Bachelorarbeit

Fakultät für Wirtschaftswissenschaften

Lehrstuhl für Externes Rechnungswesen

Progress and Obstacles to Convergence with IFRS in Europe

IM/KFK EUR: Rechnungslegung nach IAS/IFRS I

Mag. Magdalena Kuntner

Wintersemester 2013/14

Eingereicht von:

Milena Nagengast

Matrikel Nummer: 0647740

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Table of contents LIST OF ABBREVIATIONS 3 LIST OF FIGURES 3

1. INTRODUCTION 4

2. GLOBAL CONVERGENCE TO IFRS 7

3. DIFFERENCES IN ACCOUNTING SYSTEMS 10

4. IMPEDIMENTS TO CONVERGENCE WITH IFRS 14

4.1. IMPEDIMENTS TO CONVERGENCE WITH IFRS SURVEYED IN 2002 14 4.1.1. THE IFRS/IAS TRANSLATION 18 4.1.2. COMPLEXITY OF STANDARDS 20 4.1.3. TAX DRIVEN NATURE OF ACCOUNTING REGIMES 21 4.2. DEVELOPMENT OF A ‘TWO-STANDARD’ SYSTEM 23 4.3. IMPEDIMENTS TO CONVERGENCE SURVEYED PRIOR TO AND AFTER 2005 25 4.3.1. PERCEIVED IMPEDIMENTS OF OBSTACLES TO CONVERGENCE TO IFRS PRIOR TO 2005 25 4.3.2. IMPEDIMENTS TO CONVERGENCE WITH IFRS SURVEYED AFTER 2005 27

5. THE FUTURE OF THE PROCESS TO GLOBAL CONVERGENCE WITH IFRS 30

5.1. AGENTS WHO CAN SUPPORT THE CONVERGENCE TO IFRS 31 5.2. CHALLENGES TO BE MET IN THE FUTURE PROCESS OF CONVERGENCE WITH IFRS 32

6. CONCLUSION 33

7. BIBLIOGRAPHY 35

           

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List  of  abbreviations  

CFO Chief financial officer

EC European Commission

EEA European Economic Area

EU European Union

FASB Financial Accounting Standards Board

G20 Group of Twenty

GAAP Generally accepted accounting principles

IAS International Accounting Standards

IASB International Accounting Standards Board

IASC International Accounting Standards Committee

IFA International Federation of Accountants

IFAC International Federation of Accountants

IFRIC International Financial Reporting Interpretations Committee

IFRS International Financial Reporting Standards

IMF International Monetary Fond

IOSC International Organization of Securities Commissions

MoU Memorandum of Understanding

SME Small and medium enterprise

TTIP transatlantic trade and investment partnership

UK United Kingdom

US United States

List  of  figures    

Figure 1. Obstacles to convergence with IFRS surveyed in 2002 (source: GAAP

Convergence 2002, BDO et al. 2003: 10)

 

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1. Introduction Under the trend of the continuous process of globalization, there have been many

significant changes in the business world, examples of such changes being the

internationalization of enterprises on many different levels, changes in the

employment of different market entry modes, formation of alliances and cooperation

agreements with enterprises from different parts of the globe, increase in foreign

investment, and so on (Child & Faulkner 1998: 343).

Globalization of the world markets has created many opportunities for capital

investment. However, the differences in accounting frameworks among countries

have also created obstacles to the efficient capital allocation, since more time,

resources, know-how, and so on, began to be required so that investors could

interpret companies’ financial statements, compare them and make a final

investment decision (BDO et al. 2003: 2).

Overcoming such obstacles required a unification of accounting frameworks on an

international level (Erickson, Esplin & Maines 2009: 531). The development of a

single set of accounting standards across national boarders has been the goal of the

International Accounting Standards Board (IASB)1 since its foundation. The aim of

the single set of accounting standards worldwide is to enable comparability between

financial statements and efficient communication between preparers and investors

through firm’s financial statements. This is directly correlated with the

competitiveness of a firm on the global market (Razeae, Smith, & Szendi 2010: 1). In

the words of Frits Bolkestein, European Commissioner for the Internal Market, the

adoption of International Financial Reporting Standards (IFRS) will mean that

“investors and other stakeholders will be able to compare like with like. It will help […]

firms to compete on equal terms when raising capital on world markets” (qtd. in BDO

et al 2003: 2).

Generally speaking, there are many advantages of a single set of accounting

standards, especially in terms of the aforementioned argumentation for the

comparability among different financial statements and efficient communication

between different stakeholders like preparers and users of the financial statements,                                                                                                                1 Initially founded in 1973 under the name International Accounting Standards Committee (IASC) and

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investors, auditors, and so on. Despite these advantages, it has been argued that

differences among countries, such as the diversity in their legal and taxation

systems, financial sources, politics, culture, and so on, may hinder the adoption of

only one single set of accounting standards (Hellmann, Perera & Patel 2010: 108, c.f.

Patel, Harrison, & McKinnon 2002; Evans 2004; Richardson 2007; Kvaal & Nobes

2010). Furthermore, it has been shown that the diversities in accounting traditions

have led to inconsistences of application of IFRS across countries. This has been

especially the case if the accounting model of a country is different than the model of

Anglo-Aaxon/American countries, in which IFRS were initially developed (Hellmann,

Perera & Patel 2010: 109, c.f. Psaros & Trotman, 2004).

Besides the existence of inconsistencies of application of IFRS among countries,

research has shown that the progress of convergence with IFRS has been hindered

in various ways and that there are still many impediments to convergence that need

to be examined and resolved. It is of key importance for the investors to keep in mind

the still existent variations of application of IFRS, which obstruct full comparability

and uniformity of accounting frameworks (Ball 2006: 15).

The aim of this thesis is to provide a general overview about the progress and

obstacles to global convergence with IFRS, in particular by looking at the findings

reported in several research studies. In the second chapter, the general global

tendency to convergence with IFRS will be outlined by looking at different aspects of

the process, such as the willingness to convergence, whether the convergence is

compulsory or not, to what extent, and so on.

In the third chapter, the focus will be on the differences between the accounting

systems across countries. The reason for this is that accounting diversity may in itself

be considered as an impediment to global accounting harmonization. Furthermore,

the differences in application of IFRS and general obstacles to convergence will be

discussed, especially in terms of the impact of the two accounting models in Europe,

namely the Anglo-Saxon/American and the continental-European model.

The fourth chapter will include the findings of several studies with regard to perceived

obstacles to convergence with IFRS. This chapter will open up with an outline of

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important events regarding IFRS in the year 2002, since in this year, several

important events with respect to global convergence took place. For example, in

2002, the European Commission (EC) passed the so-called ‘IAS Regulation’. This

regulation requires the companies governed by the law of the European Union (EU)

member states to use IFRS for their consolidated statements for financial years on or

after January 1 2005 (Hellmann, Perera & Patel 2010: 108). Some those events

played a great role for the survey that was conduced by the six largest accounting

firms (BDO, Deloitte Touche Tohmatsu, Ernst & Young, Grand Thorton, KPMG, and

PricewaterhauseCoopers) about the progress and obstacles to convergence with

IFRS. The summary of the most important findings of this survey will be presented

and discussed in this chapter. Special attention will be given to the following

perceived obstacles to convergence: the complexity of standards, tax driven nature

of accounting regimes, translation/language barriers. This chapter also deals with

one general issue that resulted from the EU decision to make the application of IFRS

compulsory only for the consolidated statements of listed companies, known as the

development of a “two-standard” system. This system will be explained and

recommendations for its elimination in the long run will be offered. In the same

chapter, the findings of two surveys that took place just prior to and after 2005 will be

discussed. The two surveys were published by Navarro-García & Bastida’s (2010)

and respectively by Razeae, Smith, & Szendi (2010).

