration, they are the forces that encourage the development of a individual set of accounting criterions throughout the universe. ( Thorell and Whittighon, 1994 and Hopwood, 1994 )
As a consequence of such developments, several establishments have emerged:
the International Accounting Standards Board ( IASB ) ,
the Financial Accounting Standards Board ( FASB ) ,
the OECD Working Group on Accounting Standards,
the UN Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting,
the EU ‘s Accounting Advisory Forum,
the International Federation of Accountants ( IFAC ) ,
the International Organization of Securities Commissions ( IOSCO ) ,
the Federation des Experts Comptables Europeens ( FEE )
There besides are other regional and international regulative, occupational and force per unit area groups that have been created in order to harmonise the accounting criterions. They all have different involvements and a really active politic motion has emerged between them. ( Hopwood, 1994 ) The fact that political organisations are involved in the creative activity procedure is non surprising because they all want to maintain their ain accounting criterion and this is the ground why the determination of the European Union ( EU ) to give the duty of making a individual set of accounting criterions to a private organic structure on which the EU does non hold control is unanticipated. ( Chiapello and Medjad, 2009 ) However, Perry and Nolke ( 2006 ) explain the pick of the EU to farm out the creative activity of the accounting criterions by the fact that the EU did non desire to follow with the FASB and therefore, professing control of the accounting ordinance to a US criterion compositor.
In their survey, Chiapello and Medjad ( 2009 ) examine the possible grounds why the EU gave such a duty to a private organic structure. First, it appears that there was no other option as the EU ‘s members were non able to hold on a common accounting system. The IASB was the lone feasible option because their criterions could be applied as “ Global private criterions ” and non as “ Foreign private criterions ” which is more acceptable for the host state. Furthermore, unlike criterions created by governmental bureaus, IASB/IFRS criterions are expected to better reflect markets ‘ and societies ‘ concerns. The rational and lower cost of this option seems to be another ground to explicate the outsourcing of the creative activity of a individual set of accounting criterions to a individual private bureau ( Chua and Taylor, 2008 ) . Indeed, the IASB criterions are considered to be “ soft-law ” ( Non-mandatory rules that may hold practical effects ) and therefore, could let the EU to salvage money by stepping back and by allowing the IASB creates internationally recognized criterions without holding to pay anything ( Chiapello & A ; Medjad, 2009 ) .
However, such outsourcing must besides be perceived to be legitimate and, because they have three features required of a engineering for planetary administration ( e.g. sponsorship by powerful involvement groups/regulators, internationalism and malleability ) ( Chiapello & A ; Medjad, 2009 ) , and because it is the replacement of the IASC ( Whittington, 2008 ) , the IASB can be considered legitimate. However, Chua and Taylor ( 2008 ) besides said that reassigning the accounting standard puting procedure to an organisation outside national boundaries may be a agency of extinguishing what many in the regulative and political scene may see as a ”messy ” procedure at the national degree. One the other manus, Walker ( 2010 ) adds that a common set of accounting criterions could forestall the creative activity of a better manner to modulate the fiscal markets and the accounting patterns. His paper argue that the different histrions in the accounting universe disagree on what do a good accounting and reveal that the chief dissension concerns the accounting constructs ( i.e. range, aims and means to accomplish the aims of fiscal coverage ) .
The fact that the SEC ( The United States Securities and Exchange Commission ) allows foreign companies describing under IFRS to avoid supplying rapprochement with US GAAP could be a mark of a possible convergence between the IASB and the FASB. Furthermore, the two administrations create criterions on a common base and aline their dockets. In the hereafter, the SEC may besides let domestic US listed companies to follow with the IFRS norms alternatively of the US GAAP ( Whittington 2008 ) . However, in their research, Chua and Taylor ( 2008 ) found that it is really improbable to see these two accounting criterions co-exist and that the determination of the SEC may, really, detain the convergence of these two criterions compositor every bit good as the creative activity of a individual set of accounting criterions by a alone international criterion compositor.
Notice that the acknowledgment of the IFRS in the EU has raised several issues. The chief one concerns the IAS39 on the rating of the Financial Instrument ( Fair Value Accounting ( FVA ) versus Historical Cost Accounting ) and the 2nd 1 is about the administration and answerability of the IASB. influence of the Anglo-Saxon Accounting on the creative activity of the criterions. Indeed, the EU organic structures ( the Commission and the Parliament ) would wish to increase their control over the IASB to avoid a excessively big influence of the Anglo-Saxon Accounting on the criterions creative activity and therefore avoid the laterality of the English-speaking states accounting policies. The determination of the SEC has exacerbated the fright of the EU on the convergence between the IASB and the FASB. ( Bengtsson, 2011 and Whittington, 2008 )
The impacts of the compulsory acceptance of the IFRS in EU after 2005
In 2005, the European Union made the accounting criterions created by the IASB mandatary for the listed companies. This was purpose to ease the comparing between European companies. However, some writers examined the existent impact of this compulsory acceptance on the quality of revelations and of the harmonisation of accounting patterns.
