The Effect of New International Accounting Standards on Firms from India and Us

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ABSTRACT

Companies that participate in the <( Global Economy " must develop accounting systems that provide the internal information required by managers to run the organization and external information needed by lenders, shareholders, and government officials in all countries in which the companies operate. Accounting systems deal with the monetary structures of countries, which are derived from local laws, socio-economic conditions, cultural standards and traditions.

Economic globalization highlights the need for common bases of understanding of financial structure. As different countries try to open up their industries and their capital markets to foreign investment, multiple GAAPs create problems of consistent reporting to potential investors. To reduce the negative effects of these differences, the International Financial Reporting Standards Board has proposed a set of common financial reporting standards (IFRS). "Converging" to a common set of reporting standards will cause short-term problems which, hopefully, will lead to long-term net benefits. Supporters of this effort hope that widespread adoption of these common reporting standards will increase investors ' confidence and reduce barriers to the flow of investment capital.

This paper uses a computer program specifically developed to show how financial data can be translated from one system to another. Using this software, the paper shows how the proposed convergence to an internationally accepted set of common financial reporting standards can reduce the cost of doing business with international partners and reduce the risk of investing in international operations.

INTRODUCTION AND BACKGROUND

Accounting systems deal with the monetary structures of countries, which are derived from local laws, socio-economic conditions, cultural standards and traditions. Accommodations to cultural, legal, and socio-economic factors give accounting systems unique structures. In spite of the common framework of principles, countries integrate specific aspects of culture, socioeconomic framework and legal structure into unique sets of Generally Accepted Accounting Principles or GAAPs.

Accounting standards and practices reflect the influence of legal, cultural, political and economic factors. Because these factors vary by country, the underlying goals and philosophy of national accounting systems vary dramatically (Griffin, 2009).

In common law countries like the United States and United Kingdom, accounting procedures evolve from decisions of independent standard-setting boards. Accountants in common law countries follow generally accepted accounting principles (GAAP) that provide a "true and fair" value of a firm's performance based on standards promulgated by standard-setting boards. Operating within the boundaries of GAAP, accountants can exercise professional discretion in reporting a "true and fair" depiction of a firm's performance (Griffin, 2009).

In countries which rely on code law, national accounting practices are likely to be codified rather than based on the collective wisdom of professional accounting groups. In France, for example, firms must adhere to a national chart of accounts. This accounting system dates back to the seventeenth century and reflects a long tradition of strong government control over the economy (Griffin, 2009).

In countries where accounting practices are determined by national laws, the government plays the major role in monitoring accounting practices. Common law countries rely to a greater extent on private litigation to enforce the accuracy and honesty of accounting practices.

A country's accounting system may also reflect its cultural background. Large companies in France must publish a "social balance sheet" detailing compensation of their workforces. Strong anti-inflation biases are embedded in German accounting practices as a reaction to the hyperinflation of the early 1920s (Griffin, 2009). …