In the fifth chapter the agents who can support the process of overcoming the

impediments to convergence with IFRS and who can contribute to the process as a

whole will be discussed. For instance, the role of the accounting profession,

governments, regulators, supranational institutions, national standard setters, IASB,

preparers, analysts, and investors in the process of the global convergence will be

outlined and recommendation for their support will be presented. In the same chapter

we will offer a brief overview of challenges to application of and convergence with

IFRS that lie in the future. Moreover, a look into the future of IASB will be given,

especially regarding the external factors that may influence the further development

of the global accounting standards.

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The closing chapter of this thesis will include the conclusions drawn from the

observation of the tendencies to convergence outlined throughout the paper and from

the findings presented in the two surveys.

2. Global convergence to IFRS

It has been the aim of many standard setters, regulators, auditors, companies, and

so on, to improve the worldwide financial reporting by means of global convergence

with IFRS. This would subsequently ensure the ultimate goal of comparability among

numerous financial statements of companies across countries. Already in 1980s,

Hellmann, Perera & Patel (2010: 108) explain, a call for a one set of accounting

standards that is to be followed by all companies around the world emerged among

the professionals and academics in the field of accounting.

The claim of the actual existence of a global trend towards the de facto convergence

with IFRS has been supported by the observation that, in the course of time, a

significantly increasing number of countries started using IFRS (Whittington 2008:

495) and by the findings that more than hundred countries, both industrialized and

developing, permit or require the use of IFRS (c.f. Wild 2009). Furthermore, Zeff

(2007: 290) writes about 8000 listed companies in the European Union that use IFRS

for preparing their consolidated statements. In general, the IFRS Foundation and the

IASB, many large accounting firms, numerous academics and researchers, and so

on, have been assessing the process of global convergence with IFRS by looking at

the number of companies that prepare their statements in conformity with IFRS or by

looking at different jurisdictions where the use of IFRSs are adopted or permitted.

For instance, in December 2013, the IFRS Foundation reported about the findings of

the study that investigated the jurisdictional adaptation of IFRS. The total of 122

countries across all continents were surveyed and profiles for each jurisdiction were

developed. In these profiles, the progress to adopting IFRS in a particular jurisdiction

is described. In particular, it is described for which companies and for which

statements the use of IFRS is compulsory or permitted (IFRS 2013).

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In general, the findings confirm “substantial progress towards global adoption of

IFRS” (ibid.). In particular, almost all countries surveyed publically committed

themselves towards the notion of IFRS being the set of global accounting standards.

In eighty-three percent of these countries, i.e. in 101 out of 122 countries, all or most

domestic listed companies are required to prepare their financial statements in

conformity with IFRS. The remaining seventeen percent of the countries surveyed, in

which the domestic listed companies are not required to prepare their financial

statements in accordance with IFRS, the companies are permitted to do so.

Interestingly, in approximately sixty percent of countries in which the use of IFRS is

compulsory for domestic listed companies, unlisted financial institutions and/or large

unlisted companies are also required to prepare their financial statements according

to IFRS (ibid.).

Furthermore, the use of IFRS is required or permitted for unlisted companies in

ninety percent of the countries which require IFRS for listed companies. In all

countries that took part in this survey, the modifications to IFRS were rarely made

and, if so, most of the modifications were only temporary or limited in applicability.

Finally, the findings show that fifty-seven of the countries in question require or

permit IFRS for SMEs (small and medium enterprises) and sixteen countries are

considering doing the same (ibid.).

For the purpose of developing and implementation of a uniform set of standards,

many supranational institutions were established, such as the IASB, the International

Organization of Securities Commissions (IOSC), and the International Federation of

Accountants (IFA) (ibid.). Furthermore, many international organizations, such as the

Group of Twenty (G20), World Bank, International Monetary Fond (IMF), Basel

Committee, and so on, have supported the global convergence with IFRS (IFRS

2013). IASB has been formally working with the United States (US) Financial

Accounting Standards Board (FASB) towards international convergence of

accounting standards. The collaboration and objectives of the mutual efforts towards

a unified set of high-quality global accounting standards have been documented in:

(1) the Norwalk Agreement in 2002 and (2) in the Memorandum of Understanding

(MoU) –issued in 2006, updated in 2008 and 2010 (FASB 2013).

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However, Sacho & Oberholster (2008: 118) claim that “the general absentee from the

‘global IFRS team’ has been the USA”. Interestingly, Rezaee, Smith & Szendi (2010:

142) define convergence in their research study as “a process of the gradual

elimination of differences between IFRS and the […] [US] generally accepted

accounting principles (US GAAP)” with an ultimate goal of establishing IFRS that will

be adopted in place of US GAAP. Furthermore, they explain that the adoption of

IFRS by all US companies is expected to happen in 2014. The results of their survey

in 2010 show, however, that not all academics and practitioners believe that he

process of convergence to IFRS in the US will be accomplished until 2014. Around

half of the respondents expressed that they believed that convergence would be

accomplished within three to five years, whereas the other half expected

convergence with IFRS to be accomplished within six to ten years (Razaee, Smith &

Szendi 2010: 147).

On the other hand, De Lange & Howieson (2005: 1007) are not so optimistic in terms

of the ultimate accomplishment of the global convergence to a single set of

accounting standards, especially with regard to the convergence of US companies to

IFRS. They deem that despite all the efforts worldwide towards a global accounting

harmonization/convergence and despite the agreement between IASB and FASB to

work together towards convergence, it still remains uncertain what the ultimate

outcome will be. De Lange & Howieson (2005: 1007) expect, instead of one uniform

set of global accounting standards, either the continued existence of significant

accounting diversity, especially between US GAAP and IFRS, or ‘domination’ of

FASB over IFRS. Their reasons for such expectations are as follows. Firstly, the

nature of political incentives for convergence efforts seems to be only short-term.

Secondly, they claim that there are no clear incentives for US companies to adopt

IFRS. Thirdly, despite the power struggles between regulatory bodies in the country,

the relative power of the US is greater than the power of other nations. As a result,

De Lange & Howieson (2005: 1026) expect that the ‘American exceptionalism’ will

not allow the US to adopt IFRS in order to defend “US sovereignty in matters of US

foreign policy”. This reminds us that the accomplishment of global convergence to

IFRS is not only a goal but also a big challenge, especially due to the complex

political environment worldwide.

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The process of elimination of accounting diversity and accomplishment of global

accounting harmonization has faced many obstacles. As explained before, the

source of some of these obstacles is related to accounting diversity per se. Thus, the

differences in accounting systems will be discussed in the following chapter.

