Institutional Perspective

1.International Accounting Standards Board (IASB) and the IFRS Foundation aimed at development of a single set of highly qualitative & understandable financial reporting standards which are globally accepted, enforceable in nature and based upon segmented principles.

There was a unique group of financial reporting standards once among the developed countries called “national GAAP”. The year 2005 is considered as the starting of a new revolution in global business and the conversion of thirty year efforts into creation of financial reporting rules to be accepted all over the world. Since that year, 27 European Union member states along with countries like Australia, South Africa, Russia and New Zealand adopted International Financial Reporting Standards (IFRS). Few countries like Korea, Canada, Mexico, Brazil, Argentina and China adopted IFRS from then. (Atkinson, 2012).

Institutional Perspective

Researchers have used New Institutional Theory (NIS) in subjects such as political science, business, management, information technology and sociology. In the terms of accounting, many case studies are being explained by NIS in international accounting & auditing and management accounting. NIS is used as a means to understand the behavior of an organization or a country or a state for the adoption of accounting standards (Berry, 2009). 

Considering the initiatives of IFRS Convergence, institutionalization is a process through which a nation accepts the national standards of accounting that are absorbed in the favor of harmonized international accounting. It has been a practice in previous years of using the processes of isomorphism in many nations (Boyd, 2013). It is not that only Anglo Saxon countries uses IFRS that are based mostly on judgmental based financial reporting, shareholders satisfaction or micro economics but harmonized IFRS are also adopted in countries having accounting norms which are different such as code law countries. Let us take an example, China has been using IFRS since 1997 or Kazakhtan which is a USSR country, tried adopting IFRS since 1991.

In terms of IFRS Convergence, NIS is used for researches in terms of both quality and quantity. As stated by Rodriguez and Craig (2007), NIS explains the development of international accounting since the years of its beginning. When a country wants to replace its accounting standards with IFRS norms, the reason should be economically justified, that is, it should bring economic benefits to the nation such as declining in cost of capital, which has led to increament of foreign investors in the capital market (Datar, 2015). However, research shows that a country adopts IFRS more for legalized Institutional matter and less in economic terms.

Factors Driving IFRS Convergence

Factors Driving Ifrs Convergence

The most important factor for IFRS convergence is increase of businesses expanding globally. The number and size of ‘multinational companies’ that are looking forward for opportunities of investment and trading has gradually increased since past few years. Thus, for the sake of having the interest of MNCs in one’s company, it is required for all the companies to have consistent accounting standards so that companies can be compared in terms of their financial position and performance  (Picker, 2016).

The increased number of cross border transactions in equity securities and bank international transactions has been absorbed since last few decades. Thus, the preparation of financial reports has to be prepared using consistent accounting standards as such reports are capable of being compared and are used by shareholders, stock brokers, investors, researchers and analysts for their investment making decisions (Kuti, 2014).

As already discussed about European Union (EU), is considered to be one of the primary reasons of international convergence. The main reason for such strong influence is EU’s goal of a united business environment and a common market in Europe so that it can compete with US.

Another reason influencing international convergence is corporate failures and accounting scandals in US and Australia such as Enron case, HIH insurance scandal and Worldcom case shook the public confidence in accounting and auditing industry. Thus, in case of occurrence of any such collapses again, the blame could come on accounting standards and that is why, to avoid such criticism, IFRS adoption is more coming into existence (Datar , 2016).

Another reason that has influenced countries like Australia to adopt IFRS is saving of significant costs as in AASB (Australian Accounting Standard Board) responsible for revising and analyzing accounting standards is costly in nature (Holtzman, 2013).

2.As visible through various researches, there is a strong move towards international convergence all over the world. However, there are still significant barriers that need to be controlled before there is a convergence worldwide. There has to be a convergence between IASB GAAP and US for the purpose of following one set of accounting standards throughout the world. Currently, there are a number of differences between them for which the IASB and FASB are working together to eradicate the differences but until and unless they aren’t reconciling, there will be divergence in the accounting standards used for a continued period of time (Knubley, 2010). 

The arguments for the convergence of financial reporting standards has been enumerated by various authors so as to include :

• Increased comprehensive comparable cross national financial reports ;
• Increased international capital flows ;
• Cost savings of MNCs and raised level of accounting uses ;
• Use of low cost financial accounting standard standards for countries having limited resources

Contextual Issues in Implementing IFRS

According to research of Fisher, 2003 the international convergence should be in existence so that the practices of representing financial reporting between countries turns out to be same and the differences in presenting accounting transactions are eliminated. This would enhance the capability of comparing financial reports as well as it would serve as a global approach for the MNCs and other potential investors for making investment decisions (Lerner, 2009).

According to research of Goeltz, 1991, the comparability between the financial information would be a strong initiative for the free movement of capital a over the world so as to enjoy the best possible results. However, the arguments say that the international capital market is already progressing despite of the absence of globally recognized reporting standards. Therefore, it has been a constant argument that there will be no impact on the continued development of the international market. Another arguable fact is that the potential investors, analysts or brokers or portfolio managers will not be make decisions based only on the information provided in financial statements but there are several other factors to be considered for making the best possible decision. Therefore, it is not important that the comparison can be made only if such financial reports are made using consistent accounting standards. 

