Academic journal article Review of Business

International Accounting Standards and Their Implications for Accountants and U.S. Financial Statement Users

Academic journal article Review of Business

International Accounting Standards and Their Implications for Accountants and U.S. Financial Statement Users

Article excerpt

Pressure to adopt international accounting standards is growing As new international standards are being considered, U.S. businesses particularly may wonder whether they will be called upon to change their current accounting practices. This article addresses issues central to using international standards/or cross-border listings of financial investments.


The mission of the Financial Accounting Standards Board (FASB) -- the entity currently responsible for developing U.S. generally accepted accounting principles (GAAP) -- is to establish authoritative standards for U.S. financial accounting. Until recently, the FASB's development of GAAP has been mostly unfettered, except for the Securities and Exchange Commission's (SEC's) review. Recent developments in international accounting standards, however, suggest that things may soon change. U.S. firms should use this time to prepare for a worldwide shift toward uniform accounting standards, before such provisions become too onerous.

The need for international standards is clear. As businesses and trade barriers between nations become less restrictive (e.g., under the influence of the North American FreeTrade Agreement -- NAFTA), differences among national accounting and auditing standards become more troubling [13]. International competition has forced many firms to look to new markets. It has also led investors to finance the expansion and modernization needed to keep pace and advance in world markets.

In 1992, foreign investors engaged in $149 billion of transactions in U.S. securities, which, by 1997, increased dramatically to a staggering $1.1 trillion [11]. Between 1975 and 1997, cross-border transactions in bonds and equities as a percentage of Gross Domestic Product (GDP) grew from 4 percent to 213 percent in the U.S.; from 2 percent to 96 percent in Japan; from 5 percent to 253 percent in Germany; and, from 1 percent to 672 percent in Italy [14]. This expansion greatly increases internationalized worldwide capital markets. In turn, it strengthens the need for internationally comparable financial statements and related accounting standards. As Fitzgerald says:

Accounting principles and reporting practices are forms of communication which, in theory, should move across national boundaries as freely as the business practices they are intended to reflect. In truth, however, these procedures mirror the disparate economic and social environments of their respective nations and regions [9].

Ideally, establishing international accounting standards should reduce the costs of doing business and raising capital across borders, streamline internal accounting and auditing functions for multinationals, increase the efficiency of market regulations, and decrease the costs of international financial statement analysis and investment.

In July 1995, the International Accounting Standards Committee (IASC) and the International Organization of Securities Commissions (IOSCO) agreed to a list of issues to address in a "core" set of international accounting standards. These standards would be used in offerings of U.S. securities by companies incorporated outside of this country (cross-border offerings), and listings of company securities in both domestic and international markets (multiple listings) [3]. This article: (a) discusses the current state of international accounting standards; (b) suggests that no quick solution to this problem exists; and (c) assesses how U.S. firms can smoothly meet the challenges they will undoubtedly face in the area of international accounting.

Development of U.S. Financial Accounting Standards

Before 1900, the U.S. economy did not require sophisticated accounting systems since sole proprietors operated most businesses. Thus, accounting reports emphasized solvency and liquidity, and were intended for internal use or for banks' and other lending institutions' scrutiny. …

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