3. Differences in accounting systems

Before looking at the different obstacles to convergence with a common set of

accounting standards, it is important to discuss differences between national

accounting systems as well as the extent of these difference. The reason for this is

that implementation of a single set of standards like IFRS in countries with different

accounting systems can be in itself challenging and cause a certain number of

inevitable obstacles that need to be coped with. Furthermore, it is important to

describe the reasons for accounting diversity and the problems caused by that

diversity in order to fully understand and value the efforts to convergence to a

common set of accounting standards.

Doupnik & Perera (2012: 23) stress that there have been considerable differences in

accounting among countries. These differences can be found by looking at the

accounting treatment of many items. For instance, the companies in the EU are

allowed to report assets on the balance sheet at market values, whereas US

companies are only allowed to report assets like property, plant, and equipment in

amounts up to the value of the historical cost. Further examples of diversity in

accounting among countries are found by looking into the form and content of

individual financial statements and at the nature of disclosure of the financial

statements, as well as with respect to measuring and recognizing many items, in

particular assets, liabilities, revenues, and expenses (ibid.: 54-5).

It has been claimed that there were many reasons for the existence of differences in

financial reporting. Roberts, Veetman & Gordon (2005: 144) explain that there are

many societal factors that influence accounting and consequently lead to diversity

between accounting systems. These societal factors are related to the different ways

in which the societies and countries organize themselves. Even geographically close

countries, such as the US and Mexico, may have fundamentally different accounting

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principles. The reason for this is that those countries and their accounting systems

may have been exposed to different external and internal influences, such as the

culture and the religion(s) of the country, regulatory/governmental or political,

economic, legal, tax, educational, and financial systems, as well as trade, current and

historical events and relationships to other countries, forms of investment, and so on

(ibid.:146-161). It is claimed that “one of the most important determinants of

accounting regulations and practices is the political and economic system of a

country” (Roberts, Veetman & Gordon 2005: 146).

Furthermore, a survey by Meek & Saudagaren (1990: 145-82) identified five common

factors that influence a country’s accounting system. These are: (1) legal system, (2)

taxation, (3) providers of financing, (4) inflation, and (5) political and economic ties. In

the following, the first three factors will be discussed in detail, since there is high

correlation between them (Doupnik & Perera 2012: 30).

To begin with, the common law and the code (codified) law have been defined as the

two major types of legal systems. The first is found in the English-speaking countries

and the latter in the majority of non-English-speaking countries. One major difference

between the two types of legal systems lies in the amount of statute law. In common

law countries, there is only a limited amount of statute law which is supplemented by

the case law. This is to say that the courts base their decisions of their interpretation

of the statute law and, in such a way, precedents are established which than become

part of the case law. In the code law countries, there is a greater amount of statute or

codified law which is used as a basis for courts’ decisions. The code law was not

developed through precedents but mainly by the academics of the European

universities (Doupnik & Perera 2012: 28-9).

With regard to accounting, in code law countries, the accounting rules are given in

the accounting law that is passed by the government and as a result, the accounting

profession does not have much influence on the developments of the accounting

standards (Alexander & Archer 2000: 545). In common law countries, the accounting

rules are established by non-governmental organizations and the accounting

profession. It is claimed that because of the difference in the source behind the

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establishment of accounting rules and standards, these tend to be more detailed in

common law countries and in code law countries (ibid.).

The second reason for accounting diversity among countries is given under the

umbrella term ‘taxation’. The financial statements are used as the basis for taxation

in many countries, in particular in code law countries. In common law countries, the

financial statements are adjusted when they are sent to the government for the

purpose of taxation and respectively when they are sent to the stakeholders. The

next commonly identified difference in accounting among countries is the difference

in the providers of financing. There are countries in which the members of general

population are the shareholders and thus the providers of financing or the owners. In

these countries, the orientation of the financial statements is towards the income

statements, so that the shareholders can have proper insight into profit of a

company. However, there are countries where banks, powerful and influential

families, as well as the authorities and the government are the providers of financing.

Since, for instance, banks have more interest in solvency and liquidity and less in

profit, the orientation of the financial statements tends to be towards the balance

sheet (Doupnik & Perera 2012: 30).

With regard to the factors influencing the accounting systems among countries

described above and with regard to the accounting diversity as such, different models

have been developed in order to classify countries according to their accounting

systems. For instance, one of the traditional classification of accounting systems

offers a distinction between Anglo-Saxon/Anglo-American and continental-European

accounting models (Nobes 1998: 168, c.f. Nair & Frank 1980; Salter 1991). The

former has been considered to involve the United Kingdom (UK), Ireland, the

Netherlands, and the United States, whereas the Western European countries with

the exception of the UK, Ireland, and the Netherlands apply the latter model

(Sjölander 2013: 18).

The countries using the Anglo-Saxon/American model have also been described as

those where the common law is applied, where the public is the main provider of

financing of the companies, and where the financial statements are adjusted when

they are sent to the government for the purpose of taxation and respectively when

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they are sent to the stakeholders. The countries that belong to the continental-

European group apply the codified law, and here, the companies’ financial

statements are the basis for taxation and the providers of financing are banks,

families, and the state (ibid.).

In general, IFRS has been considered closer to the Anglo-Saxon/American model

than to the continental European. The two models have been often referenced to in

the discussion about international accounting harmonization, especially with regard

to the adoption of and convergence with IFRS:

A major problem is identified as being that IASC is dominated by Anglo-American approach to financing which is fundamentally different from the continental European approach followed in the EUs directives (Flower 1997: 281).

Furthermore, studies show that in the countries with accounting systems different to

the Anglo-Saxon/American model the IFRS have been applied inconsistently (c.f.

Psaros & Trotman 2004). Callao et al. (2009: 34) ask whether the inconsistencies in

application are linked to the prior accounting model of the countries. Interestingly,

they observed that the changes from national GAAP to IFRS in the process of

convergence has been similar in the UK (traditionally classified as the head of Anglo-

Saxon system) and in other continental European countries, like France (Callao et al.

2009: 50). This observation brings us to the debate about the traditional classification

of accounting models into two above described clusters. For example, d’Arcy (2001:

327) states that “a picture of Anglo-American and continental European accounting

model cannot be established”.

According to Callao et al. (2009: 50), due to the changes in economic environment

and due to the effects of IFRS in the process of accounting harmonization, it is not

possible to classify the accounting systems into two clusters, - the Anglo-

Saxon/American and continental-European. They explain that the findings of their

research study show that the differences between the two accounting systems are

not as present as before. The extent of the differences has become smaller,

especially with regard to differences between the countries within the EU, due to the

work on the implementation of a single set of accounting standards.

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Many, especially large companies in the member states of the EU have been driven

by the desire of being competitive in the international capital market and already in

1990s started using IFRS alongside their national GAAP. In the course of time, the

extent of use of IFRS has increased and it is therefore “no longer appropriate to think

in terms of all German (or all French, Italian, etc.) companies following the traditional

[c]ontinental European model of accounting” (Doupnik & Perera 2012: 42). Callao et

al. (2009: 50) claim that the actual differences in accounting can be found between

the American model (led by the US) and the European model (including the UK) and

that, therefore, the process of accounting harmonization should be focused on these

differences.

