10 Accounting: Business Reporting for Decision Making
1.5 Globalisation of accounting
LEARNING OBJECTIVE 1.5 Discuss the globalisation of financial reporting.
Even though the vast majority of our business entities are SMEs, our larger entities have become bigger,
more diversified and multinational. Consider the National Australia Bank (NAB), which reports its oper-
ating segments as Australian Banking, NAB Wealth, NZ Banking, UK Banking, NAB UK Commer-
cial Real Estate, and Corporate Functions & Other. In 2014, NAB reported a profit of $5.3 billion and
total assets of $883 billion. In 1996, its reported profit was $2.1 billion and total assets were $174 billion
(approximately a quarter of the size of its assets 18 years later!). As entities become more diversified and
multinational, they require more complex accountancy and auditing services. Accountants must ensure
that they remain up to date with the local GAAP and global accounting standards. Currently, more than
120 countries worldwide prepare their financial statements following global accounting standards. These
accounting standards are known as International Financial Reporting Standards (IFRS). The reality check,
‘Why adopt IFRS?’, highlights the advantages of having one set of high-quality accounting standards.
REALITY CHECKWhy adopt IFRS?
Today, the world’s financial markets are borderless. Companies (including small companies) seek capital
at the best price wherever it is available. Investors and lenders seek investment opportunities wherever
they can get the best returns commensurate with the risks involved. To assess the risks and returns of
their various investment opportunities, investors and lenders need financial information that is relevant,
reliable and comparable across borders.
The amounts of cross-border investment are enormous. To illustrate:
• the Organisation for Economic Co-operation and Development (OECD) estimates that worldwide
Foreign Direct Investment (FDI) outflows in 2013 were US$1.281 trillion. The historically highest level
was in 2007 (US$2.170 trillion)
• cross-border ownership of stocks and bonds amounts to many trillions of US dollars. For example,
foreign ownership of US equities, corporate bonds and treasuries amounted to nearly US$14 trillion in- And US investors held over US$9 trillion of foreign corporate stocks and bonds in 2013.
The use of one set of high quality standards by companies throughout the world improves the com-
parability and transparency of financial information and reduces financial statement preparation costs.
When the standards are applied rigorously and consistently, capital market participants receive higher
quality information and can make better decisions.
Thus, markets allocate funds more efficiently and firms can achieve a lower cost of capital.
A comprehensive review of nearly 100 academic studies of the benefits of IFRS concluded that most
of the studies ‘provide evidence that IFRS has improved efficiency of capital market operations and
promoted cross-border investment’.
Source: Pacter, P 2015, IFRS® as global standards: a pocket guide, International Financial Reporting Standards Foundation,
London, http://www.ifrs.org/Use-around-the-world/Documents/IFRS-as-global-standards-Pocket-Guide-April-2015.PDF.
1.6 Sources of company regulation
LEARNING OBJECTIVE 1.6 Identify the sources of company regulation in Australia.
The Australian business sector in the late 1990s and the first decade of the new millennium witnessed
many large-scale corporate collapses, activities of fraud by company employees, episodes of insider
trading, and the advent of hefty salary packages for company directors. Collapses in previously
buoyant industries such as insurance resulted in several thousand small and large shareholders losing
large amounts of cash and often their life savings. Corporate regulation in Australia is now under
closer scrutiny than ever before. In the early part of the twenty-first century, there were a number of