The adoption of a set of global financial accounting standards from the perspective of the UK
Introduction
The accounting standards and the financial reports are important in every organization. They vary from one organization to another depending on the nature and environment of the organization. Regulation of the global economy may be achieved by adopting a set of global financial accounting standards. If the standards are adopted across the globe it is possible to achieve uniformity and to assess the actual position of the economy (Jamal et al 2010, p. 140).
Other scholars like Hail et al (2009, p. 5) argue that adoption of global financial accounting standards may lead to the collapse of organizations. To gain more understanding on the adoption of a set of global financial accounting standards, this paper will discuss arguments for and against the adoption of a set of global financial accounting standards from the perspective of the UK.
Arguments for the adoption of a set of global financial accounting standards
The adoption of a set of global financial accounting standards is relevant in achieving regulation. Jamal et al (2010, p. 140) argues that if financial statements prescribe to the same standards across the world it is possible to make comparisons and regulate accounting standards. As a result uniformity in financial transactions will be obtained.
The standards require all participants to observe minimum requirements. This raises the standards and makes it possible for statements to be compared. More so, the standards allow for coordination in accounting.
Better financial accounting standards will emerge after the adoption of a set of global financial standards. The accounting standards will lead to innovativeness after the adoption due to monopoly. In addition, alternative standards will emerge after the adoption of the global accounting standards.
The control by the same standards may also make the organizations improve on the standards so as to achieve quality. Consequently, a more superior set of financial accounting standards will be obtained. Improved accounting standards can be taught in academic institutions to students. Into the bargain, the uniform accounting standards will lead to financial regulations and increase efficiency.
The global economy will become integrated. Nagash (2010, p. 3) mentions that globalization will lead to exchange of information that may lead to increased benefits among the states that adopt the financial accounting standards. The states participate in the international economy.
Integration will also lead to international connection that may lead to growth of businesses. Moreover, advanced technology for instance can be introduced across the globe. This will enable sharing of financial database which intern enables transactions across borders. Standardization leads to introduction of technology which leads to efficiency. Technology makes it possible to reach remote places thus expanding business (Dyson, 2009, p. 45).
Bothwel (2009, p. 2) articulates that adoption of financial accounting standards lead to increased investments. Investors may end up investing in foreign states where they are likely to make more profits.
Hail et al (2009, p. 5) point out that adoption of the global financial accounting standards lead investors to make wise decisions concerning the capital of a business. They can choose lower cost which is allocated appropriately. The standards also lead to liquidation of the market.
Arguments against the adoption of a set of global financial accounting standards
Jamal et al (2010, p. 141) believes that the adoption of a set of financial accounting standards should not put emphasis on the uniformity in financial statements as the main aim. They argue that the standards should be viewed as a means of acquiring the actual position of the economy in different businesses.
Furthermore, the comparability and regulation in accounts may not be possible. When the minimum standards are set, there is a likelihood of some institutions wanting to lower their standards hence the quality of work is reduced from excellent to good. They further point out that the introduction of the standards will encourage competition. Competition will lead to lowering of quality and eventually the market will be affected negatively.
Coordination is achieved when there is a regulated standard being in use. The impact of this coordination is efficiency that is realized after adoption of the standards. The quality of accounting is compromised as the organizations would strive to meet the minimum requirements.
Jamal et al (2010, p. 142) mentions that uniformity and regulation in financial accounting standards may not be realized due to environmental variables that affect accounting. Organizations exist in different environments and have unique challenges that may cause the adoption of the global financial standards complicated. The organizations may adopt the standard selectively or seek alternatives thus there will be no uniformity of accounting standards.
The multinational companies are likely to benefit from the global financial accounting standards as opposed to local organizations. This implies that when the financial accounting standards are introduced the organization is affected either negatively or positively. Thus the accounting standards will affect the small enterprises negatively while the multinational companies benefit from the standards (Jamal et al., 2010 p. 142).
Bothwel (2009, p. 2) says that the cost incurred in the transition to adopt the set of financial accounting standards is significant. In most cases the small enterprises are likely to experience challenges in the initial stages of the adoption due to the cost. The adoption may also lead to other challenges such as retraining employees and complications in some transactions.