Bearing in mind the differences in accounting systems across countries and the

classification of the accounting systems according to these differences, as well as the

recent changes that influenced the extent of the accounting diversity, we will not turn

to studies that report on progress and obstacles to convergence with IFRS.

4. Impediments to convergence with IFRS

There are numerous studies that report on progress and obstacles to convergence

with IFRS. In the following studies reporting on impediments to convergence with

IFRS in 2002 as well as just prior and after 2005 will be presented.

4.1. Impediments to convergence with IFRS surveyed in 2002

In 2002, there were several crucial events that paved the way to global convergence

to IFRS, the most important being the EU-regulation known as the ‘IAS2 Regulation’,

which was passed by “the European Parliament and the European Council of

Ministers” (BDO et al. 2003: 4). According to this regulation, the companies

governed by the law of the member states are obliged to use IFRS for their

consolidated statements for financial years commencing on or after January 1 2005 if

their securities are admitted to trading on a regulated market of any member state

                                                                                                               2 International Accounting Standards (IAS) was previously the name used for today’s IFRS

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(c.f. Regulation (EC) No 1606/2002 of the European Parliament and of the Council,

Article 4).

Larson & Street (2004: 90) explain that this regulation affects all member countries;

this is to say, the old member states, the new member countries and the candidate

countries. The regulation extends to the countries, which are members of the

European Economics Area (EEA), such as Norway, Iceland and Lichtenstein, since

the EEA countries are by treaty obliged to comply with the EU Accounting

Regulations and Directives. Furthermore, they explain that the countries are given

the choice regarding the required or allowed preparation of financial statements of a)

non-listed companies’ consolidated and/or individual accounts and b) listed

companies’ individual accounts (ibid.).

It has also been claimed that the existent liaison relationship between the FASB, and

IASB was strengthened in 2002 with both Boards subsequently formalizing their

commitment to convergence and cooperation in the ‘Norwalk Agreement’.

Furthermore, liaison relationship between the IASB and other national standard

setters was continued, in particular those from Australia and New Zealand, Canada,

France, Germany, Japan, the United Kingdom, and Ireland. In fact, Australia and

New Zealand decided to adopt IFRS in 2002 (ibid.). All these events started a

snowball rolling towards to point of global convergence with IFRS.

Due to the significance of the events that occurred in 2002, as described above, the

six largest accountancy firms (BDO, Deloitte, Touche Tohmatsu, Ernst & Young,

Grand Thorton, KPMG, and PricewaterhauseCoopers) conducted a survey in which

59 countries participated. The aim of this survey was to assess the respective

countries’ plans for convergence with IFRS. The initial reason for the survey was the

observation that there are still many differences between the national GAAP of many

countries and IFRS. The summary of the findings acquired through this survey is

given in GAAP Convergence 2002 (Larson & Street 2004: 91).

It is important to note at this point that the questions included in the questionnaire,

which was used in this survey as a means of addressing the process of convergence,

required of the respondents to base their answers by focusing solely on listed

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companies. In case of differences between requirements for listed and non-listed

companies, the respondents were required to provide additional information about

non-listed companies. The aforementioned focus of the questions on listed

companies is, however, necessary to keep in mind when considering the following

findings of this survey for which GAAP Convergence 2002 will be used as a primary

data source.

With regard to intentions of accepting or converging with IFRS, the findings show that

95% of the 59 countries plan to adopt, to converge with or have already adopted

IFRS, whereas 5% (these are Iceland, Japan, and Saudi Arabia) had no intention of

converging with IFRS when this survey took place. Moreover, in two countries in this

survey, Cyprus and Kenya, the adoption of IFRS is mandatory.

The findings further show that thirty-nine countries had a formal plan, such as

governmental or regulatory requirement, for adoption of or convergence with IFRS.

Out of these thirty-nine countries, twenty-five were the current or potential EU

member states. According to the findings, there has been a different approach to

convergence with IFRS across the countries: in 2002, some countries planned to

converge with IFRS and to use their national GAAP as a supplement, whereas others

planned to adopt IFRS on a standard-by-standard basis and respectively eliminate

the difference between the two sets of standards (national GAAP and IFRS). In

GAAP Convergence 2002 the overall obstacles to convergence expressed are

represented in the figure bellow.

Figure 1. Obstacles to convergence with IFRS surveyed in 2002 (source: GAAP

Convergence 2002, BDO et al. 2003: 10)

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As the figure above shows, the respondents indicated that particular standards were

found complicated. In particular, the concept of accounting that incorporates the use

of fair value was considered complicated (BDO et al. 2003: 10). The second obstacle

reported by almost half of the respondents, is the tax-driven nature of the national

accounting regime, which collides with the principle that financial statements drawn

according to IFRS mainly serve the purpose of the capital markets and not the tax

authorities (ibid.). From the figure above it can be read that the disagreement with

certain IFRS, the limited capital markets, and the satisfaction with national

accounting standards among investors/users were considered as additional

obstacles to convergence with IFRS in 2002.

Furthermore, the findings of the survey indicate that the issue of translation of IFRS

i.e. their availability in national languages of the countries involved in this survey was

considered as a matter of concern according to the respondents. According to the

respondents, the translation was available only in fifty percent of the countries

surveyed, whereas in twenty percent of these countries the translation was not

available on a timely basis, and in thirty percent of them the translation was not

available. It is interesting to note that several answers of the respondents indicated

that although the translations are available in certain countries, these are not

sanctioned by the IASB. One may pose several questions with regard to the

existence of translations that are not sanctioned by the IASB, especially concerning

the adequacy and appropriateness of the translations.

Another finding reported in GAAP Convergence 2002 is that in eighty percent of the

fifty-nine countries that took part in the survey, IFRS is included in university

curriculum, however, in twenty-seven percent of the countries there is a limited

coverage of IFRS. The obstacles given in the findings included in GAAP

Convergence 2002 suggest two things. On the one hand, there was a general

tendency towards adoption and convergence with IFRS among the fifty-nine

countries in questions. On the other hand, there was still much work to be done in

order to enable the possibility of using a common set of standards worldwide.

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All in all, it can be stated that some obstacles reported above can be classified as

more complex in their nature and need a long-term approach in order to find a

solution for them, such as in case of a tax-driven nature of accounting standards in

many countries. Other existing obstacles seem to be easier to tackle in the short-run,

such as translation of the standards or inclusion of them in the tertiary education

across national boarders, especially in European countries that have an increasing

number of universities with English-Medium instruction and where IFRS is or can be

taught in English.

However, as some research studies show, the translation difficulties are sometimes

underestimated and call for more thorough consideration. As Dahlgren & Nilsson

(2012: 39) explain “[t]he purpose of the translation is to produce the same quality

regulation in each member state and consequently achieve comparability”. Thus,

translation plays a very important role in achieving the principal goal behind the idea

of having a set of common accounting standards, that is the principle of comparability

(ibid.).

