12.3 INTERNATIONAL ACCOUNTING DIVERSITY. As businesses become more in-
ternational, there is a more pressing need for financial information to be prepared by
businesses on a comparable basis. Unfortunately, although many financial statement
users may find it surprising, international financial data are frequently not compara-
ble. The rules of financial accounting often differ from one country to another, which
adds another dimension to the complexity of the accounting puzzle. Exhibit 12.2 il-
lustrates that accounting conventions established by one nation’s accounting rule
makers are not necessarily consistent with those established elsewhere. The contin-
ued existence of differences is also illustrated in an extensive survey completed in
2001 entitled GAAP 2001: A Survey of National Accounting Rules Benchmarked
against International Accounting Standards. GAAP 2001concluded that investors
continue to be handicapped by variations between national accounting rules in the
world’s leading economies. Of the 65 countries surveyed, almost half revealed sig-
nificant differences but showed no signs of convergence. Some prevalent differences
noted in the study were in the following areas:
- Recognition and measurement of financial assets and derivatives, impairment
losses, provisions, employee benefit obligations, income taxes - Business combinations
- Related-party and -segment disclosure
There are promising signs that many countries will harmonize based on IFRS, as is
illustrated in Exhibit 12.3. The most concrete example is the fact that the European
Parliament has mandated the use of IFRS for all listed companies in the European
Union by 2005. This will impact Germany, France, and the United Kingdom and
other countries within the European Community. Countries such as Australia, Brazil,
Canada, and Singapore, which have had a long-standing practice of adopting IAS as
local standards with few exceptions, will likely also increase their efforts to adopt
new IFRS. For example, Australia has recently announced the adoption of IFRS by
2005, an announcement that in part reflects the need for Australia to “catch up” and
issue comprehensive standards in areas such as pensions and derivatives.
In the short to medium term, it is important to note that the IFRS may increase
rather than reduce differences through issuing new standards. IAS 39, “Financial In-
struments: Recognition and Measurement,” is an example of a standard that in-
creased comparability with the equivalent U.S. standard Statement of Financial Ac-
counting Standards (SFAS) No. 133, while perhaps getting ahead of various national
standard-setting efforts. IAS 40, “Investment Property,” also sets a new standard that
is not merely a “cut and paste” from a comparable U.S. standard, and for most coun-
tries the fair value model it employs presents many challenges.
Similarly, developments in the major capital markets may also increase differ-
ences. In the United States, the change to eliminate goodwill amortization charges
and introduce a fair value impairment model diverge from IAS and have resulted in
billions of dollars of impairment charges. Additionally, changes in the rules sur-
rounding the consolidation of special purpose vehicles have been made post-Enron.
Because of this inconsistency in accounting rules, investors, creditors, and other
financial statement users whose scope has broadened beyond their own countries’
borders are at a disadvantage when they analyze foreign companies. Owing to the
differences in accounting principles that exist internationally, two companies in dif-
ferent countries may experience identical economic results during a period, yet report
significantly different results in their financial statements.
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