16.1 INTRODUCTION. A business enterprise that receives capital from investors
and creditors or one that is seeking new capital has an obligation to keep its capital
providers informed about the company’s performance, condition, and prospects. In a
word, the business is accountableto its investors and creditors. It is also accountable
to others who provide resources or an environment in which to operate, such as em-
ployees, governments, and the community at large. Providing this information is the
role of financial accounting and reporting.
Historically, the rules for what financial information should be provided and in
what format have evolved country by country. By the last quarter of the twentieth
century, a mechanism for developing and adopting accounting standards had been es-
tablished in most countries.
In some cases, standard setting has been the responsibility of the public account-
ing profession, often with enforcement of the standards achieved by law or govern-
ment regulation. For example, accounting standards are set by private-sector profes-
sional accounting organizations in Austria, Brazil, Canada, Denmark, Hong Kong,
Indonesia, Italy, the Netherlands, New Zealand, Philippines, South Africa, Sweden,
Switzerland, and Taiwan.
In other cases, standard setting has been the responsibility of the government. For
example, there are government-sponsored accounting standards boards in Argentina,
China, Finland, France, Greece, Malaysia, Poland, and Saudia Arabia.
In a few countries, including Germany, Japan, the United Kingdom, and the
United States, a private-sector standard setter has been established that is independ-
ent of the public accounting profession. The Australian board is private but appointed
by and under the oversight of a government agency.
National accounting standards made sense when companies raised money in, and
investors and lenders looked for investment opportunities in, their home country. But
over 30 years ago, the accounting profession began to recognize the importance of a
cooperative international effort in the development of accounting standards—and the
benefits of a common global accounting language.
16.2 GLOBALIZATION OF CAPITAL MARKETS. Nowadays, investors seek invest-
ment opportunities all over the world. Similarly, companies seek capital at the low-
est price anywhere. Almost every day you can open a business newspaper and read
about a sizable cross-border merger. The problem that this creates for investors, of
course, is that accounting differences can completely obscure the comparisons that
they must necessarily make as they assess various investment opportunities.
In testimony before a United States House of Representatives committee in June
2001, Paul Volcker, former Chairman of the U.S. Federal Reserve Board and Chair-
man of the International Accounting Standards Committee (IASC) Foundation Board
of Trustees, said: If markets are to function properly and capital is to be allocated ef-
ficiently, investors require transparency and must have confidence that financial in-
formation accurately reflects economic performance. Investors should be able to
make comparisons among companies in order to make rational investment decisions.
In a rapidly globalizing world, it only makes sense that the same economic transac-
tions are accounted for in the same manner across various jurisdictions.
(a) Cross-Border Capital Raising Throughout the World. That the world’s financial mar-
kets are globalized is undeniable. On many stock exchanges, foreign listings are a large
percentage of total. Exhibit 16.1 sets out some representative statistics from late 2002.
16 • 2 INTERNATIONAL FINANCIAL REPORTING STANDARDS