It is therefore necessary to keep in mind that the translators are not only supposed to

translate words but also contexts if genuine translation is to be achieved. Translation

of words only is in itself not easy since there is lack of equivalency in words of

different languages. Due to the observation of the importance of the IFRS translation

process in this context, the following section is devoted to providing a more detailed

account of this subject matter (Dahlgren & Nilsson 2012: 40).

4.1.1. The IFRS/IAS translation

Language could be a problem when translating IFRS from English (Zeff 2007: 296).

The findings in GAAP Convergence 2002 discussed above show that in fifty percent

of the countries surveyed there was either no translation available in a timely manner

or provided but not sanctioned by the IASB. It is therefore essential to address the

question of the process of translation and of the approving of the same.

  19  

According to Creighton (2008: 9 qtd. in Dahlgren & Nilsson 2012: 41) there are two

steps in the translation of IFRS: professional translation and expert review. He further

characterizes the whole process as rather complicated due to the technical nature of

the standards and states that it is therefore necessary to form a committee for each

language. He further explains that, in such a committee, there are accounting

experts who need to review and approve of the translation before it becomes official.

With regard to the process of approving translations, the IASB that explains the

translations in other languages are approved “[…] provided that [the translation] is

prepared in accordance with the process that provides assurance of the quality of

translation […]” (2008b: 67). As Dahlgren and Nilsson (2012: 42) state, approved

translations exist in some languages, as for instance in the official languages of the

EU, but not in others, like Swedish.

Looking back at the quotation at the beginning of this section, let us address one of

the practical translation problems with the concept of a true a fair view present in

IFRS. It is important to remind ourselves at this point that there is a certain

discrepancy when in comes to the existence of this concept per se among different

countries. On the one hand, the concept as such is an integral and thus accepted

part of the accounting system of, for instance, the UK. At the same time, it is not

included in the accounting systems of some other countries. In some countries, there

are similar concepts but, it cannot be said that they are identical with the original

concept of the true and fair view as given in IFRS.

It can therefore be deduced that the translation of the concept of the true and fair

view principle of IFRS was initially hindered by the discrepancy regarding the

existence of this concept in different accounting systems (ibid.). As a result, different

countries applied different solutions for this issue. Some countries included the

concept into their existing accounting principles, whereas other treated it

independently. All in all, Zeff (2007: 296) concluded that “[…] perhaps the only

country in which [true and fair value concept] really has been followed is the UK”.

In general, previous research shows the existence of variation and differences in

translation of IFRS (c.f. Doupnik & Riccio 2006) which have been suggested to cause

  20  

variation in accounting outcomes and eventually a variety of problems (c.f.

Baskerville & Evens 2011), such as the problem regarding one of the central

concepts behind the common set of accounting standards - that is comparability.

Hellmann, Perera & Patel (2010: 112) claim that the translation of IFRS from English

into German is problematic since it includes mistakes and inaccuracies. Furthermore,

Zeff (2007: 296) argues that the concern is not only about mistakes and inaccuracies

in translation but “whether accountants and directors understood the [underlying]

concepts[s]”.

After having analyzed and assessed translations difficulties and variation of the

Spanish version of IFRS, Huerta, Pertides & Braun (2013) concluded that the IASB

should consider translatability of standards in the process of their development. This

recommendation has also been voiced by Tsakumis et al. (2009: 35) and latter by

Baskerville & Evans (2011: 9):

Standard setters and regulators must be fully aware of the potential difficulties of translation, and should consider these difficulties at the drafting stage. This would allow translation problems to be greatly reduced.

One of the most important steps towards the resolutions of the issues regarding the

translation and translatability of IFRS is considered to be the publication of all

endorsed IFRS in official languages of the EU by the European Council in the EU

Official Journal 2003 (Street & Larson 2004: 25). Nevertheless, the concerns

regarding this issue still remains, especially in terms of translations of the standards

into other than the eleven official languages of the EU as well as in terms of the

untimely delivery and untimely sanction of the translations by the IASB.

4.1.2. Complexity of standards In GAAP Convergence 2002, one of the impediments reported was the complexity of

the common set of accounting standards. Larson & Street (2004: 99) analyzed the

findings reported in GAAP Convergence 2002 in order to determine the standards

that were considered as too complex or complicated by thirteen European countries,

in particular, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia,

Slovenia, Bulgaria, Romania, Iceland, Norway, and Switzerland. The findings show

that in eight of these countries, the complicated nature of Financial Instruments (IAS

  21  

39) was considered an impediment to convergence. Five out of thirteen countries

stated Impairment of Assets (IAS 36) as too complex or complicated, whereas four

countries stated the same about Deferred Income Taxes (IAS 12). It was claimed

that the Employee benefits (pensions) (IAS 19) were complex by three above given

countries. Moreover, four countries listed additional standards that they considered

as an impediment to convergence due to their complexity: Reporting by Retirement

Plans (IAS 26), Hyper-Inflation (IAS 29), Joint Ventures (IAS 31), Construction

Contracts (IAS 11), Leases (IAS 17), Investment Property (IAS 40), Business

Combinations (IAS 22), SIC 19 and SIC 30 (Reporting Currency), Leases (IAS 17),

and Provisions (IAS 37) (ibid.).

As it can be deducted from above, these standards were, one the one hand,

classified as complex or complicated and, on the other hand, considered as an

impediment to convergence. In addition to the eight countries mentioned above,

twelve out of fifteen countries from another analysis of Street & Larson (2004: 24)

also stated that the complexity of IAS 39 (Financial Instruments) is the key obstacle

to convergence. Furthermore, all IFRS relating to financial instruments (IAS 32, IAS

39) were not approved by the EC. Another criticism of IAS 39 was received in 2003

from the President of France (Zeff 2007: 299). In a letter to the President of the EC,

Chirac claims that IAS 39 will have “nefarious consequences for financial stability”,

adding that some other IFRS “could have negative effects for businesses and the

European economy” (Street & Larson 2004: 24). Street & Larson’s (2004) analysis of

the findings reported in GAAP Convergence 2002 with regard to the fifteen first

member countries of EU additionally shows that these countries considered IAS 41

(Agriculture) as challenging and also viewed IAS 39, IAS 19, IAS 36, IAS 12, IAS 37,

and IAS 40 as problematic. They also confirm that “the complicated nature of certain

IFRS and disagreement with certain IFRS represent frequently cited obstacles to

convergence“ (Street & Larson 2004: 24).

4.1.3. Tax driven nature of accounting regimes

Already in 1995 Guenther & Hussein (1995: 132) stated that “one of the biggest

impediments to uniform international accounting standards is the requirement in

many countries that financial reporting standards conform to tax regulations.” Let us

  22  

now look into the findings surveyed in 2002 in order to see whether the impediment

given in this statement was still reported after a time period of seven years.

The findings reported in GAAP Convergence 2002 show that tax-driven nature of

national accounting system has been considered as an impediment to convergence

with IFRS in almost half of the countries surveyed. This impediment goes back to the

orientation and objectives of the accounting standards. As explained before, in

countries in which the there is a strong link between accounting and taxation, the

objective of the accounting standards has mainly been the determination of the

taxable income (BDO et al. 2003: 12). The orientation of the financial statements is

towards the tax authorities.

