Contemporary Issues in Accounting: IFRS Convergence and Factors Driving it

CONTEMPORARY ISSUES IN ACCOUNTING

Answer 1 :
International Accounting Standards Board (IASB) and the IFRS Foundation aimed at
development of a single set of highly qualitative & understandable financial reporting standards
which are globally accepted, enforceable in nature and based upon segmented principles.
There was a unique group of financial reporting standards once among the developed countries
called "national GAAP". The year 2005 is considered as the starting of a new revolution in
global business and the conversion of thirty year efforts into creation of financial reporting rules
to be accepted all over the world. Since that year, 27 European Union member states along with
countries like Australia, South Africa, Russia and New Zealand adopted International Financial
Reporting Standards (IFRS). Few countries like Korea, Canada, Mexico, Brazil, Argentina and
China adopted IFRS from then. (Atkinson, 2012).
INSTITUTIONAL PERSPECTIVE
Researchers have used New Institutional Theory (NIS) in subjects such as political science,
business, management, information technology and sociology. In the terms of accounting, many
case studies are being explained by NIS in international accounting & auditing and management
accounting. NIS is used as a means to understand the behavior of an organization or a country or
a state for the adoption of accounting standards (Berry, 2009).
Considering the initiatives of IFRS Convergence, institutionalization is a process through which
a nation accepts the national standards of accounting that are absorbed in the favor of
harmonized international accounting. It has been a practice in previous years of using the
processes of isomorphism in many nations (Boyd, 2013). It is not that only Anglo Saxon
countries uses IFRS that are based mostly on judgmental based financial reporting, shareholders
satisfaction or micro economics but harmonized IFRS are also adopted in countries having
accounting norms which are different such as code law countries. Let us take an example, China
has been using IFRS since 1997 or Kazakhtan which is a USSR country, tried adopting IFRS
since 1991.

In terms of IFRS Convergence, NIS is used for researches in terms of both quality and quantity.
As stated by Rodriguez and Craig (2007), NIS explains the development of international
accounting since the years of its beginning. When a country wants to replace its accounting
standards with IFRS norms, the reason should be economically justified, that is, it should bring
economic benefits to the nation such as declining in cost of capital, which has led to increament
of foreign investors in the capital market (Datar, 2015). However, research shows that a country
adopts IFRS more for legalized Institutional matter and less in economic terms.
FACTORS DRIVING IFRS CONVERGENCE
The most important factor for IFRS convergence is increase of businesses expanding globally.
The number and size of 'multinational companies' that are looking forward for opportunities of
investment and trading has gradually increased since past few years. Thus, for the sake of having
the interest of MNCs in one's company, it is required for all the companies to have consistent
accounting standards so that companies can be compared in terms of their financial position and
performance (Picker, 2016).
The increased number of cross border transactions in equity securities and bank international
transactions has been absorbed since last few decades. Thus, the preparation of financial reports
has to be prepared using consistent accounting standards as such reports are capable of being
compared and are used by shareholders, stock brokers, investors, researchers and analysts for
their investment making decisions (Kuti, 2014).
As already discussed about European Union (EU), is considered to be one of the primary reasons
of international convergence. The main reason for such strong influence is EU's goal of a united
business environment and a common market in Europe so that it can compete with US.
Another reason influencing international convergence is corporate failures and accounting
scandals in US and Australia such as Enron case, HIH insurance scandal and Worldcom case
shook the public confidence in accounting and auditing industry. Thus, in case of occurrence of
any such collapses again, the blame could come on accounting standards and that is why, to
avoid such criticism, IFRS adoption is more coming into existence (Datar , 2016).

Another reason that has influenced countries like Australia to adopt IFRS is saving of significant
costs as in AASB (Australian Accounting Standard Board) responsible for revising and
analyzing accounting standards is costly in nature (Holtzman, 2013).