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Global Accounting Rules: An Unfeasible Aim by Fearnley and Sunder

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Global Accounting Rules: An Unfeasible Aim by Fearnley and Sunder

The article “Global Accounting Rules-An Unfeasible Aim” by Fearnley and Sunder (2012) argues that International Financial Reporting Standards (IFRS) became introduced and recommended for adoption in the EU as well as other states for uniformity purposes. However, the article recognizes that using uniform rules in different societies hardly gives uniform results because the process involves too many players. It cites how lack of a suitable mechanism to control the risks associated with uniformity places the European Monetary Union in a difficult position, and compares this to risks that Accounting Standards Board (IASB) faces while trying to introduce IFRS for global use.

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The article reveals that the Securities and Exchange Commission fails to approve IFRS despite efforts by IASB and other boards because it is not a body of the US (Fearnley & Sunder, 2012). It recommends consideration of the Euro debacle to assess whether global accounting standards are possible. The Euro debacle occurred because its concepts did not have any theoretical or practical base. Although the idea of common standards seemed right at first, the inadequacy of the board led to its failure. The board issued standards that supported false profits in reports. Besides, the board failed to accept the dysfunctional outcomes of its standards, and it lacked systems for opportune correction of flaws.

Authors’ Positions

According to Fearnley and Sunder (2012), complexities of social markets make it hard for professionals to derive accounting rules for divergent economies. The two authors recommend structuring, of such rules, to use a bottom-up progression in accounting and not top-down enforcement. Besides, they argue that disregarding the judgmental aspect in defining fair standards, and not writing rules, makes accounting susceptible to wrong statements. Finally, Fearnley and Sunder (2012) suggest that the topic on global accounting standards should come to an end. Rather, they propose that businesses should present accounting reports founded on professional opinions as well as logical principles. They feel that accounting standards from Anglo-Americans are not suitable for international use.

The Relationship between IFRS and Generally Accepted Accounting Standards (GAAP)

Adoption of IFRS will cause many changes in current financial reporting because the principles of IFRS and US GAAP differ. One difference between US GAAP and IFRS is the structuring of the financial statement. Elements of financial statements such as the income statement, statement of cash flow and balance sheet will vary with the use of IFRS (Stanko & Zeller, 2010).

The Income Statement

IFRS requires reporting of expenses by function, in reporting expenses while US GAAP allows reporting by either nature or function.

Statement of Cash Flow

Although both US GAAP and IFRS follow similar structures when reporting cash flows, there differ when grouping dividends and interests in cash flows.

Balance Sheet

Financial statements in US GAAP follow the order of liquidity in reporting structure while IFRS have no certain structure of balance sheet (Stanko & Zeller, 2010).

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Other areas that this change will impact include pensions, contingent liabilities, leases, inventory as well as property, plant and equipment.

Pensions

Both US GAAP and IFRS share many aspects when measuring recognition. However, differences exist when measuring pension liability. While US GAAP considers the reported liability even when unrecognized costs exist, IFRS does not consider reported liability when there some costs are unrecognizable (Stanko & Zeller, 2010).

Leases

IFRS and US GAAP share leasing rules pertaining measurement and classification. However, the two differ slightly in method used to classify a lease as capital, or operating. While the US GAAP uses criteria with thresholds of 75% and 90%, IFRS uses the same criteria, but with no thresholds.

Contingent Liabilities

Both US GAAP and IFRS need firms to gain liabilities that will use future economic resources. However, measurement of the obligation differs between the two standards. US GAAP makes use of the low-end of the range while IFRS uses the mid of the range, in measuring the obligation.

Inventory

The inventory used by US GAAP and IFRS varies in inventory measurement, design and accounting for inventory writings. First, IFRS has design expenses in the cost of inventory while this feature lacks in the US GAAP. Second, US GAAP allows use of first in first (FIFO) in inventory valuation while IFRS disallows last in first out (LIFO) method (Stanko & Zeller, 2010). Lastly, US GAAP uses the market approach to cut inventory value while IFRS uses net realizable value.

Property, Plant and Equipment

Both US GAAP and IFRS calculate plant, property and equipment at cost. However, the two standards vary in asset valuation. US GAAP uses the cost model while IFRS uses revaluation model in asset valuation.

Why I support IFRS and believe it will be Beneficial to have one Global Accounting Standard

I support IFRS because the expanded use of a distinct, high-quality accounting standard will finally allow investors to make more knowledgeable choices through giving them information that is easy to compare. Although adoption of IFRS may cause some flaws in financial reporting at first, this problem will vanish as the model develops. Hence, I support the need for a single global accounting standard.

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References

Fearnley, S., & Sunder, S. (2012). Global accounting rules-an unfeasible aim. Financial Times, p.1

Stanko, B. B., & Zeller, T.M. (2010). The arrival of a new GAAP: International financial reporting standards. Journal of Business and Economics Research, 8(10), 27-37.

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