The objective and orientation of the financial statements prepared in accordance with

IFRS is different. Namely, their primary objective is to serve the needs of capital

markets and not of the tax authorities. The orientation of the financial statements in

conformity with IFRS is thus towards the shareholders. The difference in the

objectives and orientation of the financial statements when prepared according to

IFRS and respectively according to the national accounting standards may thus be

considered as a logical obstacle to convergence found in GAAP Convergence 2002.

Moreover, the obstacle with respect to the historical link between financial reporting

and tax laws in a number of countries of continental European countries has also

been reported in the analysis by Street & Larson (2004: 24) as they investigated the

convergence process in the first fifteen EU member countries. Eleven of the fifteen

countries they analyzed claim that the above given obstacle is a significant obstacle

to convergence. Only four countries which do not cite this obstacle are Denmark,

Ireland, the Netherlands, and the UK. This is consistent with previous research “that

highlights the importance of the relationship between tax and financial reporting in

many continental European countries and the resulting negative influence of this link

on accounting harmonization” (Street & Larson 2004: 25).

However, Street & Larson (2004: 24) additionally investigated the impact of the new

EU environment in which significant steps towards convergence with IFRS had been

taken on the tax-driven nature of the accounting systems of these countries. They

  23  

claim that the recent developments with regard to accounting harmonization “provide

preliminary evidence of the extent to which the European countries […] have been

motivated to break or relax [the] traditional link [between financial reporting and tax

laws] Street & Larson (2004: 25).

In GAAP Convergence 2002 it is stressed that it is important to keep in mind that the

objective of IFRS is to serve the needs of capital markets and it is recommended to

the governments “to acknowledge the differing roles of tax accounting and financial

reporting” and “to consider approaches that will accommodate different objectives” so

that convergence with IFRS becomes feasible for both large companies as well as for

SMEs (BDO et al. 2003: 14)

4.2. Development of a ‘two-standard’ system Having considered the EU regulation 1606/2002 or the ‘IAS Regulation’, effective

January 2005, that obliges listed companies governed by the law of the EU member

states to draw their consolidated statements in conformity with IFRS and the options

that were given to countries regarding the listed companies’ individual accounts and

non-listed companies’ individual and/or consolidated accounts, Larson & Street

(2004: 89) suggest a development of a ‘two-standard’ system as they address the

question posed by Meek & Thomas:

What about non-listed companies and companies’ nonconsolidated (i.e. individual company) accounts, particularly those from European code law countries? Will they continue to reflect national accounting systems, or will they shift away from them? (2004: 31)

Previous research with an aim to answer this question focused on first fifteen

members of the EU (Austria, Belgium, Denmark, Finland, France, Germany, Greece,

Ireland, Italy, Luxemburg, the Netherlands, Portugal, Spain, Sweden, United

Kingdom) (c.f. Haller 2002; Street & Larson 2004). Consequently, Larson & Street

(2004) looked into 17 countries which are either governed by the law of EU member

states or are economically or politically closely tied to the EU. There are Cyprus,

Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia,

Slovenia, Bulgaria, Romania, Turkey, Iceland, Lichtenstein, Norway, and

Switzerland. According to the findings, all of the aforementioned countries will oblige

or effectively allow the listed companies’ preparation of their consolidated financial

  24  

statements by 2005 and the majority of them (Cyprus, Czech Republic, Estonia,

Lithuania, Malta, and Slovakia) will require IFRS for the listed companies’ individual

accounts (Larson & Street 2004: 112).

Interestingly, research conducted by the same authors, which focused on the first

fifteen members of the EU (Street & Larson 2004) shows different findings with

regard to above given question. They report that, as the findings of GAAP

Convergence 2002 also show, the majority of the countries in question, except for

Belgium, had no plan to extend the obligatory requirement for the preparation of

financial statements in accordance with IFRS to other companies other than the

listed ones. Some countries have been considering allowing or decided to allow non-

listed companies to prepare their consolidated statements in conformity with IFRS

(Street & Larson 2004: 22).

Furthermore, the findings indicate that the majority of countries intended on

continuing to require or allow the preparation of individual statements in accordance

with their national GAAP and not with IFRS. The reason for this is considered to be

the strong tie between the fiscal and accounting legislation in many of the EU

countries that were part of this research (ibid.: 23).

However, the authors’ analyses in both cases shows that most of the European

countries, the first fifteen member states, as well as the seventeen countries which

are either governed by the law of EU member states or are economically or politically

closely tied to the EU, did not consider requiring non-listed companies to use IFRS at

that point in time (Larson & Street 2004: 113).

It was therefore concluded that there is an existence of a dual-standard system, in

which some companies continue to use their national GAAP, whereas others are

required by the ‘IAS-Regulation’ to prepare their consolidated financial statements in

accordance with IFRS. In GAAP Convergence 2002 there is a recommendation to

governments and national standard setters to eliminate these dual standards in order

to eliminate this obstacle to convergence with IFRS and thus enable further steps

towards the establishment of a global common set of accounting standards.

  25  

4.3. Impediments to convergence surveyed prior to and after 2005

The period from 2005 to 2005 can possibly be described as one in which the

largest accounting revolution in recent history occurred (Sacho & Oberholster

2008: 117).

Having concluded previously in this thesis that there are various impediments to

convergence with IFRS and that ‘IAS-Regulation’ is one of the highly significant steps

towards conformity with IFRS in both Europe and worldwide, it is now of crucial

importance to present findings of studies on obstacles to convergence that were

surveyed prior to and after 2005 – that is, just prior to and after the ‘IAS-Regulation’

became effective. For this purpose, the findings of the research studies conducted by

Navarro-García & Bastida’s (2010) and respectively by Rezaee, Smith & Szendi

(2010) will be briefly presented. The former gives some interesting observations and

perceptions just prior to 2005, however only focuses on those in Spain, and will

therefore be discussed first. The latter gives a very thorough overview of

impediments to convergence perceived after 2005 and will therefore be the second to

be presented.

4.3.1. Perceived impediments of obstacles to convergence to IFRS prior to 2005

In the empirical study by Navarro-García & Bastida (2010), the starting point was

also the significance of the ‘IAS-Regulation’ and the fact that there are some

differences between the continental European countries that use the code law and

the Anglo-Saxon countries that use the common law. Among other aspects, they

investigated the obstacles to convergence with IFRS that were perceived in Spain in

the last quarter of the year 2004 – just prior to the time point when the ‘IAS-

Regulation’ became effective.

The final sample of this the survey included 63 listed companies (Navarro-García &

Bastida 2010: 114). The findings show that complexity is perceived as a significant

concern with regards to IFRS and Navarro-García & Bastida (2010: 116) assume

that, as a result, the perception of the IFRS in general might be biased due to such

perceived complexity. As discussed throughout this thesis and as observed in the

  26  

findings of several studies given above, perceived complexity of the standards seems

to be one of the most significant obstacles to convergence with IFRS, because it is

safe to say, that even if the countries show readiness or even have formal plans for

conformity with IFRS or their adoption, the complex and/or complicated nature of the

standards can be a deal-breaker for the actual and consistent implementation of

these plans. Already in GAAP Convergence 2002 concrete recommendations have

been given regarding the IASB’s important role in recognizing that some standards

are considered complex and in working on improvements.