The existing capital requirements in the state as well as taxation may be affected after the adoption of the standards. The state’s financial reports may be different from other reports. This may mean that the standards are inaccurate and that they do not reflect the real situation.
Moreover, Jamal et al (2010, p. 143) indicates that comparison of financial reports for different organizations is unrealistic. Although the same set of financial accounting standards will be applied in different organizations the financial reports may not be comparable. Organizations engage in diverse transactions under different circumstances that are varied. The comparison of the transactions will yield inaccurate results because diversity will affect the results.
Comparability of economies may not be achieved as Hail et al (2009, pg. 5) reveal. Some economies are known to be large. The economy in the developed countries is large when compared to economies in the developing countries. Similarly, the developed countries have many multinational and large organizations when compared with developing countries.
Therefore, comparing the financial reports may not reflect the reality. It is important to note that every state may choose to implement the set of global financial accounting standards depending on the prevailing market environment. As a result uniformity will not be achieved.
Nagash (2010, p. 3) notes that benefits that are associated with global standards are short term. According to him there is uncertainty about the long term benefits of the global financial accounting standards. In addition, the distribution of the gains and losses of the set of the global standards is not clear.
The integration of the global economy may lead unfavorable situation. Considering that there is a problem in the financial market, the problem will be spread within the countries that practice the set of standards and may cause collapse of the market rapidly (Proctor, 2009, p. 17)
Since the financial accounting standards make more investors choose multinational companies over the local companies, the local companies may not have any gains from the standardization. It is also important to note that there are other factors in the market that encourage investors to choose one organization over the other Bothwel (2009, p. 2).
Organizations that are established and have a financial independent may lose a lot of information without experiencing any benefits. More so, the organizations may have little or no benefits from adopting the financial accounting standards.
Bothwel (2009, p. 3) indicates that the states may require monitoring from a regulatory board. Other major concerns with the adoption are maintaining the sovereignty of a state.
The standards should not interfere with the sovereignty of a state. They should also be undertaken such that states independence is maintained. Another concern is that of accountability of states. The states should remain accountable as well as maintain its independence.
Hail et al (2009, p. 5) argue that changes in the accounting standards as well as financial reports may cause an organization to collapse. This is because the accounting standards are important in every organization and interfering with the structure of the organization may be unfavorable for the organization. Thus the accounting standard is an important element and replacing it may lead to the collapse of the organization.
Hail et al (2009, p. 5) as well as Bothwel (2009, p. 3) concur that there is need for research in the field. This is because little is known about the long term effect of adopting the set of global financial accounting standards. There is also need to understand what the ratio of benefits to risks is after adoption of different organizations in different locations.
Conclusion
A set of global financial accounting standards would lead to the integration of the market. The integration will cause the economies to share information. It will encourage investors to venture into business in foreign states.
The standards will lead to innovativeness among the different competitors and more competent and promising standards will be invented and lead to efficiency in the market. Adoption of the standards also leads to spread of technology which leads to effectiveness and efficiency. Uniformity in financial reporting will also be achieved and make it possible to compare financial reports.
Achieving uniformity as well as comparing financial statements may become challenging due to the diversity of environment of different organizations.
What is more is that the adoption has a cost implication and may lead to collapse of the organization when the accounting standards are replaced. The adoption will require a state to be accountable, maintain its independence and retain its sovereignty which may be challenging to maintain. There is little research on the benefits and loses after adoption both in the short term and in the long term.
Reference List
Bothwel, J. L., 2009. Adopting International Financial Reporting Standards for Use in the United States: An Economic and Public Policy Perspective. Web.
Dyson, J R. 2009. Accounting for Non-Accounting Students, 8th edition, FT; Prentice Hall
Hail, L., Leuz, C., & Wysocki, P., 2009. Global accounting convergence and the potential adoption of IFRS by the United States: An analysis of economic and Policy factors. Web.
Jamal, K., Bloomfield, R., Christensen, T. E., Colson, R. H. & Ohlson, J., 2010. A research based perspective on the SEC’s proposed rule-Roadmap for the potential use of financial statements prepared in accordance with international standards. Accounting Horizone, 24, 1, pp. 139-147.
Nagash, M. 2010. The effects of IFRD adoption: A review of the early evidence. Web.
Proctor, R. 2009. Managerial Accounting for Business Decisions, 3rd edition. London: Prentice Hall