In their survey, Carmona and Trombetta ( 2008 ) states that, due to their nature, the accounting criterions do non needfully alter the coverage patterns. Indeed, the IAS/IFRS criterions, every bit good as the Generally Accepted Accounting Principles ( GAAP ) , are “ principle-based alternatively of “ rules-based ” . It gives a certain degree of flexibleness as it provides cardinal aims and guidelines that inform minutess and economic events. In the instance of the IASB, the “ principles-based ” allows houses to construe and accommodate the criterions to their ain accounting patterns, enable a speedy development and application of these norms throughout the universe. However, it is of import to detect that a deficiency of regulations can besides take to undependable and inconsistent information, doing the comparing between companies hard ( Nelson, 2003 ) . Carmona and Trombetta ( 2008 ) therefore noticed that companies use the flexibleness offers by the “ principles-based ” criterions to maintain their accounting policies. They besides found that the acceptance of the IAS/IFRS norms did non take to a complete uniformity of accounting interventions. On the other manus, they observed that the quality in voluntary revelations has improved while it is non ever the instance after 2005.
Conversely, Akman ( 2011 ) investigated to cognize if the usage of IFRS eliminates the impact of cultural dimensions on the fiscal revelation because the states portion the same set of criterions. The survey uses a sample of 498 firm-year observations from six states for the period between 2004 and 2006 and shown that civilization still plays a function in the fiscal revelation degrees of companies even after the acceptance of IFRS, although the degree of revelation additions in all states examined following the acceptance of IFRS. By saying that, even after using the IFRS norms, companies are taking advantage of its flexibleness to retain bing accounting policies, Carmona and Trombetta ( 2008 ) and Akman ( 2011 ) came to the same decision: the usage of the same accounting criterions does non wholly extinguish the differences in revelation and companies continue to unwrap information in conformity with their cultural background.
Ultimately, the alteration in the accounting criterions influences in a certain manner the administration of a company because they format the company ‘s position ( degree of net income, debt ratio equity, turnover etc… ) by the remainder of the universe and therefore, act upon the company ‘s scheme. The alteration in criterions could be seen as a opportunity to measure in which manner the accounting policies influence a company ‘s administration and how the recording of the economic sciences minutess could impact on the patterns of companies. ( Chiapello, 2005 )
The construct of just rating of fiscal instrument
The Fair Value Accounting
The accounting criterions harmonisation is in line with the Anglo-Saxon accounting policies. Indeed, the IASB admit that the stockholder position is favored. However, this manner of administration does non take into history of the sustainable development as it is by and large known and despite the ONU ‘s recommendations to take into history the general involvement, it appears improbable that the bulk of the stockholders will follow these inducements. Now the accounting criterions are no longer in the service of economic development based on the production of goods and services ; they are presently supposed to function the utmost celerity of motion of capital. This intent will take to equilibrate sheets every bit volatile as fiscal markets and do cohabitated values of existent minutess, estimated market values and expected values ensuing from computations based on mathematical theoretical accounts for random price reduction rate ( Capron, 2006 ) .
The acceptance of an Anglo-Saxon accounting besides leads to the usage of the Fair Value Accounting ( FVA ) techniques which is opposed to a more traditional accounting method ( e.g. In France or in Germany ) where the rating at the Historical Cost Accounting is preferred. The IASB defines the Fair Value as being “ aˆ¦ the sum for which an plus or liability could be exchanged between knowing, willing parties in an arm ‘s length dealing ” . ( IASB 1999-IAS19, preface, Perry and Nolke, 2006 ) and unlike historical cost, FVA eliminates the direct nexus between the monetary value paid by the house for an plus and the value attributed to this plus in the house ‘s statement. In add-on, FVA favoured the stockholders and enable companies to demo the net incomes really rapidly as a good fiscal public presentation increases the market value of the houses ( Perry and Nolke, 2006 ) . In contrast, the Gallic accounting policy, every bit good as the German one, preferred the prudence and is focused on the creditors instead than on the stockholders. Indeed, net incomes are show merely when they are certain, enabling creditors to cognize, non the fiscal value of a company taking into history fiscal prognosis, but if the company is capable to settle her liabilities ( Chiapello, 2005 ; Perry and Nolke, 2006 ; Chiapello and Medjad, 2009 ) .
Bernstein ( 2002, preface, Perry and Nolke, 2006 ) says that the pick between historic cost and FVA is tantamount to a pick between economic world and comparison. While FVA histories might break reflect current economic world and might theoretically hold more prognostic power, the figure of complex and subjective considerations that is required to bring forth an FVA fiscal statement leads to uncomparable consequences between different clip periods or between different houses.