The participants of Navarro-García & Bastida’s study (2010) were also asked to

evaluate some additional troublesome aspects of IFRS. Mean values of their

responses to the questions about troublesome aspects (1 indicating total

disagreement and 5 indicating total agreement) were between 3.60 and 3.98. The

following aspects were reported as troublesome:

1. IFRS need more guidance for their application

2. IFRS require the disclosure of too much information

3. ‘Fair value’ is generally difficult to apply

4. IFRS allow too many accounting recognition options

5. IFRS are too extensive

6. IFRS are too subjective for their application (Navarro-García & Bastida 2010:

117)

According to Navarro-García & Bastida’s (2010: 119), these findings indicate that

IFRS are seen as having negative features, especially in terms of complexity,

flexibility, and detail. They explain that the reason for this is that Spanish standards

are simpler, concrete, and less extensive and this is what the preparers of financial

statements in Spain are used to. With regard to disclosure, the authors claim that the

demand of public disclosure is lower in a code law country like Spain than in common

law countries. This might have been the reason for the respondents reporting the

requirement of full disclosure in IFRS as troublesome.

Having presented the findings regarding the perceived impediments prior 2005, let us

turn briefly to the research study that reports perceptions on convergence with IFRS

  27  

after the ‘IAS-Regulation’ became effective in order to see whether there are some

parallels or additional interesting insights.

4.3.2. Impediments to convergence with IFRS surveyed after 2005 The research study conducted by Rezaee, Smith & Szendi (2010) primarily aims at

comparing views of academics and practitioners on convergence to IFRS. In their

study, they firstly provide a review of literature on the subject matter under

investigation, listing the studies which address harmonization and convergence and

impediments to convergence, studies examining the feasibility of convergence to

IFRS, as well as those that examine effects of the convergence on economic

development, and so on (Rezaee, Smith & Szendi 2010: 143).

The literature review is followed by a theoretical framework, on which the research

questions are based. In their questionnaire, Rezaee, Smith & Szendi (2010: 146) first

asked the respondents to assess their own familiarity of IFRS. As said before, the

respondents that took part in this survey were either academics (accounting

professors, specialized in financial accounting and international accounting) or

practitioners (chief financial officers (CFOs)). Their responses implied that they were

not very familiar with IFRS. This was consistent with anecdotal evidence, Rezaee,

Smith & Szendi (2010: 146) explain, according to which there was a general lack of

familiarity with IFRS. Afterwards, the respondents were asked to assess the global

acceptance of IFRS, the transition to IFRS, the perceived benefits of convergence to

IFRS, the obstacles to convergence with IFRS, and, finally, suggested improvements

of IFRS (ibid.). In this thesis, the main focus will be to present the perceived

obstacles to convergence with IFRS cited in this study.

The findings of the study show perceived obstacles to convergence assessed

according to their severity (1=not severe; 5=severe). Most severe obstacles reported

by the academics and practitioners who participated in the study have an average

mean of 4 and are the following:

1. Lack of coverage of IFRS in financial accounting textbooks

2. Lack of uniformity in the application of IFRS in all jurisdictions

  28  

3. Lack of education, understanding, and experience by preparers of financial

reports and with the use of IFRS

4. Coordination and collaboration among global regulators

5. Necessary changes in regulatory regime

6. Initial cost of convergence

7. Lack of coverage of International Standards on Auditing (ISAs) in auditing

textbooks

8. Transition plan and issues pertaining to IFRS

9. Flexibility in adopting various versions of IFRS (e.g. EU endorsed)

10. Required changes in the legal system (Rezaee, Smith & Szendi 2010: 148).

If one looks back at the findings surveyed in 2002 and presented in GAAP

Convergence 2002 one can observe that there are some parallels between the found

obstacles to convergence in addition to some new insights that are presented in the

list above. This is partly due to the difference in the questionnaires used in the two

surveys as well as due to the point in time in which the research took place.

There are some interesting parallels and correlations that can be assumed when

comparing the findings of the two surveys. For instance, in GAAP Convergence

2002, it was reported that in eighty percent of the fifty-nine countries that took part in

the survey IFRS was included in university curriculum, whereas in twenty-seven

percent of the countries there was a limited coverage of IFRS. Moreover, it was

strongly recommended that “high priority should be assigned to accelerating efforts to

address both education of practicing accounting professionals and the university

education of those individuals entering the accounting profession” (BDO et al. 2003:

13). Further, it was stressed that IFRS should be included as an essential part of

university curricula and that education of new generations as well as already

practicing accounting professional should be supported internationally, by

organizations such as the World Bank, as well as the authorities and policy makers

(ibid.).

However, it can be seen from the findings listed above that the respondents

considered (1) lack of coverage of IFRS in financial accounting textbooks and (2)

lack of education, understanding, and experience by preparers of financial reports

  29  

and with the use of IFRS to be severe impediments to convergence several years

later, despite the clearly communicated and highlighted recommendation given in

GAAP Convergence 2002.

Another parallel that can be drawn here is the observed phenomenon of the “double-

standards” resulting from the fact that some companies continued to use their

national GAAP, whereas others have been required by the ‘IAS-Regulation’ to

prepare their consolidated financial statements in accordance with IFRS. The

concern expressed in the research of Rezaee, Smith & Szendi (2010: 149) is that

there is a lack of uniformity in the application of IFRS in all jurisdictions. In addition,

the respondents claimed flexibility in adopting various versions of IFRS (e.g.

endorsed vs. non-endorsed by the EU) to be a severe impediment due to another

kind of duality in itself (ibid.).

Interestingly, the findings of this survey shed light on the impediments to

convergence that are related to differences in legal and regulatory systems between

countries that are ought to apply a common set of standards for accountings. In

GAAP Convergence 2002 this issue as brought out by highlighting the obstacle to

convergence regarding the tax-driven nature of accounting regimes.

What is even more interesting to see from the findings listed above is that the

respondents claimed that transition plan and issues pertaining to IFRS were a

significant impediment to convergence, even though a large majority of respondents

who took part in the survey reported about in GAAP Convergence 2002 stated that

the countries had a formal plan for adoption of or convergence with IFRS. Thus, it

can be concluded that many issues regarding formal plans for transition and

transition per se remained unresolved, according to experts’ opinions given in study

of Rezaee, Smith & Szendi (2010).

In addition, the findings show other impediments to convergence considered as

severe, such as the cost of the process or lack of coverage of International

Standards on Auditing (ISAs) in auditing textbooks, and coordination and

collaboration among global regulators, whereas some obstacles, like the problems of

  30  

translation or the complexity of some standards were not considered as a severe

obstacle.