According to Henderson and Peirson, 2000 research, the different accounting standards of various nations are acting as a barrier for the development of international market by levying unreasonable costs of compliance on MNCs. This can be explained better in the following way. Companies that want their shares to be listed in another country’s market needs to comply with various other norms of that particular company. For example, New Zealand companies have to prepare their financial reports in accordance with US GAAP norms to list their shares on US stock exchange and have to prepare a reconciliation statement between US GAAP and NZ GAAP. This is, thus, costly and consumes alot of time and has also led to some weird results. For example, in 1993 Daimler Benz reported DM615 million as its profits but under US GAAP, it became a loss of DM1839. However the same researcher argues that such requirements needs the country to sacrifice their sovereignty over their own accounting and financial standards. Considering the local priorities and needs, some of the countries which are industrialized  have developed their own set of financial standards as every country possesses different business environment, cultures, languages, law and order and social political environments (McLaney & Adril, 2016).

Comparison of Financial Statements between Home Country and Australian Securities Exchange (ASX) Listed Companies

3.For the comparison purposes, let us take the companies in the mining sector called BHP Billiton Limited and Sanfire Resources NL. Sanfire Resources NL is an Australian company listed on Australian securities exchange. The consolidated financial statements for the year ending June 2017 were issued in accordance with Director’s resolution on 29th August, 2017. In a similar way, BHP Billiton Limited is one of the leading companies with huge market value listed on ASX. Bhp Billiton Limited prepares it’s financial statements in accordance with Australian Corporations Act, 2001, UK Companies Act, 2006 and accounting standards and interpretations collectively known as IFRS. On the other hand, Sanfire Resources prepares its financial annual reports as per Corporations Act, 2001, Australian Accounting Standards and other authenticated requirements of AASB. The financial reports also comply with IFRS norms (Noreen, 2015). 

 
The preparation of financial reports of BHP is on the basis of Historical cost principles. However, it doesn’t include-

• Derivative financial instruments and some other financial statements which are valued at fair value and
• Certain noncurrent assets classified as held for distribution or sale, which are measured at the lower of carrying amount or  fair value less disposable cost.

On the other hand, the financial reports of Sanfire are also prepared in the basis of historical cost basis. But its exclusions are different from that of the former company, that is, it doesn’t include trade receivables, cash settled share based payments and AFS investments (available for  sale) which are measured on the basis of fair value. BHP’s annual reports Includes such accounting policies in the notes that includes the recognition and measurement basis used and are relevant for understanding financial statements (Piper, 2015).

However we do not notice much of the differences in the accounting policies adopted by both the companies. This, for the basis of comparing, we observe similarities more than differences. This could be understood more by the following two or three points.

Both of these companies have valued their trade receivables on the basis of fair value which are then measured using effective interest method at amortized cost. Both of the companies allows the credit period of 30 days. However, in case of Sandfire, other receivables are valued as per stated in the previous statement while the trade receivables are stated at fair value only.

In case of BHP, a continuous monitoring is being made to assess the credit quality of counter parties and identify the indicators of impairment. Such receivables are considered due or impaired as per Group’s terms and conditions (Irvine, 2008) . As on 30th June 2017, receivables of US $19 million were due but not impaired as the majority of them are due for less than 30 days. In case of sandfire resources, the receivable is considered impaired if there is financial difficulties of debtors, default payments or if they due for more than 90 days. Such impairment amount is recognized in the income statement. However, currently there is no provision of impairment loss and trade receivables are at $12.803 millions.

Will IFRS Convergence Lead to Improved Financial Reporting Quality?

Both of these companies value its inventories at Lower of cost and net realizable value where cost is calculated on the basis of average weighted costs. However in case of BHP Billiton Ltd, processed inventory is valued as per absorption costing basis. In both the cases, cost includes costs of purchasing raw materials, production costs including allocated overheads while NRV is the difference of estimated selling price less the estimated costs that would be necessary for completion (Piper, 2015).

Thus, we can conclude that while comparing, we are finding similarities more than the differences. However, an enhanced study couldn’t be made due to large differences in scale of operations. However, the presentation of BHP Billiton Limited is better than Sandfire Resources in terms of quality as it discloses disclosures as maximum as possible (Ramírez, 2018). 

4.It is true that adoption of IFRS is not a matter of some days after all a global acceptance of such financial and accounting practices will take s lot of time. However, we need to focus on the bigger picture where IFRS objectives are to create a globally united nation that delivers a true and fair representation of a company’s information. The accounting and auditing industry have learnt lessons from previously collapses that have shaken the public trust and confidence. Thus, with the increasing need of satisfying stakeholder’s needs, the IFRS adoption has became vital for the accounting and auditing industry (Nobes, 2015) . 

Thus, IFRS adoption will help in preparation of financial reports which are finer qualitatively and quantitatively. Such qualitative reports will help in bringing the dreams of having one global nation into existence. Such reports are important to maintain the trust of public in companies, of the companies in such norms and of the overall public in the accounting industry. We can visualize such adoption in one of the countries, that is, India who has finally replaced its accounting standards with Indian Accounting Standards (IndAs) that are in consistent with IFRS norms.  

Though IFRS norms demands a comprehensive disclosures, it is more better to have such financial reports that delivers the needs such as comparison purposes, true and fair presentation, understandability and would help the stakeholders to extract their required information from such reports whether external or internal (Raun, 1962). It is true that the total changes would be dramatic for the next few years but only time would tell whether such global efforts would be able to generate the expected results and the world will visualize low cost reports that are highly useful and comparable.

A significant number of countries have adopted IFRS but a fully adoption has been made by a handful countries. However, we need to understand that adoption of a single set of accounting standards would be ultimately in the interest of the public that would contribute to the effective capital flows within countries. Such an adoption would help in economic growth all around the world. Thus, we can conclude that where the challenges are tough, the results would be worth (Seal, 2012).

Thus, we can conclude that convergence of IFRS will lead to improved financial reporting. 

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