By taking into history the possible additions ; the new system takes the hazard to record and to apportion additions that are non certain and which may hold non been evaluated decently ( the appraisal is made today by the market, or by an hearer act uponing the market but is non needfully validated by a dealing ) . This pattern can take to a leery market vis-a-vis of a company value while the IASB would wish to reenforce the investors ‘ assurance. This unexpected effect has raised a figure of reaction and in peculiar in the banking sector. Indeed, with 39 ( covering with acknowledgment and measuring of fiscal instruments ) , the IASB favours the guess on the fiscal instrument while bankers use them in order to protect themselves in the long-run ( Gallic bankers have been officially supported by the President Jacque Chirac against the application of the IAS 39 ) . After dialogues, they eventually obtained a really controlled freedom ( Capron, 2006 ) .
IAS 39 and the Fair Valuation of fiscal instruments
The application of the just rating of fiscal instrument impacts the balance sheets of fiscal establishment, doing them more sensitive to the fluctuation in the just monetary value. Indeed if a mark-to-market monetary value is higher than the historical cost so it leads to write-ups of assets and frailty versa. In other words, the application of just value could magnify the rise in stock monetary values in periods of lifting market and downward motions in the diminution stage of the stock. Furthermore, the Global Crisis highlighted this delicate inquiry of the just rating of fiscal instrument as political organic structures seems to believe that it was one of the factor that aggravated the extension and the strength of the crisis on Bankss, fiscal markets and the overall economic system ( Bengtsson, 2011 and Walliser, 2012 ) .
The contraption of the Fair Value Accounting is a common point between the IASB and the FASB. They both believe that this method is superior to historic cost. In their research, Perry and Nolke ( 2006 ) found out that FVA accounting criterions are expected to increase direction efficiency and cut down the principal agent struggle. FVA is besides supposed to cut down the accounting use and the information dissymmetry between directors and stockholders ( Walliser, 2012 ) . However, the combined usage of the Balance Sheet Approach and the FVA can increase the volatility of net incomes caused by the re-measurement of assets values. ( Bernstein, 2002, preface, Perry and Nolke, 2006 )
For states such as France and Germany, in peculiar, this production of accounting criterions by a non-governmental organisation is a cultural revolution and open the door to a considerable volume of critical literature emanating from France ( Raffournier, 2007 preface Chiapello and Medjad, 2009 ) . While the independency of the IASB was the status for the EU ‘s acceptance of IFRS, a repoliticalization of accounting standard scene can be observed as it seemed to be necessary in order to avoid a new crisis. The IASB independency has been sacrificed it in order to reinstall a fiscal stableness and to assist the Bankss. ( Bengtsson, 2011 )
In his paper, Bengtsson ( 2011 ) nowadayss different positions that have been taken about the deduction of the just rating during the crisis. The first group considers that FVA contributed to losingss recorded by fiscal establishments and other houses. Even if small grounds has been found refering the deduction of the FVA, some writers think that this rating method put force per unit area on the balance sheets of fiscal establishments, taking some Bankss to sell assets at down monetary values to avoid transgressing capital demands and therefore doing losingss on the other Bankss ‘ balance sheets ( Allen and Carletti, 2007 ; Appelbaum, 2009 ; Jones, 2009 preface Bengtsson, 2011 ) . Alternatively, the other group believe that FVA allows the appraisal of the true place of fiscal establishments, increasing the transparence of the rating ( Turner, 2008 ; Veron, 2008 preface Bengtsson, 2011 ) , leting so investors and others markets ‘ histrions to separate between hard-pressed and healthy fiscal establishment and hence, to decelerate the patterned advance of the crisis.
While the execution of the IFRS after 2005 should hold cut down fluctuation in accounting pattern and present a grade of uniformity into fiscal coverage which will take to a better comparison between companies and therefore, will increase the grade of confident in the market, some writers ( e.g. Carmona and Trombetta, 2008, Akman, 2011 ) shown that a state civilization still play a function in the application of the IFRS and that the usage of the same accounting criterions does non wholly extinguish the differences in revelation.
With the support of the EU, the diffusion of the IFRS has been comparatively fast, conveying important alterations in some cardinal characteristics of the accounting policies. The chief and the most controversy alteration concerns the just rating of the fiscal instruments framed by the IAS 39 ( acknowledgment and measuring of fiscal instruments ) . With the Anglo-Saxon orientation of the IASB, IAS 39 brings the construct of Fair Value Accounting ( FVA ) techniques to measure the value of an increasing assortment of assets which increase the sensitiveness of fiscal establishments ‘ balance sheet to the fluctuation in the just monetary values, and therefore to the volatility of fiscal markets. The Global Crisis besides highlighted the possible issues raised by the usage of the just rating of fiscal instrument as political organic structures seems to believe that it has contributed to increase the effects of the crisis on Bankss, fiscal markets and the overall economic system.
The deficiency of inside informations and the big reading chances of the IFRS can take to new deceitful patterns, motivated by the profit-seeking throughout the fiscal guess. The focal point of the IASB on the stockholders positions leads to a alteration in the company ‘s administration where they need now to concentrate their determinations on the stockholders wealth maximization alternatively of taking into history the general involvement. The attempts in recent old ages to better coverage to 3rd parties may be delayed or nullified by an accounting system turned to another intent: the publicity of the fiscal guess.