Rezaee, Smith & Szendi (2010: 149) also listed obstacles to convergence, which

were considered by the respondents as less severe than those given above (mean

response from 3.3 to 3.9):

1. Insufficient involvement of global regulators in the standard-setting process

2. IASB funding and membership

3. Objectivity and independence of IASB in establishing IFRS

4. Assurance of the long-term sustainability and infrastructure of the IASB

5. Perceived uncertainties surrounding IFRS

6. Needed improvement in public accountability of IASB

7. Global acceptance of IFRS as a high-quality set of accounting standards

8. Perceived threat to the continuing existence of the FASB

9. Required changes in auditing standards

10. Needed improvement in governance structure of the IASB.

The obstacles given above can in general be understood as concerns with regard to

the IASB itself on the one hand and, on the other hand, as the future challenges to

global convergence with IFRS.

5. The future of the process to global convergence with IFRS

Global process of convergence with IFRS is a large-scale project and IASB’s due

process needs the support of numerous agents (BDO et al 2003: 14). It is necessary

that these agents are aware of their role in the accomplishment of global accounting

harmonization. Furthermore, it is essential that they realize that there are still many

challenges in the process of global convergence with IFRS and that they should act

upon these challenges. In this chapter, an overview of agents who can support the

convergence with IFRS will be given. This will be followed by a brief discussion of

challenges that need to be addressed in the future so that the goal of convergence

with global set of accounting standards can be realized.

  31  

5.1. Agents who can support the convergence to IFRS

The support and commitment in the process of global convergence with is required

from countries across the planet and their national standard setters. In GAAP

Convergence 2002, countries and national standard setters are encouraged to

participate in the process of convergence and are consequently asked to adopt and

accept IFRS as the global solution. Countries can support further steps towards

global convergence by requiring all companies to prepare their financial statements

in conformity with IFRS, by including IFRS into the curricula of educational

institutions, and so on.

Furthermore, it is stressed that the IASB and the International Financial Reporting

Interpretations Committee (IFRIC) are the sole clearinghouse for the interpretations

of IFRS. However, the support of national and regional regulators in needed in order

to make sure that interpretation of IFRS stays consistent across countries. It is also

important that the regulators cooperate and ensure effective enforcement of IFRS

(ibid.).

IASB also needs the support and active participation of analysts and investors in the

standard-setting process. The companies that use IFRS are encouraged to educate

their staff, especially the preparers of financial statements, about the standards in

general as well as about the changes and updates to the standards in the course of

time (BDO et al. 2003: 14).

Finally, the accounting profession can and should continue actively promoting and

developing global standards “by providing training to clients and others, and by

assisting those countries that have started the convergence process to complete it”

(BDO et al. 2003: 14). The accounting profession is also advised and encouraged to

work closely with the International Federation of Accountants’ (IFAC) Education

Committee in the course of developing of a university curriculum that should be

offered at the higher-education institutions, especially in those countries that have

already adopted IFRS (ibid.).

Zeff (2007: 302) adds that “to overcome [the] obstacles and therefore promote

genuine international convergence and comparability” we need

  32  

“enlightened leadership and commitment from […] academics, audit firm partners, […] company accountants, as well as from company finance directors and national regulators and other instrumentalities of Government, such as the European Commission […]”.

5.2. Challenges to be met in the future process of convergence with IFRS

In addition to many obstacles to convergence that have been cited from various

surveys throughout this thesis, there are many additional challenges that to be faced

by those involved in the process of accounting harmonization. Sacho & Oberholster

(2008: 132) explain some challenges to convergences with IFRS that lie ahead.

Examples of such challenges are the impact of influential political lobbyists on the

IASB as well as the influence of the FASB on the IASB (Sacho & Oberholster 2008:

132). For the IASB, it is necessary to develop strategies for opposing the influence of

the lobbyists, who require the IASB to amend IFRS according to their objectives, in

order to for IASB to retain their independence and ensure the quality of the standards

(ibid.).

Furthermore, Sacho & Oberholster (2008: 132) state that many challenges to global

convergence with IFRS lie in the collaboration between the IASB and the FASB. As

discussed previously in this thesis, due to the worldwide economic and political

influence of the US, there is a great deal of concern with regard to the influence of

the FASB on the IASB and subsequently on the development of IFRS.

Zeff (2007: 302) argues that external pressure on the IASB, such as that of lobbyists

and/or other countries and their institutions, can become less intense with the help of

auditors and regulators across countries. He explains that the independence and

influence of the standards setter, the IASB, is strengthened if the auditor and the

regulator of a country are strict. However, a strong and independent standard setter

with more and more power, that the IASB has become, needs to be aware of

challenges and pressure can be both external and internal. Thus, once the IASB

manages to lessen the influence of the external lobbyists, it still needs to face the

challenge of internal lobbying and, as Zeff (2007: 302) puts it, internal ‘politicking’ that

also may have a negative effect on the quality of IFRS.

  33  

Sacho & Oberholster (2008: 132) add that the challenge regarding the misapplication

of IFRS due to diverse of interpretation of the standards across countries needs to be

addressed in the future. The same can be concluded from the findings of the surveys

that were discussed in this thesis.

6. Conclusion

The globalizing forces have resulted in a need of a unification of accounting

frameworks on an international level. The accounting diversity across countries has

created different obstacles to efficient capital allocation and to comparability of

financial statements across the globe. One of the central aims of the global process

of convergence with IFRS has been to enable comparability between financial

statements and efficient communication between preparers and investors on the

basis of the firms’ financial statements. The advantages of a single set of accounting

standards such as IFRS are the increased comparability among financial statements

in companies worldwide, more efficient communication between different

stakeholders like preparers and users of the financial statements, investors, auditors,

and so on.

This process of global accounting harmonization has, however, been hindered in

various ways and there are still many impediments to convergence with IFRS that

need to be resolved in order to accomplish full comparability and uniformity of

accounting standards. The aim of this thesis was to provide a general overview about

the progress and obstacles to convergence with IFRS, especially by looking into the

findings given in several empirical studies.

These findings have shown that there are still many impediments to convergence

with IFRS as well as many challenges that lie in the future and need to be addressed.

The fact that the process of convergence with IFRS is still not accomplished does not

come as a surprise. The situation we have at the moment presents itself as follows:

politicians, accounting experts, entrepreneurs, investors, and so on, unanimously

claim that IFRS convergence needs to be promoted. Yet, we also witness a

  34  

disproportion between the claims and the de facto results in the process of

convergence. The same tendency can be found in many other fields of political or

economic activity in the context of globalization. Due to the ongoing integration in

economic and, to some extent, political terms, it is clear that it is in the interest of all

parties involved to harmonize international regulations affecting international

economic transactions. One example for this would be the ongoing negotiations

concerning the transatlantic trade and investment partnership (TTIP).

Having examined the progress and obstacles to convergence with IFRS and having

considered similar processes, such as the TTIP, it becomes clear that the

impediments in the process of convergence with IFRS and the specific solutions

generated for those impediments can be considered as representative of many

international harmonization processes concerning legal frameworks and economic

regulations.

It can be further concluded that the specific solutions mentioned above deserve to be

carefully studied by authorities who are actively engaged in the making of legal

regulations or negotiations with the objective of harmonizing international regulations,

for, in my opinion, they hold essential clues regarding the problems that may arise

when different parties with different cultural and/or economic backgrounds need to

come to terms.

 

  35  

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